ACCOUNTING PRINCIPLES 7TH CANADIAN EDITION BY WEYGANDT, DONALD KIESO, KIMMEL TRENHOLM, WARREN NOVAK SOLUTIONS MANUAL
CHAPTER 1 Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Identify the use and users of accounting and the objective of financial reporting.
1, 2, 3
1
1, 2, 5
1
1
2. Compare different forms of business organization.
4
2
3,
2
2
3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework. 4. Describe the components of the financial statements and explain the accounting equation.
5, 6, 7, 8, 9, 10, 11
3, 4, 5, 6
4, 5, 9, 10
2, 5, 7, 11
2, 5, 7, 11
12, 13, 14. 15, 16
7, 8, 9, 10, 11, 15
6, 7, 13
3, 4, 6, 7, 8, 11
3, 4, 6, 7, 8, 11
5. Analyze the effects of business transactions on the accounting equation.
17, 18
12, 13, 14
5, 8, 9, 10, 11, 12, 13
5, 7, 8, 11
6, 7, 8, 9, 10, 11
6. Prepare financial statements.
19, 20
14, 15, 16 17, 18
9, 14, 15, 16, 17
6, 7, 8, 9, 10, 11
2, 5, 7, 11
Learning Objectives
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Identify users and use of accounting information.
Simple
15-20
2A
Determine forms of business organization and types of accounting standards. Determine missing items.
Simple
15-20
Moderate
20-25
Simple
20-30
5A
Classify accounts and prepare accounting equation. Assess accounting treatment.
Moderate
20-25
6A
Analyze transactions and calculate owner’s equity.
Simple
35-45
7A
Analyze transactions and prepare balance sheet.
Simple
40-50
8A
Moderate
40-50
9A
Analyze transactions and prepare financial statements. Prepare financial statements.
Simple
35-45
10A
Determine missing amounts, and comment.
Moderate
35-45
11A
Discuss errors and prepare corrected balance sheet.
Moderate
45-55
1B
Identify users and use of accounting information.
Simple
15-20
2B
Determine forms of business organization and types of accounting standards. Determine missing items.
Simple
15-20
Moderate
20-25
Simple
20-30
5B
Classify accounts and prepare accounting equation. Assess accounting treatment.
Moderate
20-25
6B
Analyze transactions and calculate owner’s equity.
Simple
35-45
7B
Analyze transactions and prepare balance sheet.
Simple
40-50
8B
Moderate
40-50
9B
Analyze transactions and prepare financial statements. Prepare financial statements.
Simple
35-45
10B
Determine missing amounts, and comment.
Moderate
35-45
11B
Discuss errors and prepare corrected balance sheet.
Moderate
45-55
3A 4A
3B 4B
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material
Learning Objective 1. Identify the use and users of accounting and the objective of financial reporting.
Knowledge Q1-3 BE1-1 E1-5
2. Compare different forms of business organization .
Comprehension Q1-1 Q1-2 E1-1 E1-2
Application
Q1-4 BE1-2 BE1-4 BE1-10 E1-3 E1-7
P1-2A P1-2B P1-11B
3. Explain the building blocks of accounting: ethics and the concepts included in the conceptual framework.
Q1-6 Q1-7 E1-5
Q1-5 Q1-8 Q1-9 Q1-10 Q1-11 BE1-4 BE1-5 BE1-6 E1-4 E1-9 E1-10 P1-5A P1-5B
P1-2A P1-2B P1-3A P1-3B P1-7A P1-7B P1-11A P1-11B
4. Describe the components of the financial statements and explain the accounting equation.
Q1-12 Q1-13 Q1-14 Q1-16 BE1-11
BE1-7
BE1-8 BE1-9 BE1-10 BE1-14 BE1-15 E1-6 E1-7 E1-13 P1-4A P1-4B P1-6A P1-6B P1-7A P1-7B P1-8A P1-8B P1-11A P1-11B
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Analysis
Synthesis P1-1A P1-1B
Evaluat ion
BE1-3
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued) Learning Objective 5. Analyze the effects of business transactions on the accounting equation.
Knowledge Q1-19 E1-5
6. Prepare financial statements.
Broadening Your Perspective
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Comprehension Q1-17 Q1-20 E1-8 E1-9 E1-10 E1-11 P1-5A P1-5B
Q1-19 Q1-20 E1-9
BYP1-1
Santé Saga BYP1- 6
1-4
Application Analysis Q1-18 BE1-12 BE1-13 BE1-14 E1-12 E1-13 P1-7A P1-7B P1-8A P1-8B P1-11A P1-11B BE1-15 BE1-16 BE1-17 BE1-18 E1-14 E1-15 E1-16 E1-17 P1-6A P1-6B P1-7A P1-7B P1-8A P1-8B P1-9A P1-9B P1-11A P1-11B BYP1-3
Synthesis
Evaluat ion
P1-10A P1-10B
BYP1-4
BYP1-2 BYP1-5
Chapter 1
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Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Yes. Accounting is the financial information system that provides useful financial information to every person who owns and uses economic resources or otherwise engages in economic activity.
2.
Internal users are those who plan, organize, and run businesses and include managers, supervisors, directors, and company officers. External users work for other organizations but have reasons to be interested in the company’s financial position and performance, and include current or potential investors (owners), and creditors. Internal users may want answers to several types of questions. For example, the finance department wants to know if there is enough cash to pay the bills. The marketing department wants to know what price the business should use in selling its products to maximize profits. The human resources department wants to know how many people the business can afford to hire. The production department wants to know which product lines make the business the most profit. External users may want answers to several types of questions. For example, investors want to know if the company is earning enough to give them a return on their investment. Creditors want to know if the company is able to pay its debts as they come due. Labour unions want to know whether the owners can afford to pay increased wages and benefits. Customers are interested in whether a company will continue to honour its product warranties and support its product lines. Taxing authorities want to know whether the company respects the tax laws. Regulatory agencies want to know whether the company is respecting established rules.
3.
The main objective of financial reporting is to provide useful information to investors and creditors (external users) to make decisions about a business. Users may be potential investors who need to decide if they wish to invest in the business or they may be creditors deciding if they wish to lend money to the business. These users want to know if the business is running successfully and can generate cash and earn a profit.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 4.
5.
Proprietorships, partnerships and corporations are the three main forms of business organization. The main difference among these three forms is the size of the business. Since a proprietorship is a business owned by one person, it has limited resources. The size of the business is typically small and the life of the business is limited to the life of the owner. The size of businesses can expand in the case of a partnership as more owners are involved in the day to day operations of the business. In order to achieve a large size, with a diverse group of owners, the corporate form is used to have easy transferability of the ownership through the issuance of shares. Another important difference is that the corporation is a separate legal entity and pays income taxes. In addition, the corporation is the only form where owners have limited liability with respect to the business. The following are the main characteristics of each form: a)
A proprietorship is a private business with one owner who has unlimited liability for the business. The proprietorship has a limited life tied to the life of the owner. There is transparency between the owner and the business. Ultimately the owner is personally responsible to pay tax on the profit of the business.
b)
A partnership has essentially the same characteristics as a proprietorship except that in a partnership, there is more than one owner. A partnership need not be a private business, although it usually is.
c)
For corporations, the owners are one or more shareholders who enjoy limited liability. The corporation pays income taxes and can have an indefinite live since its ownership units, in the form of shares, are easily transferred to other owners.
Ethics is a fundamental business concept. If accountants do not have a high ethical standard, the information they produce will not have any credibility. Ethics are important to statement users because it provides them comfort that the financial information they are using is credible and reliable.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 6.
The users of financial information of publicly accountable companies have different needs than the users of financial information of private companies. Publicly traded corporations are required to to present financial information using accounting rules that are consistent with those used globally. To do this, public traded companies need to follow International Financial Reporting Standards (IFRS). Doing so helps Canadian companies compete in a global market. But following this set of policies and standards is often not essential or cost effective for privately owned businesses. The users of private company financial statements often do not require the extensive measurements and disclosures required by IFRS and thus private companies may report under Accounting Standards for Private Enterprises (ASPE).
7.
The reporting entity concept states that economic events can be identified with a particular unit of accountability. This concept requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities.
8.
Accounting information has relevance if it makes a difference in a decision. Faithful representation shows the economic reality of events rather than just their legal form. Faithful representation is achieved if the information is complete, neutral and free from material error. Complete information includes all information necessary to show the economic reality of the transaction. Accounting information is neutral if it is free from bias intended to attain a predetermined result or encourage a particular behaviour.
9.
Historical cost represents the amount paid in a transaction. The fair value of an asset is generally the amount an asset could be sold for in the market. On the date of purchase, fair value and cost are the same. As time progresses, the fair value changes depending on the nature of the asset.
10. In order for an event to be recognized in the accounting records, the event must change the entity’s financial position. Examples of events that are not transactions include hiring of employees and signing a lease for premises. 11. The monetary unit concept states that only transaction data that can be expressed as an amount of money may be included in the accounting records. Consequently, information that cannot be objectively measured in dollars cannot be included as transactions of the business. It is also assumed that the monetary unit is stable with respect to the value over several years. In other words, inflation is ignored.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 12. The basic accounting equation is Assets = Liabilities + Owner's Equity and the expanded accounting equation is Assets = Liabilities + Owner's Capital – Owner’s Drawings + Revenue − Expenses. The equation is the basis for recording and summarizing all of the economic events and transactions of a business. 13. (a) Assets are resources controlled by a business as a result of past events and from which future economic benefits (like cash) are expected to flow into the business. Liabilities are current obligations, arising from past events, the settlement of which will include an outflow of economic benefits (such as cash or services) Put more simply, liabilities are existing debts and obligations. Owner's equity is the residual assets in a business after deducting liabilities. (b)
Revenues and investments by the owner increase owner's equity. Drawings and expenses decrease owner’s equity.
14. Accounts Receivable represent amounts owed to the business by its customers for services performed or goods provided, but for which collection has not yet been received. It is an asset. Accounts Payable represent amounts owed by the business for services or goods received, but for which payment has not yet been made. It is a liability. 15. Profit or loss is the result of the calculation: revenues less expenses. If revenues exceed expenses, the business has experienced profit. If expenses exceed revenues, a loss is experienced by the business. 16. (a) (b)
Accounts for assets, liabilities and owner’s equity are reported on the balance sheet. Accounts for revenue and expenses are reported on the income statement.
17. 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, such as when equipment is purchased for cash (resulting in an increase in the equipment asset account which is offset by a decrease in the cash asset account).
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QUESTIONS (Continued) 18. No, this treatment is not proper. While the transaction does involve a disbursement of cash, it does not represent an expense. Expenses are decreases in owner's equity resulting from business activities entered into for the purpose of earning profit. This transaction is a withdrawal of capital from the business by the owner and should be recorded as a decrease in both cash and owner’s equity. 19. Financial statements are prepared the following order: 1) Income statement 2) Statement of owners’ equity and 3) Balance sheet. This sequence is necessary because the profit or loss calculated on the income statement is used in the statement of owner’s equity, reporting the amounts that affect the owner’s equity during the year. The ending balance on the statement of owner’s equity is the year-end balance of the owner’s capital account. That balance is needed in the Balance sheet. 20. It is likely that the use of rounded figures would not change the decisions made by the users of the financial statements. As well, presenting the information in this manner make the statements easier to read and analyze, thereby increasing their usefulness to the users.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 1-1 (a) Kind of Decision 4 3 2 5 1
User Owner Marketing manager Creditor Chief financial officer Labour union
(b) Internal or External User Internal Internal External Internal External
BRIEF EXERCISE 1-2 (a) (b)
(c)
P
C PP
BRIEF EXERCISE 1-3 (a)
The student is provided with the opportunity to cheat on an exam.
(b)
A production supervisor might become aware of a defect in a company’s product that is ready to ship but his/her bonus is based on volume of shipments.
(c)
A banker is able to approve a loan for an unqualified family member.
BRIEF EXERCISE 1-4 (a) (b) (c) (d) (e)
F F T T T
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BRIEF EXERCISE 1-5 (a) (b) (c) (d)
F F T T
BRIEF EXERCISE 1-6 (a) (b) (c) (d) (e)
5. 1. 4. 2. 3.
Monetary unit Historical cost Reporting entity Revenue recognition Going concern assumption
BRIEF EXERCISE 1-7
(a) (b) (c) (d) (e)
Component
Balance Sheet or Income Statement
Revenues Assets Owner’s equity Liabilities Expenses
Income Statement Balance Sheet Balance Sheet Balance Sheet Income Statement
BRIEF EXERCISE 1-8 (a)
$75,000 − $24,000 = $51,000 (Owner's Equity)
(b) $150,000 + $91,000 = $241,000 (Assets) (c)
$89,000 − $52,000 = $37,000 (Liabilities)
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BRIEF EXERCISE 1-9 (a)
$120,000 + $232,000 = $352,000 (Assets)
(b) $190,000 − $91,000 = $99,000 (Total liabilities) (c)
$800,000 − ($800,000 x ½) = $400,000 (Owner’s equity)
BRIEF EXERCISE 1-10 Assets = Liabilities + Owner’s Equity $850,000 = $550,000 + X Owner’s Equity = Assets − Liabilities $300,000 = $850,000 − $550,000 (a)
($850,000 + $130,000) − ($550,000 − $80,000) = $510,000 (Owner's equity)
(b) ($550,000 − $95,000) + ($300,000 − $40,000 + $100,000) = $815,000 (Assets) (c)
($850,000 + $45,000) − ($550,000 − $50,000) = $395,000 ending balance Owner’s equity $395,000 + $40,000 − $300,000 = $135,000 Profit
BRIEF EXERCISE 1-11 1. 2. 3. 4. 5. 6.
Accounts receivable Salaries payable Equipment Supplies Owner’s capital Notes payable
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 1-12 Transaction (a) (b) (c) (d) (e) (f) (g) (h) (i)
Assets +$250 +500 –300 –250 +1,000 –400 NE +500 / –500 +450
Owner's Equity Drawings Revenues NE NE NE +$500 NE NE NE NE NE NE –$400 NE NE NE
Liabilities +$250 NE NE –250 NE NE NE
Capital NE NE NE NE +$1,000 NE NE
NE
NE
NE
NE
NE
+450
NE
NE
NE
NE
Expenses NE NE –$300 NE NE NE NE
BRIEF EXERCISE 1-13 (a) (b) (c) (d)
Description Transaction Analysis Company paid in advance for rent. 2 Owner invests cash in the business. 1 Supplies are purchased on account. 3 Company provides service on account. 4
BRIEF EXERCISE 1-14 E R I E R E D
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(a) Advertising expense (b) Commission fees earned (c) Cash received from company owner (d) Amounts paid to employees (e) Services performed on account (f) Utilities incurred (g) Cash distributed to company owner
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 1-15 (a) (b) (c) (d)
$68,000 − $25,000 − $50,000 = drawings $7,000 $65,000 + $33,000 − $68,000 = profit $30,000 $65,000 Ending balance 2014 = Opening balance 2015 $65,000 + $20,000 + 17,000 − $12,000 = $90,000
BRIEF EXERCISE 1-16 PRAIRIE COMPANY Income Statement Month Ended October 31, 2017 Revenues Service revenue ............................................... Expenses Advertising expense ........................................ $3,600 Rent expense ................................................... 2,600 Total expenses ............................................ Profit......................................................................
$23,000
6,200 $16,800
BRIEF EXERCISE 1-17 PRAIRIE COMPANY Statement of Owner's Equity Month Ended October 31, 2017 N. Woods, Capital, October 1 .............................. Add: Profit ......................................................... Less: Drawings.................................................... N. Woods, Capital, October 31 ............................
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$36,000 16,800 52,800 6,000 $46,800
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 1-18
PRAIRIE COMPANY Balance Sheet October 31, 2017 Assets Cash .................................................................................. $ 59,300 Accounts receivable ........................................................ 77,500 Total assets ............................................................... $136,800 Liabilities and Owner's Equity Liabilities Accounts payable ..................................................... $ 90,000 Owner's equity N. Woods, capital ...................................................... 46,800 Total liabilities and owner's equity ................... $136,800
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 1-1 (a)
Customer Store manager Canada Revenue Agency Supplier Labour unions Chief Financial Officer Marketing manager Loan officer
E - External I - Internal E - External E - External E - External I – Internal I - Internal E - External
(b) Can the company afford to give our members a pay raise?
E
How does the company’s profitability compare with other companies in the industry? E Do we need to borrow money in the near future?
I
What does it cost to manufacture each unit produced?
I
Has the company paid all income tax amounts owing?
E
Which product should we emphasize?
I
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EXERCISE 1-2 (a)
Chief Financial Officer — Can lululemon Athletica Inc. generate enough cash to expand its product line? Human Resource Manager — What is lululemon Athletica Inc.’s annual salary expense?
(b) Creditor — Does lululemon Athletica Inc. have enough cash available to make its monthly debt payments? Investor — How much did lululemon Athletica Inc. pay in dividends last year?
EXERCISE 1-3
Proprietorship F F F F F F T F
(a) (b) (c) (d) (e) (f) (g) (h)
Partnership F F F F F T T F
Publicly Traded Corporation T F T T T T F T
EXERCISE 1-4 (a) (b) (c) (d) (e) (f)
2 1 5 6 4 3
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Faithful representation Relevance Neutrality Understandability Verifiability Comparability
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EXERCISE 1-5 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)
8 10 1 11 12 5 3 7 4 6 2 9
Corporation Generally accepted accounting principles (GAAP) Accounts payable Accounts receivable Owner’s equity Prepaid expense Creditor Assets International Financial Reporting Standards (IFRS) Profit Expenses Unearned revenue
EXERCISE 1-6 (a) (b) (c) (d) (e)
$6,800 - $400 - $900 - $3,500 = $2,000 $18,000 - $6,800 = $11,200 Same as (b) $11,200 $26,200 - $21,700 = $4,500 $21,200 – $11,200 = $10,000
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EXERCISE 1-7 The statement of owner’s equity is a calculation presented in statement form, therefore, we can use the following equation and solve for the unknown in this question: Owner’s equity, beginning of period + Owner’s investments + Profit (loss) for the period – Owner’s withdrawals = Owner’s equity, end of period
(a)
Owner’s equity, December 31, 2017 = $370,000 – $210,000 = $160,000 $0 + $100,000 + Profit(loss) - $50,000 = $160,000 Profit(loss) = $160,000 - $100,000 + 50,000 Profit (loss) = $110,000
(b) Owner’s equity, December 31, 2018 = $440,000 - $290,000 = $150,000 $160,000 (see a) + $40,000 + Profit(loss) - $0 = $150,000 Profit(loss) = $150,000 - $160,000 - $40,000 Profit (loss) = ($50,000) (c)
Owner’s equity, December 31, 2019 = $525,000 - $355,000 = $170,000
$150,000 (see b) + $10,000 + Profit(loss) - $60,000 = $170,000 Profit(loss) = $170,000 - $150,000 - $10,000 + $60,000 Profit (loss) = $70,000
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EXERCISE 1-8 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
Accounts payable Accounts receivable Cash Equipment Interest payable Interest revenue Interest expense Investment by the owner Service revenue Prepaid rent P. Zizler, capital (opening balance) P. Zizler, drawings Salaries expense Supplies Supplies expense Unearned revenue
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(a) L A A A L Eq Eq Eq Eq A
(b) BS BS BS BS BS IS IS OE IS BS
Eq Eq Eq A Eq L
OE OE IS BS IS BS
Chapter 1
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Accounting Principles, Seventh Canadian Edition
EXERCISE 1-9 (a) and (b) 1. This accounting treatment is incorrect, as it violates the historical cost principle. Land was reported at its market value, when it should have been recorded and reported at cost. 2. This accounting treatment is correct. Although a commitment for future payments is put into place when the lease is signed, an exchange has not yet taken place so there is no transaction that needs to be recorded. At this time, all that is required concerning this lease is to disclose the details of the commitment in the notes to the financial statements. 3. This accounting treatment is incorrect, as it violates the reporting entity assumption. An owner’s personal transactions should be kept separate from those of the business. Instead of being charged as an expense to the business, the transaction should be recorded as drawings taken by the owner. 4. This accounting treatment is incorrect, because at the time of payment, the insurance coverage had not yet been used up. The amount should have been recorded to Prepaid Insurance. Eventually, when the coverage expires at the end of one year, the full amount of $1,200 will have become insurance expense. 5. This accounting treatment is partially correct. It is assumed that a company is a going concern, unless the notes state otherwise. Consequently, the statement in the notes that the company is a going concern need not be added. On the other hand, the company is required to make the disclosure that it is following ASPE.
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EXERCISE 1-10 (a) and (b) 1. This is a transaction that should be recorded in the accounts as there has been an exchange of assets. Cash was reduced and equipment was increased. The historical cost of $10,000 should be used when recording this transaction. 2. This is a transaction that should be recorded in the accounts as there has been an exchange of assets. Cash was reduced and equipment was increased. The transaction is to be recorded in Canadian funds in order to follow the monetary unit concept, so the amount that should be used when recording this transaction is $5,200. 3. This is a transaction that should be recorded in the accounts because a performance obligation has been completed related to a contract with a customer and accounts receivable should be increased as the company now has a right to payment. The amount of $4,000 should be used when recording this transaction. 4. This is not a transaction as an exchange has not yet occurred. 5. This is a transaction that should be recorded in the accounts because an asset, cash has increased and a liability has been created (unearned revenue) to perform services to the customer at a future date. The amount of $4,000 should be used in when recording this transaction.
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EXERCISE 1-11 1.
Purchase inventory on credit. Increases an asset (inventory) and increases a liability (accounts payable).
2.
Investment made by owner. Increases an asset (cash) and increases owner’s equity (owner’s capital).
3.
Payment of accounts payable. Decreases an asset (cash) and decreases a liability (accounts payable).
4.
Withdrawal of cash by the owner or payment of an expense. Decreases an asset (cash) and decreases owner’s equity (drawings or expense).
5.
Record salaries due to employees. Increases a liability (salaries payable) and decreases owner’s equity (expense).
6.
Collect an accounts receivable. Increases one asset (cash) and decreases another asset (accounts receivable).
Note: These are examples. There are other correct responses.
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EXERCISE 1-12 Assets
Trans. Cash Bal. $12,000 1 –3,000 2 +12,000 3 –3,000 4 –2,500 5 +7,000 6 –1,000 7 –5,000 8 –2,100 9 No entry 10 Total $14,400
+ Accounts Rec.
= + Equipment
$18,000
Liabilities + Accounts Payable $4,000
+
+ Note Payable
Owner's Equity + G. Brister Capital $26,000
G. Brister Drawings
+ Revenues Expenses
+$20,000
+$23,000
–12,000 –$3,000 –2,500 +$7,000 –1,000 –$5,000
+$6,000
+$23,000
+1,500 +$3,000
–2,000
–100
+$18,000
–1,500 –$5,600
+$26,000
–$5,000
+$7,000
$43,400 = $ 43,400
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EXERCISE 1-13 (a)
1.
Owner invested $18,000 cash and equipment with the fair value of $6,000 in the business. 2. Purchased equipment for $8,000, paying $4,000 in cash with the balance of $4,000 on account. 3. Prepaid for insurance for $750 cash. 4. Earned $8,300 in service revenue, receiving $3,500 cash with the remaining $4,800 on account. 5. Paid $2,000 cash on accounts payable. 6. B. Star withdrew $3,300 cash for personal use. 7. Paid $800 cash for rent for the month of July. 8. Collected $1,350 cash from customers on account. 9. Paid salaries of $2,700. 10. Incurred $420 of utilities expense on account.
(b) Revenues ................................................................... Rent expense ............................................................. Salaries expense........................................................ Utilities expense ........................................................ Profit........................................................................... (c)
$8,300 (800) (2,700) (420) $4,380
Investment ................................................................. $24,000 Profit........................................................................... 4,380 Drawings .................................................................... (3,300) Increase in owner’s equity ........................................ $25,080
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EXERCISE 1-14 STAR & CO. Income Statement Month Ended July 31, 2017 Revenues Service revenue ............................................... Expenses Salaries expense.............................................. $2,700 Rent expense ................................................... 800 Utilities expense .............................................. 420 Total expenses ............................................ Profit......................................................................
$8,300
3,920 $4,380
STAR & CO. Statement of Owner's Equity Month Ended July 31, 2017 B. Star, Capital, July 1.......................................... Add: Investments .............................................. $24,000 Profit .......................................................... 4,380 Less: Drawings.................................................... B. Star, Capital, July 31........................................
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$
0
28,380 28,380 3,300 $25,080
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Accounting Principles, Seventh Canadian Edition
EXERCISE 1-14 (Continued)
STAR & CO. Balance Sheet July 31, 2017 Assets Cash .................................................................................. Accounts receivable ........................................................ Prepaid insurance ............................................................ Equipment......................................................................... Total assets ...............................................................
$ 9,300 3,450 750 14,000 $27,500
Liabilities and Owner's Equity Liabilities Accounts payable ..................................................... $ 2,420 Owner's equity B. Star, Capital ............................................................. 25,080 Total liabilities and owner's equity ..................... $27,500
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EXERCISE 1-15 ATLANTIC CRUISE CO. Income Statement Year Ended May 31, 2017 Revenues Ticket revenue ............................................ $350,640 Expenses Salaries expense......................................... $126,950 Maintenance expense................................. 82,870 Other expenses........................................... 66,500 Interest expense ......................................... 20,960 Advertising expense................................... 3,640 Insurance expense ..................................... 2,566 Total expenses ....................................... 303,486 Profit................................................................. $ 47,154
ATLANTIC CRUISE CO. Statement of Owner's Equity Year Ended May 31, 2017 I. Temelkova, Capital, June 1, 2016 ................ Add: Investments .......................................... Profit ..................................................... Less: Drawings............................................... I. Temelkova, Capital, May 31, 2017 ...............
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$311,182 $5,847 47,154
53,001 364,183 33,950 $330,233
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Accounting Principles, Seventh Canadian Edition
EXERCISE 1-16 ATLANTIC CRUISE CO. Balance Sheet May 31, 2017 Assets Cash ....................................................................... Accounts receivable ............................................. Supplies ................................................................. Prepaid insurance ................................................. Building.................................................................. Equipment.............................................................. Total assets ..................................................
$ 20,080 42,950 16,800 1,283 122,570 553,300 $756,983
Liabilities and Owner's Equity Liabilities Notes payable ....................................................... $379,000 Accounts payable ................................................ 47,750 Total liabilities .............................................. 426,750 Owner's equity I. Temelkova, Capital ............................................ 330,233 Total liabilities and owner's equity.................. $756,983
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EXERCISE 1-17 (a)
Revenues—camping fees ........................................ $150,000 Revenues—general store......................................... 40,000 Total revenue..................................................... 190,000 Operating expenses ................................................. 150,000 Profit .......................................................................... $ 40,000
(b) J. Cumby, Capital, April 1, 2016 .............................. Add: Profit .............................................................. Less: J. Cumby, Drawings ...................................... J. Cumby, Capital, March 31, 2017 ..........................
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$17,000 40,000 57,000 5,000 $52,000
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EXERCISE 1-17 (Continued) (c) DEER PARK Balance Sheet March 31, 2017 Assets Cash ........................................................................... $ 9,400 Accounts receivable ..................................................... 21,000 Supplies ..................................................................... 2,500 Prepaid insurance ..................................................... 600 Equipment.................................................................. 110,000 Total assets ........................................................... $143,500 Liabilities and Owner's Equity Liabilities Notes payable ....................................................... $ 70,000 Accounts payable ..................................................... 11,500 Unearned revenue .................................................. 10,000 Total liabilities ...................................................... 91,500 Owner's equity J. Cumby, Capital ................................................... 52,000 Total liabilities and owner's equity.................. $143,500
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SOLUTIONS TO PROBLEMS PROBLEM 1-1A 1. (a) In deciding to extend credit to a new customer, Pierson Industries is an external user of the accounting information of its customers. (b) Pierson Industries would focus its attention on the information about the customer’s economic resources and claims to those resources. The terms of the credit they are extending to customers, requires collection in a short period of time. Funds used to pay Pierson Industries would come from cash on hand. The balance sheet will show if the new customer has enough cash to meet its obligations, including those to Pierson Industries. 2. (a) The owner, Dean Gunnerson is an internal user of the accounting information of Toys and Sports Co. (b) When deciding which manufactured products generate the most profit, the information that will be most relevant to the owner will be shown on the income statement. The income statement reports the past performance of the business in terms of its revenue, expenses and profit. Using the details of revenue and expenses at a product line level, the owner can establish which product line is more profitable. 3. (a) The president of Hi-tech Adventure is an internal user of the accounting information. (b) In order to determine if Hi-tech Adventure is holding enough cash to buy additional equipment, the president should examine the business’s economic resources and claims to those resources in order to determine if the necessary cash is available to meet obligations and address the equipment purchase plans.
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PROBLEM 1-1A (Continued) 4. (a) Standen Bank is an external user of the accounting information of the small business that is the loan applicant. (b) In deciding whether to extend a loan, Standen Bank is interested in two things—the ability of the company to make interest payments on an annual basis for the next five years and the ability to repay the principal amount at the end of five years. In order to evaluate both of these factors, the focus should be on business’s economic resources and claims to those resources in order to determine if the necessary cash is available to meet obligations. As well, Standen Bank will look at the economic performance of the business that should generate the necessary cash from its operations on an ongoing basis. This will be the most important factor in determining if the company will survive and be able to repay the loan. Taking It Further: When making decisions based on the financial statements of a business, users need to rely on the faithful representation of the financial statements. The individual preparing the financial statements must adhere to the highest standards of ethical behaviour to ensure that the decision maker is not hurt by false or misleading financial information.
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PROBLEM 1-2A 1. (a) Tom will likely operate his walking service as a proprietorship because he is planning on operating it for a short time period and a proprietorship is the simplest and least costly business organization to form and dissolve. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. 2. (a) Joseph and Sabra might form a partnership as it is a small operation and would be easy to set up. However, a corporation may offer benefits that the partnership will not offer. The corporation will give them limited liability. Also a corporation may be the best form of business for them because they plan to raise funds in the coming year. It is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS. 3. (a) The professors should incorporate their business because of their concerns about the legal liabilities. A corporation is the only form of business that provides limited liability to its owners. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS.
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PROBLEM 1-2A (Continued) 4. (a) Abdur would likely form a corporation because he needs to raise funds to invest in inventories and equipment. He has no savings or personal assets and it is normally easier to raise funds through a corporation than through a proprietorship or partnership. (b) ASPE will likely be the accounting standard followed, as it is simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS.
Taking It Further: The advantages of starting a business as a proprietorship and later incorporating the business include: the ease of formation, simplicity and reduced costs. As the business grows and the additional costs and administration that are required of corporations are justified, incorporating the business provides additional advantages.
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PROBLEM 1-3A (a)
Total assets (Jan. 1, 2015) ...................................... Total liabilities (Jan. 1, 2015) .................................. Total owner's equity (Jan. 1, 2015) .........................
$40,000 0 $40,000
(b) Total liabilities (Dec. 31, 2015 ................................. $50,000 Total owner's equity (Dec. 31, 2015) (c) below ...... 75,000 Total assets (Dec. 31, 2015) .................................... $125,000 (c)
Total owner's equity (Dec. 31, 2015) ...................... Equal to owner's equity (Jan. 1, 2016) given
$75,000
(d) Total owner's equity (Dec. 31, 2015) ...................... Total owner's equity (Jan. 1, 2015)......................... Increase in owner's equity ......................................
$75,000 40,000 $35,000
Increase in owner's equity ...................................... Less: Investments ................................................... Add: Drawings ......................................................... Profit .........................................................................
$35,000 (7,000) 15,000 $43,000
(e)
Total revenues ......................................................... $132,000 Less: Profit (d) above .............................................. (43,000) Total expenses......................................................... $ 89,000
(f)
Total liabilities (Jan. 1, 2016) .................................. $50,000 Total owner's equity (Jan. 1, 2016)......................... 75,000 Total assets (Jan. 1, 2016) ...................................... $125,000 Also same as (b) above
(g) Total assets (Dec. 31, 2016) ................................... Total owner's equity (Dec. 31, 2016)...................... Total liabilities (Dec. 31, 2016) ...............................
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$140,000 97,000 $ 43,000
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PROBLEM 1-3A (Continued) (h) Total owner's equity (Dec. 31, 2016) ...................... Total owner's equity (Jan. 1, 2016) (c) above ........ Increase in owner's equity ......................................
$97,000 75,000 $22,000
Increase in owner's equity ...................................... Less: Profit ................................................ $40,000 Investments ..................................... 0 Drawings ..................................................................
$22,000
(i)
Profit......................................................................... Total expenses ........................................................ Total revenues .........................................................
$40,000 95,000 $135,000
(j)
Total assets (Jan. 1, 2017) ........................................ $140,000 Equal to total assets (Dec. 31, 2016) given
(k)
Total liabilities (Jan. 1, 2017) .................................... $43,000 Equal to total liabilities (Dec. 31, 2016) (g) above
(l)
Total owner's equity (Jan. 1, 2017............................ $97,000 Equal to total owner's equity (Dec. 31, 2016) given
40,000 $18,000
(m) Total assets (Dec. 31, 2017) ................................... Total liabilities (Dec. 31, 2017)............................... Total owner's equity (Dec. 31, 2017) .....................
$172,000 65,000 $107,000
(n) Total owner's equity (Dec. 31, 2017) ..................... Total owner's equity (Jan. 1, 2017) (l) above ........ Increase in owner's equity .....................................
$107,000 97,000 $ 10,000
Increase in owner's equity ..................................... Less: Profit (o) below .............................. ($31,000) Add: Drawings ....................................... 36,000 Investments ............................................................
$10,000
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5,000 $15,000
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PROBLEM 1-3A (Continued) (o) Total revenues ........................................................... $157,000 Less: Total expenses ................................................ 126,000 Profit............................................................................ $ 31,000 Taking It Further: In order to decide if an owner is able to withdraw cash from the business, the owner needs to find out if her/his capital account is sufficiently high to cover the drawings charge. S/He also needs to know that there is sufficient cash available to make the withdrawal and still have enough cash to meet the obligations of the business.
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PROBLEM 139A (a) and (b) ($ in thousands) 1. L 2. A 3. A 4. R 5. A 6. E 7. E 8. C 9. D 10. E 11. E
(c)
BS BS BS IS BS IS IS OE OE IS IS
Accounts payable Accounts receivable Cash Consulting revenue Equipment Interest expense Rent expense S. Parker, capital, January 1 S. Parker, drawings Salaries expense Utilities expense
$ 810 900 3,500 15,730 5,700 790 4,800 6,600 3,900 3,200 350
(in thousands) Revenue – Expenses = Profit Revenue = $15,730 Expenses ($4,800 + $790 +$3,200 + $350) = $9,140 Profit ($15,730 - $9,140) = $6,590
Taking It Further: It is important for Parker Information Technology Company to keep track of its different types of expenses to ensure that management is able to get the necessary information to make decisions concerning where improvements in performance can be made. The Company can also determine, by comparing the expenses with the revenues, if the amount of expenses is reasonable.
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PROBLEM 1-5A 1. (a) This accounting treatment is incorrect as people involved with the organization are not an asset of the business to be placed on the balance sheet. There is no reasonable way that a measurement of their value could be made. (b) The entries to record people as assets should be removed from the accounting records. 2. (a) This accounting treatment is incorrect as it violates the historical cost concept. The land and building should be recorded at $350,000, the amount paid on purchase. If the company was in the business of buying and reselling land and buildings, they may be able to value these items at fair value but that does not appear to be the case here. It appears that Sharon is attempting to deliberately overstate her assets to get a loan. These actions would be considered professionally unethical. (b) The entry to increase the carrying value of the land and building from $350,000 to $500,000 should be removed from the accounting records of Barton Industries. 3. (a) This accounting treatment is incorrect as it violates the reporting entity concept. The electric guitar is a personal asset, and not an asset of the business. (b) The entry to record the purchase of the guitar should be removed from the equipment account. Instead this should be recorded as a drawing by Will Viceira. 4. (a) West Spirit Oil Corp. does not have a choice in adopting IFRS because it is a publicly traded corporation. (b) The 2017 financial statements must be prepared in accordance with the International Financial Reporting Standards (IFRS).
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PROBLEM 1-5A (Continued) Taking It Further: It is important for private and public companies to follow generally accepted accounting principles (GAAP) because a common set of standards, applied by all businesses and entities, provides financial statements which are reasonably comparable. Without a common set of standards, each enterprise could develop its own theory structure and set of practices, resulting in non-comparability among enterprises, to the detriment of financial statement users.
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PROBLEM 1-6A (a)
PETRONIC ACCOUNTING SERVICES Assets
Transaction June 4 6 8
Cash +$4,376 -1,050
+
+
+
+
Acc. Rec.
Supplies
Furniture
Acc. Payable
+$3,160
Owner's Equity
+ F. Petronick Capital +$4,376
– F. Petronick Drawings
28
+900
30
-128
Revenues
Expenses
-1,580 +$344
-49
–
+$1,865
-1,580
26
+
+3,160
+1,865
18
Total
Liabilities +
-$1,050
15 15
=
+344 -49
-900 -$128
$2,469
$965
$344
$3,160
$1,924
+$4,376
-$128
+$1,865
–$1,099
$6,938 = $6,938 Note: Events at other dates than the transactions above are not transactions or are personal transactions of F. Petronick.
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PROBLEM 1-6A (Continued) (b) Capital Investment ........................................................ $4,376 Less: Drawings......................................................... 128 4,248 Add: Revenue .......................................................... 1,865 Less: Expenses ........................................................... (1,099) F. Petronick, Capital, June 30 ....................................... $5,014 Taking It Further: $144 should be reported as an asset, Supplies, on the June 30 balance sheet. This is the amount of supplies on hand. $200 should be reported as an expense. This is the cost of supplies that were actually used in the month of June.
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PROBLEM 1-7A (a)
LETOURNEAU LEGAL SERVICES Assets +
Transaction 1
+
Acc. Rec.
Cash
Liabilities
=
Supplies
+
Equipment
+
+ Unearned RevAcc. Payable enue
Owner's Equity
+ +
+
–
+
–
Note Payable
A. LeTourneau Capital
A. LeTourneau Drawings
Revenues
Expenses
2 3
+$50,000
+$50,000
4 5
–2,500
–$2,500
6 7
–10,000
+10,000
8 9
+$400 –3,000
10
+$6,500
+$3,500
+$3,500
11
+2,500
12
–500
13
–400
Total
+400 +$3,500 +$2,500 -500 –400
$36,100 $3,500
$400
$16,500
$0
$2,500
$3,500
$50,000
0
$3,500
$56,500 = $56,500 Solutions Manual
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PROBLEM 1-7A (Continued) (a) (Continued) Notes: Items 1 (March 4), 2 (March 7), and 4 (March 14) are not relevant to the business entity. They are personal transactions. Item 6 (March 19) is not recorded, because the transaction has not yet been completed. There is no expense, nor liability, until he begins working. (b)
Profit = Revenues − Expenses = ($3,500 − $3,000) = $500 Owner’s Equity = Investment − Drawings + Profit = ($50,000 − $0 + $500) = $50,500
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PROBLEM 1-7A (Continued) (c) LETOURNEAU LEGAL SERVICES Balance Sheet March 31, 2017 Assets Cash .......................................................................... Accounts receivable ................................................ Supplies .................................................................... Equipment.................................................................
$36,100 3,500 400 16,500
Total assets ..........................................................
$56,500
Liabilities and Owner's Equity Note payable ................................................................. $ 3,500 Unearned revenue .................................................... 2,500 Total liabilities...................................................... 6,000 Owner’s Equity A. LeTourneau, Capital ............................................ 50,500 Total liabilities and owner's equity ........................ $56,500 Taking It Further: Recognition of an event or transaction should take place only when there has been a change in the financial position of the company. In other words, if a transaction meets the definition of an asset, liability, equity, revenue or expense and has a measureable dollar amount, it should be recognized in the accounting records. As well, personal transactions must be excluded, to comply with the reporting entity concept.
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PROBLEM 1-8A (a)
Bal Sept. 4 5 7 12 15 15 15 18 20 26 29 30
Izabela Jach, MD Accounts Cash + Receivable + $3,000 + $1,500 + +800 −800 +7,700 +2,800 −2,900 −800 –2,800 –1,900 –275 +700 –700 −1,000 +3,000
Supplies + $600 +
EquipAccounts Notes I. Jach, I. Jach, ment = Payable + Payable + Capital – Drawings + Revenues – Expenses $7,500 = $5,500 $3,000 + $4,100 +$10,500 +2,300
-2,900 +1,500 –$2,800 –1,900 –275 –$1,000 +3,000 –325
+325 $5,525 +
+10,000 $12,800 +
$600 +
$9,800 =
$4,425 + $6,000 +
$4,100 –
$1,000 +
+10,000 $20,500 –
$5,300
$28,725 = $28,725 Note that the September 28 transaction is not recorded, because the work will not commence until October.
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PROBLEM 1-8A (Continued) (b) IZABELA JACK, MD Income Statement Month Ended September 30, 2017 Revenues Service revenue ....................................................... $20,500 Expenses Advertising expense.................................... $ 275 Rent expense .................................................. 1,900 Salaries expense............................................. 2,800 Utilities expense ........................................... 325 Total expenses ..................................................... 5,300 Profit............................................................................. $15,200
IZABELA JACH, MD Statement of Owner's Equity Month Ended September 30, 2017 I.Jach, Capital, September 1 ........................................ $4,100 Add: Profit ................................................................. 15,200 19,300 Less: Drawings ......................................................... 1,000 I. Jach, Capital, September 30 .............................. $18,300
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PROBLEM 1-8A (Continued) (b) (Continued) IZABELA JACH, MD Balance Sheet September 30, 2017 Assets Cash ........................................................................... Accounts receivable ................................................. Supplies on hand ...................................................... Equipment..................................................................
$ 5,525 12,800 600 9,800
Total assets ........................................................... $28,725 Liabilities and Owner's Equity Liabilities Accounts payable ................................................. $ 4,425 Notes payable ....................................................... 6,000 Total liabilities ...................................................... 10,425 Owner's Equity L. Anderson, Capital ............................................... 18,300 Total liabilities and owner's equity.................... $28,725 Taking It Further: When an item is purchased on account, payment usually must be made in 30 days. If a note payable is used, payment will be delayed until the maturity date of the note, which is typically longer than 30 days. Although this will likely mean that interest will also have to be paid, the cash remains in the business longer than if the item had been purchased on account.
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PROBLEM 1-9A PAVLOV’S HOME RENOVATIONS Income Statement Year Ended December 31, 2017 Revenues Service revenue ............................................................ $153,750 Expenses Interest expense .......................................... Insurance expense ...................................... Supplies expense ........................................ Salaries expense.......................................... Operating expenses .................................... Total expenses ........................................
$ 1,195 3,375 20,095 88,230 3,545 116,440
Profit.................................................................................... $ 37,310
PAVLOV’S HOME RENOVATIONS Statement of Owner's Equity Year Ended December 31, 2017 J. Pavlov, Capital, January 1 ............................................ $45,850 Add: Profit ....................................................................... 37,310 83,160 Less: J. Pavlov, Drawings ............................................... 44,800 J. Pavlov, Capital, December 31....................................... $38,360
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PROBLEM 1-9A (Continued) PAVLOV’S HOME RENOVATIONS Balance Sheet December 31, 2017
Assets Cash ................................................................................... Accounts receivable ......................................................... Supplies ............................................................................. Prepaid insurance ............................................................. Equipment.......................................................................... Vehicles .............................................................................
$ 8,250 10,080 595 1,685 29,400 42,000
Total assets ................................................................... $92,010 Liabilities and Owner's Equity Liabilities Notes payable ................................................................. $30,800 Accounts payable ......................................................... 7,850 Unearned revenue .......................................................... 15,000 Total liabilities .............................................................. 53,650 Owner's equity J. Pavlov, Capital ............................................................ 38,360 Total liabilities and owner's equity ........................... $92,010 Taking It Further: In order to prepare the statement of owner’s equity, you need to have the amount of the profit or loss for the year. This is why the income statement is prepared first. The statement of owner’s equity is prepared next in order to have the ending capital balance for the balance sheet.
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PROBLEM 1-52A $91,300 (from ii) − $9,500 − $5,300 − $41,500 = $35,000 (ii) Total liabilities and owner’s equity = $91,300 (iii) $43,800 − $26,000 = $17,800 (iv) $91,300 − $43,800 = $47,500 (v) $59,500 − $32,000 − $1,500 = $26,000 (vi) $95,000 − $59,500 = $35,500 (vii) $62,500 − $22,000 − $35,500 (from viii) = $5,000 (viii) $35,500 from income statement (from vi) (ix) $62,500 − $47,500 (from x) = $15,000 (x) $47,500 from the balance sheet (from iv)
(a) (i)
(b) In preparing the financial statements, the first statement to be prepared is the income statement. The profit figure is used in the statement of owner’s equity to calculate the ending balance of capital. The balance sheet is then completed, using the balance of capital as calculated in the statement of owner’s equity. Taking It Further: The balance sheet, which is sometimes referred to as the statement of financial position, reports balances at a specific point in time – as of the last day of the reporting period. , The income statement on the other hand, reports the results of revenue and expense business transactions for a period of time, whether it is a month, a quarter or a fiscal year. The statement of owner’s equity also reports for the period of time, those items that have increased or decreased capital. Consequently, the income statement and the statement of owner’s equity are for the period of time ending on a specific date and the balance sheet is at that specific date.
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PROBLEM 1-11A (a) 1.
The land should be recorded at cost of $36,000 until it is sold. The increase in value is not recognized until the land is sold. (historical cost concept)
2.
The accounts receivable should be recorded in Canadian dollars not in Chinese yuan (monetary unit concept). Accounts receivable should have the corrected balance of $7,000 Canadian.
3.
Equipment is an asset and not a liability. The entry in the liabilities for equipment of $58,000 must be removed and appear instead under assets. Supplies are also assets, not liabilities. This item will also have to be removed from the liabilities and added to assets.
4.
Notes payable are liabilities, not assets. The company has an obligation to pay the note in the future. The entry in the assets for notes payable must be removed from assets and instead should appear under liabilities.
5.
C. Dryfuss, capital is an equity account, not an asset. His investment in the company is an asset to him, but for the company it is equity (reporting entity concept). The entry in the assets for C. Dryfuss, capital should be removed and instead appear under owner’s equity section of the balance sheet. The ‘plug’ figure needs to be removed. The accounting equation states that Assets = Liabilities + Owner’s Equity. Dryfuss needs to make the corrections above in order to determine the Owner’s Equity balance.
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PROBLEM 1-11A (Continued) (b) REFLECTIONS BOOK SHOP Balance Sheet April 30, 2017 Assets Cash ................................................................................ $ 10,000 Accounts receivable ($5,000 + $2,000) .......................... 7,000 Supplies ........................................................................... 1,000 Land ................................................................................. 36,000 Equipment........................................................................ 58,000 Building............................................................................ 110,000 Total assets ................................................................. $222,000 Liabilities and Owner's Equity Liabilities Notes payable ............................................................... $120,000 Accounts payable ........................................................ 15,000 Total liabilities ............................................................ 135,000 Owner's equity: C. Dryfuss, capital .......................................................... 87,000 Total liabilities and owner's equity ......................... $222,000
Taking It Further: All transactions affect a minimum of two financial statement items to ensure that the accounting equation always remains in balance – what we do to one side of the equation must be done to the other side. For example, when cash is decreased the reason why the cash is decreased is also recorded. Thus, an increase in another asset or a decrease in a liability or owner’s equity must also be recorded.
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PROBLEM 1-1B 1. (a) The owner, Samuel Colt is an internal user of the accounting information of Organics To You. (b) When deciding which retail products, in this case pasta, generate the most profit, the owner will be interested in the economic performance of the business as shown on the income statement. The income statement reports the past performance of the business in terms of its revenue, expenses and profit. Using the details of revenue and expenses at a product line level, the owner can establish which pasta is more profitable to its retail chain of stores. 2. (a) In deciding to extend credit to a new customer, Backroads Company is an external user of the accounting information of its customers. (b) Backroads Company would focus its attention on the information about Europe Tours Company’s economic resources and claims to those resources. The terms of the credit extended to customers, requires collection in a short period of time. Funds used to pay Backroads Company would come from cash on hand. The balance sheet will show if the new customer has enough cash to meet its obligations, including those to Backroads Company. 3. (a) The senior partner of Accountants R Us is an internal user of the accounting information. (b) In order to determine if the partnership is holding enough cash to increase the amount of partners’ drawings and still have enough cash to expand its operations, the senior partner should examine the business’s economic resources and claims to those resources in order to determine if the necessary cash is available to meet obligations and address the drawings and expansion plans.
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PROBLEM 1-1B (Continued)
Taking It Further: When making decisions based on the financial statements of a business, users need to rely on the faithful representation of the financial statements. To ensure this principle can be met, the individual preparing the financial statements must adhere to the highest standards of ethical behaviour so that the decision maker is not hurt by false or misleading financial information.
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PROBLEM 1-2B 1. (a) The computer science students should incorporate their business because of their concerns about legal liabilities. A corporation is the only form of business that provides limited liability to its owners. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS. 2. (a) Shamira should run her small cupcake shop as a proprietorship because this is the simplest and least costly form of business organization to establish and eventually dissolve. She is the only person involved in the business and is planning to operate for a limited time. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow. 3. (a) Robert and Tom should form a corporation when they combine their operations. This is the best form of business for them to choose because they expect to raise funds in the coming year and it is easier to raise funds in a corporation. A corporation may also receive more favourable income tax treatment. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow. The business would not be a publicly traded corporation requiring the use of IFRS. 4. (a) A partnership would be the most likely form of business for Darcy, Ellen and Meg to choose. It is simpler to form than a corporation and less costly. (b) ASPE will likely be the accounting standards followed, as they are simpler to follow.
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PROBLEM 1-2B (Continued)
Taking It Further: The advantages of starting a business such as a partnership and later incorporating the business include: ease of formation, simplicity, and reduced costs. As the business grows and the additional costs and administration that are required of corporations are justified, incorporating the business provides additional advantages.
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PROBLEM 1-3B (a)
Total owner's equity (Jan. 1, 2015)......................... Total liabilities (Jan. 1, 2015) .................................. Total assets (Jan. 1, 2015).......................................
$60,000 0 $60,000
(b) Total assets (Dec. 31, 2015) .................................... Total owner's equity (Dec. 31, 2015) ...................... Total liabilities (Dec. 31, 2015)................................
$75,000 45,000 $30,000
(c)
Total owner's equity (Dec. 31, 2015) ...................... Total owner's equity (Jan. 1, 2015)......................... Decrease in owner's equity .....................................
$45,000 60,000 $15,000
Decrease in owner's equity .................................... Add: Investments..................................................... Less: Drawings ........................................................ Loss ..........................................................................
$15,000 5,000 0 $20,000
(d) Total expenses ........................................................ $120,000 Less: Loss................................................................ (20,000) Total revenues ......................................................... $100,000 (e)
Total liabilities (Jan. 1, 2016) .................................... $30,000 Equal to total liabilities (Dec. 31, 2015) (b) above
(f)
Total owner's equity (Jan. 1, 2016)........................... $45,000 Equal to total owner's equity (Dec. 31, 2015) given
(g) Total assets (Dec. 31, 2016) ................................... Equal to total assets (Jan. 1, 2017) given
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PROBLEM 1-3B (Continued) (h) Total assets (Dec. 31, 2016) (g) above .................. Total liabilities (Dec. 31, 2016)............................... Total owner's equity (Dec. 31, 2016)......................
$127,000 45,000 $ 82,000
(i)
Total owner's equity (Dec. 31, 2016) ...................... Total owner's equity (Jan. 1, 2016) (f) above ......... Increase in owner's equity ......................................
$82,000 45,000 $37,000
Increase in owner's equity ...................................... Less: Profit .............................................. $(35,000) Add: Drawings ......................................... 10,000 Investments .............................................................
$37,000 (25,000) $12,000
(j)
Profit......................................................................... $ 35,000 Add: Total expenses ............................................... 95,000 Total revenues ......................................................... $130,000
(k)
Total liabilities (Jan. 1, 2017) ...................................... $45,000 Equal to total liabilities (Dec. 31, 2016) given
(l)
Total owner's equity (Jan. 1, 2017) ............................. $82,000 Equal to total owner's equity (Dec. 31, 2016) (h) above
(m) Total assets (Dec. 31, 2017) ...................................... $170,000 Total owner's equity (Dec. 31, 2017) ........................ 100,000 Total liabilities (Dec. 31, 2017) ................................... $ 70,000 (n) Total owner's equity (Dec. 31, 2017) ........................ $100,000 Total owner's equity (Jan. 1, 2017) (l) above ............ 82,000 Increase in owner's equity ......................................... $ 18,000 Increase in owner's equity ..................................... Less: Profit .............................................. $(30,000) Less: Investments .................................. .. 0 Drawings .................................................................
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PROBLEM 1-3B (Continued) (o) Total revenues ........................................................... $160,000 Less: Profit ............................................................... 30,000 Total expenses .......................................................... $130,000 Taking It Further: In order to decide if an owner needs to invest additional cash in the business, the owner needs to determine if there is sufficient cash available to pay the obligations of the business. Quite often when a business is new, cash infusions are needed to fund the purchase of operating assets. Once the business is established and profitable, the owner is able to start making withdrawals.
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PROBLEM 1-4B (a) and (b) ($ in thousands) 1. L 2. A 3. A 4. A 5. E 6. E 7. A 8. L 9. A 10. E 11. A 12. L 13. R 14. R 15. L 16. C 17. D 18. L
(c)
BS BS BS BS IS IS BS BS BS IS BS BS IS IS BS OE OE BS
Accounts payable Accounts receivable Cash Equipment Interest expense Insurance expense Land and buildings Notes payable Prepaid insurance Operating expenses Other assets Other liabilities Other revenue Rent revenues Salaries payable T. Yuen, capital, January 1 T. Yuen, drawings Unearned rent revenue
$195 160 120 600 45 15 1,495 950 30 871 615 396 52 1,295 125 934 20 24
($ in thousands) Revenue – Expenses = Profit Revenue ($1,295 + $52) = $1,347 Expenses ($45 + $15 +$871) = $931 Profit ($1,347 - $931) = $416
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PROBLEM 1-4B (Continued) Taking It Further: It is important for Paradise Mountain Family Resort to keep track of its different types of expenses to ensure that management is able to get the necessary information to make decisions concerning where improvements in performance can be made. As well, separate expenses can be compared with their related revenues to determine the amount of profit from the different sources of revenue activity for the business.
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PROBLEM 1-5B 1. (a)
The accounting treatment is incorrect. The president is a person outside of the organization and not an asset of the business so the impact of his death should not be recorded. (b) The entry to record the impact of the death of the president should be removed from the accounting records. Users of the statements would be aware of the death and no mention need be made in the financial statements notes.
2. (a) The accounting treatment is incorrect as it violates the historical cost concept. The equipment should be recorded at the amount paid to purchase it. (b) The entry to record the purchase of the equipment should be reduced by $100,000 in the accounting records of Montigny. 3. (a) A note to the financial statements stating that Vertical Lines Company is a going concern is not necessary. The business is assumed to be a going concern, unless there is evidence to the contrary. (b) Any note stating that the business is a going concern should be removed. Taking It Further: It is important for companies to follow generally accepted accounting principles (GAAP) because a common set of standards, applied by all businesses and entities, provides financial statements that are reasonably comparable. Without a common set of standards, each enterprise could develop its own theory structure and set of practices, resulting in noncomparability among enterprises, to the detriment of financial statement users.
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PROBLEM 1-6B (a) KENSINGTON BIKE REPAIR SHOP
Cash
+
Acc. Rec.
SupEquipAcc. Unearned Note L.Depres, L.Depres, Ex+ plies + ment = Payable + Revenue + Payable + Capital – Drawings +Revenue – penses
April 1 +$21,000 +$9,000 2 −3,000 5 −1,050 7 +$975 9 +3,200 16 +$2,900 26 +1,200 −1,200 27 −975 28 −290 29 −1,300 30 30 −1,400 30 +750 30 +2,100 $19,485+ $2,450 + $975 + $9,000 =
+$21,000 +$6,000
−$1,050
+$975 +$3,200 +2,900 −975 −290 −1,300 −200 −1,400
+200 +750 +$2,100 $200 + $2,100 + $6,000 + $21,000 −
$1,300 + $6,850
$31,910 = $31,910
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PROBLEM 1-6B (Continued) (b)
Capital investment .................................................... $21,000 Less: Drawings ........................................................ 1,300 19,700 Add: Revenue.......................................................... 6,850 Less: Expenses ........................................................ (2,940) L. Depres, Capital, April 30 ....................................... $23,610
Taking It Further: $500 should be reported as an asset, Supplies, on the April 30 balance sheet; the unused supplies on hand as of that date. $475 should be reported as Supplies Expense representing supplies that were actually used in the month of June.
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PROBLEM 1-7B (a)
Transaction
Cash
BARRY CONSULTING
Acc. + Sup- + Equip. = Acc. + Notes Rec. plies Payable Pay. June 1 +$6,000 2 –900 3 +$545 $545 5 –95 9 +3,275 12 –600 15 +$5,000 17 21 22 26 29 30 30
+
–1,800 +3,000 –545 +5,500 –2,150 –150 +2,500 $14,035 +
Unearn ed + Reve- + L. Barry, – L. Barry, + Revenue – Exnue Capital Drawings penses +$6,000 –$900 –95 +$3,275 –$600 +5,000 –1,800
–3,000 -545 +$5,500 +$2,150 –150 +$2,500 $2,000 +
$545 + $2,150 =
$
0 + $ 5,500 + $2,500 +
$6,000 –
$600 +
$8,275 –
$18,730 = $18,730
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PROBLEM 1-7B (Continued) (a) Note:
(Continued) The first June 1 transaction is not relevant to the business entity. It is a personal transaction. The June 25 transaction is not recorded because the transaction has not yet been completed. Revenue will not be recognized until the services are performed in July.
(b)
Profit = Revenues − Expenses = ($8,275 − $2,945) = $5,330 Owner’s Equity = Investment − Drawings + Profit = ($6,000 − $600 + $5,330) = $10,730
(c) BARRY CONSULTING Balance Sheet June 30, 2017 Assets Cash ........................................................................... $14,035 Accounts receivable ................................................. 2,000 Supplies ..................................................................... 545 Equipment.................................................................. 2,150 Total assets ........................................................... $18,730 Liabilities and Owner's Equity Liabilities Note payable ............................................................ $ 5,500 Unearned revenue .................................................... 2,500 Total liabilities....................................................... 8,000 Owner’s equity L. Barry, Capital (see part (b)) ................................ 10,730 Total liabilities and owner's equity ........................ $18,730
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PROBLEM 1-7B (Continued) Taking It Further: Recognition of an event or transaction should take place only when there has been a change in the financial position of the company. In other words, if a transaction meets the definition of an asset, liability, equity, revenue or expense and has a measureable dollar amount, it should be recognized in the accounting records. As well, personal transactions must be excluded, to comply with the reporting entity concept.
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PROBLEM 1-8B (a)
BAKER’S ACCOUNTING SERVICE +
Trans. Oct. 1 1 1 4 8 14 15 18 20 25 28 29 29 30 30 Total
Cash $5,700 -3,800 -900 +1,550 -500
+
+
=
Acc. Sup- EquipRec. plies ment $2,100 $350 $7,600
+ + + + – + F. UnF. Acc. Notes Revearned Baker, Baker, Pay. Revenue Payable Capital Drawings enues $4,300 $11,450 -3,800 +
-1,550 +4,000
+$3,500 +$900 -300
-400 -$500 +8,000 +2,300
+5,400 -720 +$2,800 +205
-1,200 $13,630
Expenses
-$900
+900 -300 +400 -500 +8,000 +3,100 -720 +2,800
–
$3,350 $350
$11,600 =
$ 705
-205 $ 2,800
$11,500 +
$11,450
-1,200 -$ 1,700
$ 6,300 -$2,125
$28,930 = $28,930
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PROBLEM 1-8B (Continued) (a)
(Continued)
Note: The October 5 and October 26 events are not recorded because no accounting transaction has taken place. The October 26 statement is not a transaction. In the October 5 transaction, the expense incurred for the office assistant will be recorded when the office assistant has worked for Baker. (b) BAKER’S ACCOUNTING SERVICE Income Statement Month Ended October 31, 2017 Revenues Service revenue ........................................................ $6,300 Expenses Advertising expense ........................................ $300 Rent expense ............................................... 900 Salaries expense.......................................... 720 Telephone expense ......................................... 205 Total expenses ..................................................... 2,125 Profit............................................................................... $4,175 BAKER’S ACCOUNTING SERVICE Statement of Owner's Equity Month Ended October 31, 2017 F. Baker, Capital, October 1 ........................................ $11,450 Add: Profit ................................................................. 4,175 15,625 Less: Drawings ........................................................ 1,700 F. Baker, Capital, October 31 ...................................... $13,925
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PROBLEM 1-8B (Continued) (b) (Continued) BAKER’S ACCOUNTING SERVICE Balance Sheet October 31, 2017 Assets Cash ............................................................................. $13,630 Accounts receivable ....................................................... 3,350 Supplies ....................................................................... 350 Equipment..................................................................... 11,600 Total assets ............................................................. $28,930 Liabilities and Owner's Equity Liabilities Notes payable ......................................................... $11,500 Accounts payable ................................................... 705 Unearned revenue .................................................... 2,800 Total liabilities ...................................................... 15,005 Owner's Equity F. Baker, Capital ....................................................... 13,925 Total liabilities and owner's equity.................... $28,930
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PROBLEM 1-8B (Continued) (b) (Continued) Taking It Further: Although a payment was made from the business bank account, the payment was with respect to a personal transaction of the owner for his family. The amount must be recorded as a drawings transaction to the F. Baker, Drawings account as it is not a business expense. The reporting entity concept guides the accounting treatment for these transactions, it states that transactions related to the business must be kept separate from the personal transactions of the owner. In this case, the cost of the dinner is not a benefit to the business nor does it represent a cost associated with operating the business.
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PROBLEM 1-9B JOHANSEN DESIGNS Income Statement Year Ended December 31, 2017 Revenues Service revenue ............................................................ $132,900 Expenses Salaries expense................................................ $70,500 Rent expense .................................................... 18,000 Supplies expense ............................................. 3,225 Telephone expense .......................................... 3,000 Utilities expense ............................................... 2,400 Insurance expense ........................................... 1,800 Interest expense ............................................... 350 Total expenses ........................................................... 99,275 Profit..................................................................................... $33,625 JOHANSEN DESIGNS Statement of Owner's Equity Year Ended December 31, 2017 J. Johansen, Capital, January 1 ....................................... $35,800 Add: Profit ....................................................................... 33,625 69,425 Less: Drawings................................................................. 40,000 J. Johansen, Capital, December 31.................................. $29,425
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PROBLEM 1-9B (Continued) JOHANSEN DESIGNS Balance Sheet December 31, 2017 Assets Cash ................................................................................... $ 11,895 Accounts receivable ......................................................... 6,745 Supplies ............................................................................. 675 Prepaid insurance ............................................................. 600 Furniture ............................................................................ 15,750 Equipment.......................................................................... 9,850 Total assets ................................................................... $45,515 Liabilities and Owner's Equity Liabilities Notes payable ............................................................... Accounts payable ......................................................... Unearned revenue ........................................................ Total liabilities ..........................................................
$ 7,000 6,590 2,500 16,090
Owner's equity J. Johansen, Capital ........................................................ 29,425 Total liabilities and owner's equity ........................... $45,515 Taking It Further: In order to be able to determine the December 31, 2017, balance in the J. Johansen, Capital account for the balance sheet, you need to have prepared the statement of owner’s equity first. The balance in the owner’s capital is not updated each time owner’s equity is increased or decreased. Instead, at the end of the accounting period, the impact of the revenues, expenses, and drawings on owner’s capital is determined in the income statement and then in the statement of owner’s equity.
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PROBLEM 1-76B (a)
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)
$110,000 − $5,000 − $10,000 − $45,000 = $50,000 $66,500 − $59,600 = $6,900 $110,000 − $66,500 = $43,500 Total assets = $110,000 $62,500 − $37,500 − $6,000 = $19,000 $80,000 − $62,500 = $17,500 $57,500 − $35,000 − $17,500 (from vi) = $5,000 $17,500 (from vi) $57,500 − $43,500 (from iii) = $14,000 $43,500 from the balance sheet (from iii)
(b) In preparing the financial statements, the first statement to be prepared is the income statement. The profit figure is used in the statement of owner’s equity to calculate the ending balance of capital. The balance sheet is then completed using the balance of capital as calculated in the statement of owner’s equity. Taking It Further: The balance sheet, which is sometimes referred to as the statement of financial position, reports balances at a specific point in time – as of the last day of the reporting period. The income statement on the other hand, reports the results of the business transactions of revenues and expenses for a period of time, whether it is a month, a quarter, or a fiscal year. The statement of owner’s equity also reports for the period of time, those items that have increased or decreased capital. Consequently, the income statement and the statement of owner’s equity are for the period of time ending at a specific date and the balance sheet is at that specific date.
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PROBLEM 1-11B (a) 1. Only the assets that belong to the business and the liabilities that are owed by the business should be recorded in its financial statements. The boat and related debt should be removed from the balance sheet to conform to the reporting entity concept. 2.
The supplies should be recorded at cost of $15,000 until they are used. (historical cost concept)
3.
The $5,000 should be returned to cash as this transaction has not yet occurred. (recognition criteria)
4.
G. Goodman, Capital should be reported at its ending balance at December 31, 2017 on the balance sheet. He needs to update the balance to include the impact of all revenues, expense, and drawings during the period on owner’s equity.
5.
The prepaid insurance of $1,200 needs to be added to the assets of the business.
6.
The profit should not appear on the balance sheet, but should be included in the ending balance of the Capital account.
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PROBLEM 1-11B (Continued) (b) GG Company Balance Sheet December 31, 2017 Assets Liabilities and Owner’s Equity Cash $20,000 Accounts payable $45,000 Accounts receivable 55,000 Supplies 15,000 G. Goodman, Capital 46,200 Prepaid insurance 1,200 Total liabilities and Total assets $91,200 owner’s equity $91,200 G. Goodman, Capital = $91,200 – $45,000 = $46,200. Taking It Further: If Gil Goodman did not make any withdrawals from GG Company nor make further investments into the business during 2017, the change in his capital account will correspond to the profit for the year ending December 31, 2017. In this case the G. Goodman, Capital account increased from $25,000 to $46,200 and so the profit was $21,200.
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BYP 1-1 FINANCIAL REPORTING PROBLEM
(a) Corus uses an August 31 fiscal year end. (b) As mentioned in note 2 to the financial statements, titled Basis of Preparation and Statement of Compliance, Corus confirms that it has reported under IFRS . (c) The four consolidated financial statements presented for the year ended August 31, 2014 include: 1. Statements of Financial Position 2. Statements of Income and Comprehensive Income 3. Statements of Changes in Shareholders’ Equity 4. Statements of Cash Flows (d) At the top of each financial statement, immediately after the title of the statement in brackets (in thousands of Canadian dollars) appears. For the statement of income and comprehensive income, the further clarification is given that this presentation excludes the amounts reported for earnings per share (except per share amounts). (e) Total assets as at August 31, 2014: August 31, 2013: (f)
$2,784,582,000 $2,167,137,000
Total liabilities as at August 31, 2014: August 31, 2013:
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BYP 1-1 (Continued)
(g) Net income for year ended: August 31, 2014: August 31, 2013: Decline in net income
$156,169,000 165,749,000 $ 9,580,000
Or 5.8% decline in net income ($9,580,000 ÷ $165,749,000)
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BYP 1-2 INTERPRETING FINANCIAL STATEMENTS
(a)
Employees are the most important economic resource to a business such as Apple. Employees bring innovation in the development of new products and are therefore expected to provide future economic benefit to the business. In order for an asset to be included on a company’s balance sheet, that asset needs to be owned or controlled by the company and expected to provide future services or economic benefits. In addition, the value must be able to be reliably measured in monetary terms. While employees do provide future services and economic benefits, their value cannot be measured in monetary terms, and they are not owned by Apple Inc. Unrecorded economic resources such as employees are not included on the balance sheet.
(b) The total assets reported on the balance sheet do not reveal what Apple is worth. A full balance sheet would be needed to find out how these assets are financed. If there was a great deal of debt on the balance sheet that would have to be paid out from the assets, this would leave very little equity to the shareholders, which is the amount that would be closer to the value of the business. There are other limitations to the balance sheet besides omitting the value of the employees. Many assets on the balance sheet are recorded at cost, rather than fair value. Other assets, such as the Apple trademark, are not listed. As well, what a business is “worth” or can be sold for may not be representative of either its cost or fair value. In the end, it is what someone is willing to pay for a company that determines a company’s worth, ideally supported by its current fair value or expected future profits.
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BYP 1-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP 1-4 COMMUNICATION ACTIVITY Date: To: Robert Joote From: Student Subject: Balance Sheet Correction I have reviewed the balance sheet of Peak Company as at December 31, 2017 and offer the following comments for your review and consideration: a.
The balance in your capital account should be the accumulation of all investments, either in cash or other assets, contributed by you to the company, less any drawings, in either cash or other assets, you have made for personal use, plus profit and less losses over time. The purpose of a balance sheet is to present the financial position of the company at a point in time. The balance sheet lists the company’s assets, liabilities and equities.
b.
A number of items in your balance sheet are not properly reported as indicated below: 1.
The balance sheet should be dated as of a specific date, not for a period of time such as the month ended December 31, 2017. Rather, it should be dated "December 31, 2017."
2.
Assets on the balance sheet are normally listed in order of liquidity.
3.
Assets include Accounts Receivable and Prepaid Insurance, which should be included in the assets section rather than as deductions to liabilities and owner’s equity.
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BYP 1-4 (Continued) (b) (Continued) 4.
The bottom portion of the balance sheet, headed "Liabilities and Owner's Equity", should be sub-divided into two sections: one for Liabilities and one for Owner's Equity. Liabilitiy accounts would include Notes Payable and Accounts Payable. The owner’s equity section would include the capital account.
5.
Accounts Payable should be reported in the liability section, rather than as a deduction in the assets section of the balance sheet.
6.
R. Joote, Drawings should not be reported separately on the balance sheet but rather should be subtracted from R. Joote, Capital to arrive at owner's equity for the end of the period.
In order to be able to prepare the statement of owner’s equity, you need to have the amount of the profit or loss for the year. This is why the income statement is prepared first. In order to determine the ending balance in the capital account for the balance sheet, you need to have the balance in the owner’s capital account. This is why the statement of owner’s equity is prepared second.
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BYP 1-4 (Continued) (c)
A correct balance sheet follows: PEAK COMPANY Balance Sheet December 31, 2017
Assets Cash ................................................................................... $10,500 Accounts receivable ......................................................... 3,000 Supplies ............................................................................. 2,000 Prepaid insurance ............................................................. 2,500 Equipment.......................................................................... 20,500 Total assets ................................................................... $38,500 Liabilities and Owner's Equity Liabilities Notes payable ................................................................. $12,000 Accounts payable ............................................................ 5,000 Total liabilities .............................................................. 17,000 Owner's equity R. Joote, Capital.............................................................. 21,500 Total liabilities and owner's equity ........................... $38,500 R. Joote, Capital = $38,500 − $17,000 = $21,500.
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BYP 1-5 ALL ABOUT YOU (a) 1. When deciding what kind of summer job to apply for, considerations would include: tuition and textbooks costs, living expenses, and spending money requirements for the year. The wage rate of any employment opportunity is also relevant in the decision, including the the number of weeks of worked during the the summer months. Financial stability of the employer to ensure continued employment may also be a consideration particularly if continued part-time employment beyond the summer months is desired. (b)
By understanding an income statement and how it is used, the concept can be applied to assist in choosing an appropriate “profitable” job. Wages earned constitute the revenues that a student can expect less any of the relevant monthly expenses required to cover school and living expenses. This can help determine whether the wages earned by a particular job will result in a profit or loss at the end of the period. 2. In determining the affordability of purchasing a second hand car and incurring parking expenses versus using public transit to get back and forth to college each day, several pieces of financial information are required in order to compare the costs of these options. The relevant information for the purchase and financing of a second hand car include: the actual cost of the car, financing costs, insurance costs, maintenance costs, gas and parking costs, along with the value of the car at the end of the school term. Lending costs would be dependent on negotiations regarding the car purchase including amount that could be borrowed, money available for a down payment, interest rates and the loan amortization period. All of these factors will affect the monthly loan payment required. Other debt obligations should also be taken into consideration. Alternatively, public transit
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could be used. The cost would be limited to the college term. BYP 1-5 (Continued) (b) (Continued) (b) By understanding the financial statements a better analysis of the value of the car as an asset and the associated debt as a liability can be determined, the student can make a more informed decision regarding the obligations of a car purchase. Monthly costs of owning the vehicle or using a transit pass will also have an impact on the amount of money (revenues / wages) the student requires to cover these additional expenses. 3. When assessing whether or not an employer is financially stable and has growth potential, it is useful to have financial information. If the two options include publicly traded companies, annual reports and audited financial statements are a good source of information about the companies’ financial stability and growth potential. (b)
By understanding the financial statements of a business, an individual is in a better position to reduce the risks involved in choosing between employers, whether this decision is upon graduation or for summer employment. The income statement provides information regarding profitability, while the balance sheet is used to assess long term stability and immediate liquidity or solvency of the firm.
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BYP 1-6 Santé Smoothie Saga (a)
Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation may limit her liability to her investment in the business; however, in Canada it is not unusual for business lenders to require the shareholder(s) of small privately held corporations to personally guarantee corporate loans. In this case the shareholder may still be responsible for the business debt in the event of bankruptcy and / or insolvency. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate, as well as additional ongoing costs to administrate and operate the business as a corporation, could be more costly than a proprietorship.1 The corporation would pay income taxes on its profits, instead of Natalie personally paying taxes on the net income of the proprietorship. The amount of taxes that would be paid could be higher with the corporation.1 My recommendation is that Natalie choose the proprietorship form of business organization. This is a very small business where the cost of incorporating outweighs the benefits of incorporating at this point in time. Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she is finished college.
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1
Additional comments that are not specifically covered in the text that some students may identify or the instructor may wish to discuss with the students.
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BYP 1-6 (Continued) (b) Yes, Natalie will need accounting information to help her operate her business. She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her smoothies so she can establish what to charge her customer. She will need to know the company’s revenues and expenses so she can report her profit for personal income tax reporting purposes on an annual basis. If she borrows money, she will need financial statements so lenders can assess the company’s ability to the service the debt. Ie. pay the principal plus interest. . Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because accounting information is needed on a timely basis. (c)
If Natalie needs to borrow money from a relative or from the bank or needs to establish credit with some suppliers, she will need to be able to present these creditors with a set of financial statements to obtain credit and to demonstrate her ability to repay loans. The Canada Revenue Agency (CRA) is another user of the financial information. CRA will want to ensure that Natalie is reporting all of the profits properly and that the expenses of the business are in fact deductible. Natalie will personally pay income taxes on the (net) profit of the company.
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BYP 1-6 (Continued) (d) Assets: Cash, Accounts Receivable, Supplies, Equipment Liabilities: Accounts Payable, Unearned Revenue, Notes Payable Owner’s Equity: N. Koebel, Capital, N. Koebel, Drawings Revenue: Revenue Expenses: Advertising Expense, Interest Supplies Expense, Telephone Expense (e)
Expense,
Natalie should have a separate bank account used solely by Santé Smoothies. This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately.
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CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Questions
Brief Exercises
1. Describe how
1, 2, 3, 4, 5, 6
accounts, debits, and credits are used to record business transactions. 2. State how a journal is used in the recording process and journalize transactions. 3. Explain how a ledger helps in the recording process and post transactions. 4. Prepare a trial balance.
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Exercises
Problems Set A
Problems Set B
1, 2, 3, 4, 5
1, 2, 3, 4
1, 4
1, 4
7, 8, 9, 10, 11
6, 7, 8, 9, 10, 11, 12
2, 5, 6, 7, 8, 9, 14, 16
1, 2, 3, 4, 5, 6, 7, 8, 11
1, 2, 3, 4, 5, 6, 7, 8, 11
12, 13, 14
13, 14, 15
2, 10, 11, 12, 13, 15, 16
4, 5, 6, 7, 8, 11
4, 5, 6, 7, 8, 11
15, 16, 17, 18, 19, 20
16, 17, 18
2, 10, 12, 13, 14, 15, 16, 17, 18, 19
4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Perform transaction analysis and journalize transactions.
Simple
15-20
2A
Journalize transactions.
Simple
20-30
3A
Journalize transactions.
Simple
20-30
4A
Journalize transactions, post, and prepare trial balance.
Moderate
40-50
5A
Journalize transactions, post, and prepare trial balance.
Moderate
40-50
6A
Journalize transactions, post, and prepare trial balance.
Moderate
55-65
7A
Journalize transactions, post, and prepare trial balance.
Moderate
55-65
8A
Journalize transactions, post, and prepare trial balance.
Moderate
55-65
9A
Prepare a trial balance.
Simple
25-35
10A
Prepare financial statements.
Simple
25-35
11A
Journalize transactions, post, and prepare trial balance.
Moderate
65-75
12A
Prepare financial statements.
Simple
25-35
13A
Prepare trial balance and financial statements.
Simple
35-45
14A
Analyze errors and effects on trial balance.
Moderate
25-35
15A
Prepare correct trial balance.
Complex
30-40
1B
Perform transaction analysis and journalize transactions.
Simple
15-20
2B
Journalize transactions.
Simple
20-30
3B
Journalize transactions.
Simple
20-30
4B
Journalize transactions, post, and prepare trial balance.
Moderate
40-50
5B
Journalize transactions, post, and prepare trial balance.
Moderate
40-50
6B
Journalize transactions, post, and prepare trial balance.
Moderate
55-65
7B
Journalize transactions, post, and prepare trial balance.
Moderate
55-65
8B
Journalize transactions, post, and prepare trial balance.
Moderate
55-65
9B
Prepare a trial balance.
Simple
25-35
10B
Prepare financial statements.
Simple
25-35
11B
Journalize transactions, post, and prepare trial balance.
Moderate
65-75
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
12B
Prepare financial statements.
Simple
25-35
13B
Prepare trial balance and financial statements.
Simple
35-45
14B
Analyze errors and effects on trial balance.
Moderate
25-35
15B
Prepare correct trial balance.
Complex
30-40
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives, and End-ofChapter Material Study Objective 1. Describe how accounts, debits, and credits are used to record business transactions.
Knowledge Q2-2 Q2-3 BE2-2 BE2-3 BE2-4 BE2-5 E2-1 E2-2
Comprehension Q2-1 Q2-4 Q2-5 Q2-6 E2-3 E2-4
Application BE2-1 P2-1A P2-1B P2-4A P2-4B
2. State how a journal is used in the recording process and journalize transactions.
Q2-8 Q2-10 BE2-6
Q2-7 Q2-9 Q2-11 BE2-7 BE2-8
BE2-9 BE2-11 E2-5 E2-6 E2-8 E2-14 P2-1A P2-2A P2-3A P2-4A P2-5A P2-6A P2-7A P2-8A P2-11A
3. Explain how a ledger helps in the recording process and post transactions
Q2-12 E2-2 E2-11
Q2-13 Q2-14
BE2-13 BE2-14 BE2-15 P2-4A P2-5A P2-6A P2-7A P2-8A P2-11A
4. Prepare a trial balance.
Q2-15 E2-2
Q2-16 Q2-17 Q2-18 Q2-19
Q2-20 BE2-16 BE2-17 BE2-18 E2-10 E2-14 P2-4A P2-5A P2-6A P2-7A P2-8A P2-9A P2-10A P2-11A P2-12A P2-13A
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Analysis
Synthesis
Evaluation
BE2-10 BE2-12 E2-7 E2-9 E2-16 P2-1B P2-2B P2-3B P2-4B P2-5B P2-6B P2-7B P2-8B P2-11B E2-10 E2-12 E2-13 E2-15 E2-16 P2-4B P2-5B P2-6B P2-7B P2-8B P2-11B E2-12 E2-13 E2-15 E2-16 E2-17 E2-19 P2-4B P2-5B P2-6B P2-7B P2-8B P2-9B P2-10B P2-11B P2-12B P2-13B
Q2-19 E2-18 P2-14A P2-14B P2-15A P2-15B
Chapter 2
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Study Objective Broadening Your Perspective
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Knowledge
Comprehension BYP2-1 BYP2-4
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Accounting Principles, Seventh Canadian Edition
Application BYP2-2 BYP2-3 BYP2-5 BYP2-6
Analysis
Synthesis
Evaluation
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
An account is an accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. A company will need, at a minimum, two accounts to represent an asset account and either a liability or owner’s equity account. However, companies usually have many accounts since they will have different types of assets, liabilities, and owner’s equity items, including drawings, revenues, and expenses.
2.
Debiting an account refers to the practice of entering an amount on the debit (or left) side of an account. Crediting an account signifies entering an amount on the credit (or right) side of an account.
3.
Assets are on the left side of the basic accounting equation and liabilities and owner’s equity are on the right side of the basic accounting equation. Since debits are on the left side, and assets are also on the left side, the normal balance of an asset is a debit balance. Since credits are on the right side and liabilities are on the right side, the normal balance of a liability is a credit balance. The same is also true for owner’s equity. Revenues increase owner’s equity and therefore also have a normal credit balance. But expenses and drawings are decreases to owner’s equity and thus have a normal debit balance.
4.
Dmitri is incorrect because debit and credit don’t mean increase or decrease. Debit means left side and credit means right side. Different types of accounts will increase with debits versus credits. Accounts on the left side of the accounting equation (assets) will increase with debits. Accounts on the right side of the accounting equation (liabilities and owner’s equity) will increase with credits except for expenses and drawings which are decreases to owner’s equity and therefore are increased with debits. This way, the accounting equation remains in balance.
5.
The normal balance of owner’s capital is a credit. The account is increased by credits and decreased by debits. Both drawings and expenses reduce owner’s equity. Because of this, their normal balance is a debit. These two accounts are increased by debits, which end up reducing owner’s equity.
6.
Gustave is incorrect. The double-entry system merely records the effect of a transaction on the two (or more) accounts affected. A transaction is not recorded twice; it is recorded once, with a dual (or multiple) effect on the accounting equation.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 7.
An event or transaction is recorded only if it causes the company’s financial position (assets, liabilities, and/or owner’s equity) to change. In some events, nothing is currently obtained nor given up so nothing is recorded. The event may lead to a future transaction that changes the company’s financial position but is not recorded until that time. An example of an event that is not currently recorded but will result in a future transaction is the signing of a lease.
8.
The three basic steps in the recording process are analyze, journalize, and post.
9.
After it is determined that a transaction should be recorded because it does cause the company’s financial position to change, analyzing a business transaction involves: identifying (1) the type of accounts involved, (2) whether the accounts are increased or decreased, and (3) whether the accounts need to be debited or credited.
10.
A simple journal entry refers to an entry that affects only two accounts, a debit to one account and a credit to another account. A compound entry refers to an entry that affects three or more accounts. To ensure the accounting equation remains balanced, the totals of the debit amounts and credit amounts must be equal.
11.
The accounts that could be credited are Revenue, Accounts Receivable, and Unearned Revenue. Revenue would be credited for a cash sale. Accounts Receivable would be credited when a customer makes a payment on account for revenue that was previously earned and recorded. Unearned Revenue would be credited when a customer pays in advance.
12.
The advantages of recording the individual transactions in a journal before posting to the ledger are: 1. The journal discloses in one place the complete effect of a transaction. 2. The journal provides a chronological record of all transactions. 3. The journal helps to prevent or locate errors, because the debit and credit amounts for each entry can be readily compared.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 13.
The T account is often used in accounting textbooks for illustrative purposes. It shows only the debit and credit side of a ledger account. It is faster to create and more efficient for analyzing the impact of specific transactions Businesses however usually use a “standard” form of account. This form shows a debit and credit column but also includes additional information such as the balance of the account (to show the account balance after every transaction), the date, explanation, and reference. This additional information is useful in preventing and detecting errors.
14.
The entire group of accounts and related transactional details maintained by a company, including all the asset, liability, and owners' equity accounts, is referred to collectively as the ledger. A chart of accounts lists only the account names and account numbers that identify their location in the ledger. The numbering system used to identify the accounts usually starts with the balance sheet accounts and follows with the income statement accounts. 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.
15.
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.
16.
Since accounts are given an account number in the chart of accounts, the trial balance is prepared in numerical order. Accounts are generally listed and assigned account numbers in the chart of accounts using the following numerical sequence: assets, liabilities, owner’s equity, drawings, revenues, and lastly expenses. This convention makes is easy for anyone to find an account either in the chart of accounts or in a trial balance.
17.
The sequence in which the first four steps in the accounting process does matter in properly accounting for transactions. Unless business transactions are first analyzed, it is possible for the transaction to be misinterpreted or omitted from the accounting process. Once analyzed, the transactions need to be journalized in a journal, after which the transactions are posted to the general ledger in order to arrive at updated balances which then appear in a trial balance.
18.
The company should use “December 31” on its trial balance. The trial balance simply shows the balance in the accounts at a specific point in time.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 19.
(a) The trial balance would not balance, because there were two debits for $750 and no credits. The debits do not equal the credits. Accounts Payable should have been credited, not debited, for $750. (b) The trial balance would balance, because the debits ($1,000) and credits ($1,000) are equal. But both the Service Revenue and the Accounts Receivable balances would be incorrect as the credit should have been recorded to Accounts Receivable, not Service Revenue. (c) The trial balance would not balance, because the debit to Rent Expense for $650 is not equal to the credit to Cash for $560. The debit side of the trial balance is overstated by $90, because either the Rent Expense is overstated by $90 (Rent Expense should have been debited for $560), or cash is overstated by $90 (the payment should have been credited for $650).
20.
The following are three types of errors that could cause the trial balance to not balance, in spite of the fact that the ledger accounts have correct balances. 1. When transcribing amounts from the ledger to the trial balance, an account balance was recorded at an incorrect amount or omitted. 2. Balances in the trial balance did not appear in the correct column. 3. The addition of the trial balance columns was not done correctly.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1 (a)
$7,500 + $16,700 – $15,400 = $8,800
(b) $8,800 + $13,100 – $4,700 = $17,200 (c)
$3,800 – $6,400 + $6,800 = $4,200
(d) $3,800 + $7,700 – $5,900 = $5,600 (e) $100,000 – $24,000 + $45,000 = $121,000 (f) $149,000 – $121,000 + $27,000 = $55,000 BRIEF EXERCISE 2-2 Account 1. Prepaid Insurance 2. Accounts Payable 3. Land 4. Service Revenue 5. Utilities Expense 6. Owner’s Capital 7. Equipment 8. Salaries Expense 9. Supplies 10. Unearned Revenue
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Type of Account Asset Liability Asset Owner’s Equity Owner’s Equity Owner’s Equity Asset Owner’s Equity Asset Liability
2-10
Normal Balance Debit Credit Debit Credit Debit Credit Debit Debit Debit Credit
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-3
1. 2. 3. 4. 5. 6. 7. 8.
(a) Type of Account Asset Owner’s Equity Owner’s Equity Asset Liability Owner’s Equity Asset Liability
Account Accounts Receivable Rent Expense B. Damji, Drawings Supplies Unearned Revenue Service Revenue Prepaid Insurance Notes Payable
(b) Normal Balance Debit Debit Debit Debit Credit Credit Debit Credit
BRIEF EXERCISE 2-4 Cash Dr. 500 800 8,920 5,355 10,435 Sub. 26,010 Bal. 10,045
Service Revenue Dr. Cr. 9,500 3,200 4,500 1,050 Bal. 18,250
Cr. 8,720 495 6,750
15,965
Accounts Payable Dr. Cr. 1,720 6,740 495 2,500 6,750 Sub. 8,965
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Salaries Expense Dr. Cr. 4,550 550 3,750 425 Bal. 9,275
9,240 Bal. 275
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-5 (a)
1. 2. 3. 4. 5. 6. 7. 8.
Accounts Payable Supplies J. Takamoto, Capital J. Takamoto, Drawings Prepaid Rent Utilities Expense Service Revenue Unearned Revenue
Balance Credit Debit Credit Debit Debit Debit Credit Credit
(b) (c) Normal Debit Credit Effect Effect Decrease Increase Increase Decrease Decrease Increase Increase Decrease Increase Decrease Increase Decrease Decrease Increase Decrease Increase
BRIEF EXERCISE 2-6 (a)
1. Increase in D. Parmelee, Capital
Account Owner’s Equity
2. Decrease in Cash
Asset
3. Decrease in Notes Payable Liability
Debit
Owner’s
Debit Equity
4. Increase in Rent Expense
(b) Change with Credit
Credit
5. Increase in D. Parmelee, Drawings
Owner’s Equity
Debit
6.
Increase in Equipment
Asset
Debit
7.
Increase in Accounts Payable
Liability
Credit
8.
Increase in Service Revenue
Owner’s Equity
Credit
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-7 Transaction 1: (Solution provided in text.) Basic Analysis Debit/Credit Analysis
The asset account Cash is decreased by $439. The asset account Supplies is increased by $439. Debits increase assets: debit Supplies $439. Credits decrease assets: credit Cash $439.
Transaction 2: Basic Analysis Debit/Credit Analysis
The asset account Accounts Receivable is increased by $1,020. The revenue account Service Revenue is increased by $1,020. Debits increase assets: debit Accounts Receivable $1,020. Credits increase revenues: credit Service Revenue $1,020.
Transaction 3: Basic Analysis Debit/Credit Analysis
The asset account Equipment is increased by $2,230. The liability account Accounts Payable is increased by $2,230. Debits increase assets: debit Equipment $2,230. Credits increase liabilities: credit Accounts Payable $2,230.
Transaction 4: Basic Analysis Debit/Credit Analysis
Solutions Manual .
The expense account Utilities Expense is increased by $293. The asset account Cash is decreased by $293. Debits increase expenses: debit Utilities Expense $293. Credits decrease assets: credit Cash $293.
2-13
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-7 (Continued) Transaction 5: Basic Analysis Debit/Credit Analysis
The asset account Cash is increased by $750. The revenue account Service Revenue is increased by $750. Debits increase assets: debit Cash $750. Credits increase revenues: credit Service Revenue $750.
Transaction 6: Basic Analysis Debit/Credit Analysis
Solutions Manual .
The asset account Cash is increased by $7,100. The liability account Unearned Revenue is increased by $7,100. Debits increase assets: debit Cash $7,100. Credits increase liabilities: credit Unearned Revenue $7,100.
2-14
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-8 Account Debited (a) (b) Basic Specific Type Account Asset Cash
+ $17,970
4
Asset
+ $4,720
5
Asset
Prepaid Rent Supplies
6
Asset
Cash
17
Asset
27
Owner’s Equity Owner’s Equity
Accounts Receivable Salaries Expense B. Fleming, Drawings
Transaction Aug. 1*
29
(c) Effect
Account Credited (a) (b) (c) Basic Specific Effect Type Account Owner’s B. Fleming, + $17,970 Equity Capital Asset Cash – $4,720
+ $625
Liability
+ $560
+ $980
Owner’s Equity Owner’s Equity Asset
Accounts Payable Service Revenue Service Revenue Cash
+ $720
Asset
Cash
+ $1,210
*Solution provided in text.
2-15
+ $625 + $560 + $1,210 – $980 – $720
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-9 June 1 transaction: (Soltuion provided in text) Basic Analysis Debit/Credit Analysis Journal Entry
The asset account Cash is increased by $8,430. The owner’s equity account T. Pridham, Capital is increased by $8,430. Debits increase assets: debit Cash $8,430. Credits increase owner’s equity: credit T. Pridham, Capital $8,430. June 1 Cash 8,430 T. Pridham,Capital 8,430 Invested cash in business.
June 2 transaction: Basic Analysis Debit/Credit Analysis Journal Entry
The asset account Equipment is increased by $2,620. The liability account Accounts Payable is increased by $2,620. Debits increase assets: debit Equipment $2,620. Credits increase liabilities: credit Accounts Payable $2,620. June 2 Equipment 2,620 Accounts Payable 2,620 Purchased equipment on account.
June 5 transaction: Basic Analysis
Solutions Manual .
An accounting transaction has not occurred. A debit/credit analysis is not needed because there is no accounting entry.
2-16
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-9 (Continued) June 17 transaction: Basic Analysis Debit/Credit Analysis Journal Entry
The asset account Accounts Receivable is increased by $2,500. The revenue account Service Revenue is increased by $2,500. Debits increase assets: debit Accounts Receivable $2,500. Credits increase revenues: credit Service Revenue $2,500. June 17 Accounts Receivable 2,500 Service Revenue 2,500 Performed services on account for R. Windl.
June 27 transaction: Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
The asset account Cash is increased by $1,190. The asset account Accounts Receivable is decreased by $1,190. Debits increase assets: debit Cash $1,190. Credits decrease assets: credit Accounts Receivable $1,190. June 27 Cash 1,190 Accounts Receivable 1,190 Collected cash on account from R. Windl.
2-17
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-10 Oct.
1
2
3
6
27
30
Solutions Manual .
Cash ..................................................... 30,000 L. Berge, Capital ............................. Rent Expense ...................................... Cash ................................................
30,000
700 700
Equipment ........................................... 2,800 Accounts Payable...........................
2,800
Accounts Receivable .......................... 4,400 Service Revenue.............................
4,400
Accounts Payable ............................... 1,100 Cash ................................................
1,100
Utilities Expense ................................. Accounts Payable ..........................
2-18
130 130
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-11 Aug. 31
31
31
31
31
31
Solutions Manual .
Supplies ............................................... Cash ................................................
439 439
Accounts Receivable .......................... 1,020 Service Revenue.............................
1,020
Equipment ........................................... 2,230 Accounts Payable...........................
2,230
Utilities Expense ................................. Cash ................................................
293
Cash ..................................................... Service Revenue.............................
750
293
750
Cash ..................................................... 7,100 Unearned Revenue .........................
7,100
2-19
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-12 Aug
1
4
5
6
17
27
29
Solutions Manual .
Cash ..................................................... 17,970 B. Fleming, Capital .........................
17,970
Prepaid Rent ........................................ 4,720 Cash ................................................
4,720
Supplies ............................................... Accounts Payable...........................
625
Cash ..................................................... Service Revenue.............................
560
625
560
Accounts Receivable .......................... 1,210 Service Revenue............................. Salaries Expense................................. Cash ................................................
980
B. Fleming, Drawings.......................... Cash ................................................
720
2-20
1,210
980 720
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-13 Aug. 1 6 Bal.
Cash 17,970 Aug. 4 560 27 29 12,110
B. Fleming, Capital Aug. 1 17,970
4,720 980 720
Bal.
17,970
Accounts Receivable Aug. 17 1,210
B. Fleming, Drawings Aug. 29 720
Bal.
1,210
Bal.
Aug. 4
Prepaid Rent 4,720
Bal.
4,720
720 Service Revenue Aug. 6 17 Bal.
Aug. 5
Supplies 625
Salaries Expense Aug. 27 980
Bal.
625
Bal.
Accounts Payable Aug. 5
980
625
Bal.
625
BRIEF EXERCISE 2-14 Apr. 1 3 Bal.
Solutions Manual .
Cash 1,600 Apr. 16
700
3,400
250
20
4,050
2-21
Chapter 2
560 1,210 1,770
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-15
Sept. 4
Cash 2,400
10
3,000
28
1,325
Sept. 30 Bal.
6,725
Accounts Receivable Sept. 2 4,400 Sept. 4 2,400 28
1,325
Service Revenue Sept. 2 10
4,400 3,000
Sept. 30 Bal. 675
Sept.30 Bal. 7,400
BRIEF EXERCISE 2-16 AMARO COMPANY Trial Balance June 30, 2017 Debit Cash ............................................................... $5,800 Accounts receivable ..................................... 3,000 Equipment ..................................................... 17,000 Accounts payable.......................................... Owner’s capital.............................................. Owner’s drawings ......................................... 1,200 Service revenue............................................. Rent expense ................................................. 1,000 Salaries expense ........................................... 5,100 $33,100
Solutions Manual .
2-22
Credit
$ 8,100 15,000 10,000 $33,100
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-17 PETTIPAS COMPANY Trial Balance April 30, 2017 Debit
Credit
Cash ............................................................... $6,400 Accounts receivable ..................................... 5,000 Supplies ......................................................... 650 Prepaid rent ................................................... 800 Equipment ..................................................... 14,600 Accounts payable.......................................... Unearned revenue ......................................... C. Pettipas, capital ........................................ 1,100 C. Pettipas, drawings .................................... Service revenue............................................. 4,500 Rent expense ................................................. Salaries expense ........................................... 1,000 $34,050
$ 3,300 250 22,500
Solutions Manual .
2-23
8,000 $34,050
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 2-18 1.
The Prepaid insurance balance was in the wrong column. Assets have a normal debit balance. When this account is moved to the debit column, the new total in the debit column will be $46,200 ($42,700 + $3,500) and the new total in the credit column will be $47,100 ($50,600 – $3,500).
2.
The trial balance is now out of balance by $900 ($46,200 – $47,100). The transposition error in L. Bourque, Capital account is the cause of the $900 difference. If the $15,400 balance in that account is transposed to $14,500 this will reduce the total credits by $900 and the trial balance will now balance. See revised trial balance below: BOURQUE COMPANY Trial Balance December 31, 2017
Debit Cash ............................................................... $15,000 Accounts receivable ..................................... 1,800 Prepaid insurance ......................................... 3,500 Accounts payable.......................................... Unearned revenue ......................................... L. Bourque, capital ........................................ L. Bourque, drawings.................................... 4,900 Service revenue............................................. Rent expense ................................................. 2,400 Salaries expense ........................................... 18,600 $46,200
Solutions Manual .
2-24
Credit
$ 2,000 2,200 14,500 27,500
$46,200
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 2-1 1.
False. An account is an accounting record of a specific asset, liability, or owner’s equity item.
2.
False. An account shows increases and decreases in the item it relates to.
3.
False. Each asset, liability, and owner’s equity item has a separate account.
4.
False. An account has a left, or debit side, and a right, or credit side.
5.
True.
EXERCISE 2-2 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
4. 2. 9. 1. 5. 7. 10. 4. 3. 6.
Credit Analyzing transactions Posting Account Debit Journalizing Trial balance Credit Chart of accounts Journal
Solutions Manual .
2-25
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-3 (a) Account Cash* M. Kobayashi, Capital Accounts Payable Building Fees Earned Insurance Expense Interest Revenue M. Kobayashi, Drawings Notes Receivable Prepaid Insurance Rent Expense Supplies
(1) Type of Account Asset Owner’s Equity (Capital) Liability Asset Owner’s Equity (Revenue) Owner’s Equity (Expense) Owner’s Equity (Revenue) Owner’s Equity (Drawings) Asset Asset Owner’s Equity (Expense) Asset
(2) Financial Statement Balance Sheet Balance Sheet and Statement of Owner’s Equity Balance Sheet Balance Sheet Income Statement
(3) Normal Balance Debit Credit Credit Debit Credit
Income Statement
Debit
Income Statement
Credit
Statement of Owner’s Equity Balance Sheet Balance Sheet Income Statement
Debit
Balance Sheet
Debit
Debit Debit Debit
*Solution provided in text. (b) Assets are on the left side of the basic accounting equation and liabilities and owner’s equity are on the right side of the basic accounting equation. Since debits are on the left side, and assets are also on the left side, the normal balance of an asset is a debit balance. Since credits are on the right side and liabilities are on the right side, the normal balance of a liability is a credit balance. The same is also true for owner’s equity. Revenues increase owner’s equity and therefore also have a normal credit balance. But expenses and drawings are decreases to owner’s equity and thus have a normal debit balance.
Solutions Manual .
2-26
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 2-4 (a) Basic Date Type Mar. 5 Asset*
Account Debited (b) (c) Specific Effect Account Cash + $10,220
7 Owner’s Equity 9 Asset
Advertising Expense Supplies
11 Asset 13 Asset 25 Asset
Vehicles Accounts Receivable Cash
26 Asset 29 Liability 30 Asset
+ $1,050
Liability
+ $8,770 + $1,520 + $10,880
Asset Owner’s Equity Liability
Cash
+ $1,140
Asset
Accounts Payable Cash
– $1,050
Asset
+ $800
Liability
+ $1,720
Asset
31 Owner’s J. MacKenzie, Equity Drawings *Solution provided in text.
Solutions Manual .
+ $350
Account Credited (a) (b) (c) Basic Specific Effect Type Account Owner’s J. MacKenzie, +$10,220 Equity Capital Asset Cash – $350
2-27
Accounts Payable Cash Service Revenue Notes Payable Accounts Receivable Cash Unearned Revenue Cash
+ $1,050 – $8,770 + $1,520 +$10,880 – $1,140 – $1,050 + $800 – $1,720
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-5 Mar.
5
7
9
11
13
25
26
29
30
31
Solutions Manual .
Cash ..................................................... 10,220 J. MacKenzie, Capital ..................... Advertising Expense .......................... Cash ................................................
10,220
350 350
Supplies............................................... 1,050 Accounts Payable ..........................
1,050
Vehicles ............................................... 8,770 Cash ................................................
8,770
Accounts Receivable .......................... 1,520 Service Revenue.............................
1,520
Cash ..................................................... 10,880 Notes Payable.................................
10,880
Cash ..................................................... 1,140 Accounts Receivable .....................
1,140
Accounts Payable ............................... 1,050 Cash ................................................
1,050
Cash ..................................................... Unearned Revenue .........................
800
J. MacKenzie, Drawings ..................... 1,720 Cash ................................................
2-28
800 1,720
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-6 Transaction 1: Basic Analysis Debit/Credit Analysis Journal Entry
The expense account Rent Expense is increased by $550. The asset account Cash is decreased by $550. Debits increase expenses: debit Rent Expense $550. Credits decrease assets: credit Cash $550. June 1 Rent Expense 550 Cash 550 Paid June rent.
Transaction 2: Basic Analysis Debit/Credit Analysis Journal Entry
The expense account Insurance Expense is increased by $175. The asset account Cash is decreased by $175. Debits increase expenses: debit Insurance Expense $175. Credits decrease assets: credit Cash $175. June 2 Insurance Expense 175 Cash 175 Paid one month of insurance.
Transaction 3: Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
The asset account Cash is increased by $1,255. The asset account Accounts Receivable is decreased by $1,255. Debits increase assets: debit Cash $1,255. Credits decrease assets: credit Accounts Receivable $1,255. June 5 Cash 1,255 Accounts Receivable 1,255 Collected cash on account.
2-29
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-6 (Continued) Transaction 4: Basic Analysis
June 9: An accounting transaction has not occurred. A debit/credit analysis is not needed because there is no accounting entry.
Transaction 5: Basic Analysis Debit/Credit Analysis Journal Entry
The liability account Accounts Payable is decreased by $675. The asset account Cash is decreased by $675. Debits decrease liabilities: debit Accounts Payable $675. Credits decrease assets: credit Cash $675. June 14 Accounts Payable 675 Cash 675 Paid cash on account.
Transaction 6: Basic Analysis
Debit/Credit Analysis Journal Entry
Solutions Manual .
The asset account Accounts Receivable is increased by $1,420. The revenue account Service Revenue is increased by $1,420. Debits increase assets: debit Accounts Receivable $1,420. Credits increase revenues: credit Service Revenue $1,420. June 17 Accounts Receivable 1,420 Service Revenue 1,420 Performed services on account for Rudy Holland.
2-30
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-6 (Continued) Transaction 7: Basic Analysis Debit/Credit Analysis Journal Entry
The asset account Cash is increased by $1,000. The liability account Unearned Revenue is increased by $1,000. Debits increase assets: debit Cash $1,000. Credits increase liabilities: credit Unearned Revenue $1,000. June 19 Cash 1,000 Unearned Revenue 1,000 Received advance from J. Dupuis for future services.
Transaction 8: Basic Analysis Debit/Credit Analysis Journal Entry
The asset account Equipment is increased by $1,575. The liability account Accounts Payable is increased by $1,575. Debits increase assets: debit Equipment $1,575. Credits increase liabilities: credit Accounts Payable $1,575. June 29 Equipment 1,575 Accounts Payable 1,575 Purchased equipment on account.
Transaction 9: Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
The expense account Salaries Expense is increased by $850. The asset account Cash is decreased by $850. Debits increase expenses: debit Salaries Expense $850. Credits decrease assets: credit Cash $850. June 30 Salaries Expense 850 Cash 850 Paid employee.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-6 (Continued) Transaction 10: Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
The owner’s equity account D. Bratt, Drawings is increased by $1,250. The asset account Cash is decreased by $1,250. Debits increase drawings: debit D. Bratt, Drawings $1,250. Credits decrease assets: credit Cash $1,250. June 30 D. Bratt, Drawings 1,250 Cash 1,250 Paid D. Bratt, the company owner.
2-32
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-7 June 1
2
5
14
17
19
29
30
30
Solutions Manual .
Rent Expense ...................................... Cash ................................................
550
Insurance Expense ............................. Cash ................................................
175
550
175
Cash ..................................................... 1,255 Accounts Receivable ..................... Accounts Payable ............................... Cash ................................................
1,255
675 675
Accounts Receivable .......................... 1,420 Service Revenue.............................
1,420
Cash ..................................................... 1,000 Unearned Revenue .........................
1,000
Equipment ........................................... 1,575 Accounts Payable ..........................
1,575
Salaries Expense ................................ Cash ................................................
850
D. Bratt, Drawings ............................... 1,250 Cash ................................................
2-33
850 1,250
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-8 GENERAL JOURNAL Trans.
Account Titles
1.
2.
3.
4.
5. 6.
7.
8.
9.
Solutions Manual .
Debit
Cash ........................................................ Service Revenue ................................
1,820
Rent Expense ......................................... Cash....................................................
1,095
Supplies .................................................. Accounts Payable..............................
450
Accounts Receivable ............................. Service Revenue ................................
2,105
Cash ........................................................ Accounts Receivable.........................
1,225
Cash ........................................................ Unearned Revenue ............................
7,960
Prepaid Advertising .............................. Cash....................................................
8,120
Accounts Payable .................................. Cash....................................................
450
S. Beaulieu, Drawings ............................ Cash....................................................
2,800
2-34
Credit
1,820
1,095
450
2,105
1,225 7,960
8,120
450 2,800
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-9 GENERAL JOURNAL Date
Account Titles
Debit
Credit
June 1 Cash ........................................................ 13,430 Equipment .............................................. 3,490 S. Polland, Capital ............................. 16,920 2 Prepaid Insurance .................................. Cash....................................................
1,420
3 Equipment .............................................. Cash.................................................... Notes Payable ....................................
4,580
10 Cash ........................................................ Service Revenue ................................
220
16 Accounts Receivable ............................. Service Revenue ................................
8,000
27 Advertising Expense.............................. Cash....................................................
650
29 Telephone Expense ............................... Accounts Payable..............................
80
30 Salaries Expense.................................... Cash....................................................
1,830
30 Cash ........................................................ Accounts Receivable.........................
8,000
Solutions Manual .
2-35
1,420 930 3,650
220
8,000
650
80
1,830 8,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-10 (a) and (b) Cash June 1 13,430 June 2 1,420 10 220 3 930 30 8,000 27 650 30 1,830 June30Bal. 16,820
S. Polland, Capital June 1 16,920
Accounts Receivable June 16 8,000 June 30 8,000
Service Revenue June10 220 16 8,000 June30 Bal. 8,220
June 30 Bal.
0
June30Bal. 16,920
Prepaid Insurance June 2 1,420 June 30Bal. 1,420 Equipment June 1 3,490 3 4,580 June30 Bal. 8,070
Notes Payable June 3
Salaries Expense June30 1,830 June30Bal. 1,830
3,650
June30 Bal3,650
Accounts Payable June29
80
June30 Bal. 80 Solutions Manual .
2-36
Advertising Expense June 27 650 June 30 Bal.650
Telephone Expense June29 80 June 30 Bal. 80 Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-10 (Continued) (b) POLLAND REAL ESTATE AGENCY Trial Balance June 30, 2017
Cash ........................................................ Prepaid insurance .................................. Equipment .............................................. Accounts payable .................................. Notes payable......................................... S. Polland, capital .................................. Service revenue...................................... Salaries expense .................................... Advertising expense .............................. Telephone expense ................................
Debit $16,820 1,420 8,070
Credit
$
80 3,650 16,920 8,220
1,830 650 80 $28,870
$28,870
EXERCISE 2-11 1. 2. 3.
4. 5.
False. The general ledger contains all the asset, liability, and owner’s equity accounts. True. False. The accounts in the general ledger are arranged in financial statement order, which is also used in the chart of accounts: first the assets, then the liabilities, owner’s capital, owner’s drawings, revenues, and expenses. True. False. The general ledger is not a book of original entry; transactions are first recorded in the general journal, then in the general ledger.
Solutions Manual .
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-12 (a) and (b) Cash Sept. 1 17,400 (1) 1,200 (4) 1,000 Sept.30Bal.18,700
(2) (3)
700 200 (3)
Accounts Receivable Sept. 1 2,000 (4) 1,000 Sept. 30 Bal.1,000
Accounts Payable Sept. 1 1,000 (6) 1,000 200 Sept.30 Bal. 1,800
Unearned Service Revenue (5) 1,200 Sept. 1 1,600 Sept.30Bal.
400
Supplies Sept. 1 1,900 (6) 1,000 Sept. 30 Bal. 2,900
Owner’s Capital Sept. 1
Salaries Expense Sept. 1 1,400 (2) 700
Service Revenue Sept. 1 4,100 (1) 1,200 (5) 1,200 Sept. 30Bal. 6,500
Sept.30Bal.
Solutions Manual .
16,000
Sept.30Bal. 16,000
2,100
2-38
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-12 (Continued) (c) DEPOT COMPANY Trial Balance September 30, 2017
Debit Cash ....................................................... $18,700 Accounts receivable ............................. 1,000 Supplies ................................................. 2,900 Accounts payable ................................. Unearned revenue ................................. Owner’s capital...................................... Service revenue..................................... Salaries expense ................................... 2,100 $24,700
Solutions Manual .
2-39
Credit
$ 1,800 400 16,000 6,500 $24,700
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-13 (a) Cash 5,000 Aug. 12 2,300 2,600 900 6,200
Aug. 1 10 31 Aug.31Bal.
Accounts Receivable Aug. 25 1,700 Aug. 31 Aug. 31 Bal.
Aug. 12
900
800
Equipment 5,000
J. Feldman, Capital Aug. 1 5,000
Aug. 31Bal. 5,000
Service Revenue Aug.10 2,600 25 1,700 Aug.31Bal. 4,300 Notes Payable Aug. 12
Aug. 31Bal. 5,000
2,700
Aug.31 Bal 2,700
(b) JUNE FELDMAN, INVESTMENT BROKER Trial Balance August 31, 2017
Cash ....................................................... Accounts receivable ............................. Equipment ............................................. Notes payable........................................ J. Feldman, capital ................................ Service revenue....................................
Debit $6,200 800 5,000
$12,000
Solutions Manual .
2-40
Credit
$ 2,700 5,000 4,300 $12,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-14 (a)
GENERAL JOURNAL
Date
Account Titles and Explanation
Oct.
J1 Debit
Credit
1 Cash ........................................................... 1,200 A. Fortin, Capital ................................... Invested cash in business.
1,200
3 Equipment ................................................. 5,400 Cash....................................................... Notes Payable ....................................... Purchased equipment and issued a note.
400 5,000
4 Supplies ........................................................ 800 Accounts Payable................................. Purchased supplies on account.
800
6 Accounts Receivable ................................ 1,000 Service Revenue ................................... Performed services on account.
1,000
10 Cash .............................................................. 650 Service Revenue ................................... Performed services for cash.
650
12 Accounts Payable ........................................ 500 Cash....................................................... Paid cash on account.
500
15 Cash ........................................................... 3,000 Service Revenue ................................... Performed services for cash.
3,000
20 Accounts Receivable ................................... 940 Service Revenue ................................... Performed services on account.
940
Solutions Manual .
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-14 (Continued) (a) (Continued) GENERAL JOURNAL Date
Account Titles and Explanation
J1 Debit
Credit
21 Cash .............................................................. 800 Accounts Receivable............................ Received cash on account.
800
25 Cash ........................................................... 2,000 A. Fortin, Capital ................................... Invested cash in business.
2,000
28 Advertising Expense................................. 400 Accounts Payable................................. Purchased advertising on account.
400
30 A. Fortin, Drawings ................................... 600 Cash....................................................... Withdrew cash for personal use.
600
31 Rent Expense ............................................ 250 Cash....................................................... Paid rent.
250
31 Salaries Expense .......................................... 500 Cash....................................................... Paid salaries.
500
Solutions Manual .
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-14 (Continued) (b) FORTIN CO. Trial Balance October 31, 2017
Debit Cash ....................................................... $ 5,400 Accounts receivable ............................. 1,140 Supplies ................................................. 800 Equipment ............................................. 5,400 Notes payable........................................ Accounts payable ................................. A. Fortin, capital .................................... A. Fortin, drawings................................ 600 Service revenue..................................... Advertising expense ............................. 400 Rent expense......................................... 250 Salaries expense ................................... 500 $14,490
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Credit
$ 5,000 700 3,200 5,590
$14,490
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-15 (a) and (b) Cash July 31 8,800 Aug. 1 Aug. 12 2,400 10 31 5,910 25 30 31 Aug.31 Bal. 7,930
1,200 420 2,250 540 4,770
Aug. 31 Bal. 2,900
Fees Earned July 31 10,410 Aug. 31 8,460 Aug.31Bal.18,870
Bal. 585 Equipment 15,550
July 31
Rent Expense July 31 1,200 Aug. 1 1,200 Aug.31 Bal. 2,400
Aug.31Bal. 15,550
Aug. 30
L. Meche, Drawings July 31 5,125 Aug. 31 4,770 Aug.31Bal. 9,895
Supplies 585
July 31
Notes Payable 500 July 31 10,000 Aug. 31 Bal. 9,500
Accounts Payable Aug. 10 420 July 31
Salaries Expense July 31 2,250 Aug. 25 2,250 Aug.31 Bal.4,500
Interest Expense 850 Aug.30 40
Aug. 31 Bal. 430 Aug.31
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15,000
Aug. 31 Bal. 15,000
Accounts Receivable July 31 2,750 Aug. 12 2,400 Aug. 31 2,550
Aug.31
L. Meche, Capital July 31
2-44
Bal. 40
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-15 (Continued) (c) LEE MECHE, MD Trial Balance August 31, 2017
Cash ............................................................ Accounts receivable .................................. Supplies ...................................................... Equipment .................................................. Notes payable............................................. Accounts payable ...................................... L. Meche, capital ........................................ L. Meche, drawings .................................... Fees earned ................................................ Interest expense......................................... Rent expense.............................................. Salaries expense ........................................
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Debit $7,930 2,900 585 15,550
Credit
$9,500 430 15,000 9,895 18,870 40 2,400 4,500 $43,800
$43,800
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-16 (a) GENERAL JOURNAL Date July
Account Titles
J1 Debit
Credit
2 Rent Expense ............................................ 1,060 Cash.......................................................
1,060
4 Supplies ........................................................ 790 Accounts Payable.................................
790
15 Accounts Payable ........................................ 680 Cash.......................................................
680
31 Salaries expense ....................................... 2,420 Cash.......................................................
2,420
31 Cash ........................................................... 9,940 Accounts Receivable ................................... 400 Service Revenue ...................................
10,340
(b) and (c) Cash Accounts Payable June 30 5,820 July 2 1,060 June 30 680 31 9,940 15 680 July 4 790 680 31 2,420 July 15 July31 Bal. 11,600 July 31 Bal.790 Accounts Receivable June 30 400 July 31 Bal. 400
Solutions Manual .
Notes Payable June 30 50,020 July 31Bal. 50,020
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-16 (Continued) (b) and (c) (Continued) Supplies June 30 1,180 July 4 790 July 31 Bal. 1,970
June 30
Equipment 64,990
July31Bal.
64,990
July 2
S. Ahuja, Capital June 30 21,290 July31Bal. 21,290 Service Revenue July 31
July 31Bal. 10,340
Rent Expense 1,060
July31Bal.
10,340
Salaries Expense July 31 2,420 July31Bal.2,420
1,060
(d) AHUJA DENTAL SERVICES Trial Balance July 31, 2017
Debit Cash ............................................................ $11,600 Accounts receivable .................................. 400 Supplies ...................................................... 1,970 Equipment .................................................. 64,990 Notes payable............................................. Accounts payable ...................................... S. Ahuja, capital ......................................... Service revenue.......................................... Rent expense.............................................. 1,060 Salaries expense ........................................ 2,420 $82,440
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Credit
$50,020 790 21,290 10,340
$82,440
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-17 (a) O’NEILL’S PHYCHOLOGICAL SERVICES Trial Balance July 31, 2017
Cash .......................................................... Accounts receivable ................................ Supplies .................................................... Equipment ................................................ Notes payable........................................... Accounts payable .................................... Unearned revenue .................................... T. O’Neill, capital ...................................... T. O’Neill, drawings .................................. Service revenue........................................ Rent expense............................................ Salaries expense ...................................... Supplies expense.....................................
This
assumes
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notes
payable
2-48
are
Debit $ 6,470 7,340 790 58,900
Credit
$22,960 9,030 1,350 64,340 57,980 96,180 10,880 45,540 5,960 $193,860 $193,860
repayable
very
quickly.
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-17 (Continued)
(b) O’NEILL’S PSYCHOLOGICAL SERVICES Income Statement Year Ended July 31, 2017 Revenues Service revenue ....................................................... $96,180 Expenses Rent expense ............................................ $10,880 Salaries expense ........................................ 45,540 Supplies expense ....................................... 5,960 Total expenses .................................................... 62,380 Profit ............................................................................. $33,800
O’NEILL’S PSYCHOLOGICAL SERVICES Statement of Owner's Equity Year Ended July 31, 2017 T. O’Neill, capital, August 1, 2016 ............................. $64,340 Add: Profit ............................................................... 33,800 98,140 Less: Drawings ......................................................... 57,980 T. O’Neill, capital, July 31, 2017 ................................ $40,160
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-17 (Continued)
(b) (Continued) O’NEILL’S PSYCHOLOGICAL SERVICES Balance Sheet July 31, 2017 Assets Cash ............................................................................ $ 6,470 Accounts receivable .................................................. 7,340 Supplies ...................................................................... 790 Equipment .................................................................. 58,900 Total assets............................................................ $73,500 Liabilities and Owner's Equity Liabilities Notes payable .......................................................... $22,960 Accounts payable .................................................. 9,030 Unearned revenue .................................................... 1,350 Total liabilities............................................................ 33,340 Owner's Equity T. O’Neill, capital ...................................................... 40,160 Total liabilities and owner's equity .................... $73,500
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-18 (b)
(d)
Error 1.*
(a) In Balance No
Difference $400
(c) Larger Column Debit
2.
Yes
$0
None
Rent Expense Prepaid Rent
3.
Yes
$0
None
Accounts Receivable Service Revenue
4.
No
$500
Credit
Accounts Payable
5.
Yes
$0
None
Supplies Cash
6.
No
$18
Credit
Advertising Expense
7.
Yes
$0
None
Cash Salaries Expense
Incorrect Accounts Accounts Payable
*Solution provided in text.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 2-19 ROYAL MOUNTAIN TOURS Trial Balance March 31, 2017
Debit Cash ($12,800+ $400 – [$240 × 2]) ..............$12,720 Accounts receivable ($4,090 + $900 + $770) .......................................... 5,760 Supplies ...................................................... 840 Equipment .................................................. 7,350 Accounts payable ($2,500 + 400) .............. T. Zelinski, capital ...................................... T. Zelinski, drawings .................................. 3,650 Service revenue ($6,750 + $770) ............... Advertising expense .................................. 3,700 Salaries expense ........................................ 400 Totals $34,420
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Credit
$ 2,900 24,000 7,520
$34,420
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 2-1A (a)
Basic Type Asset
Account Debited (2) Specific Account Cash
Effect + $12,800
2
Asset
Equipment
+ $5,000
Liability
Accounts Payable
+$5,000
2
Owner’s Equity
Insurance Expense
+ $134
Asset
Cash
– $134
2
Asset
Supplies
+ $590
Asset
Cash
– $590
7
Owner’s Equity
Advertising Expense
+ $600
Asset
Cash
– $600
8
Asset
Cash
+ $630
Owner’s Equity
Service Revenue
+ $630
(1) Transaction Apr. 1*
(3)
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Account Credited (1) (2) (3) Specific Basic Type Account Effect Owner’s N. Dhaliwal, + $12,800 Equity Capital
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-1A (Continued) (a) (Continued)
(1) Transaction 10
Basic Type
Account Debited (2) Specific Account
(3) Effect
Account Credited (1) (2) Specific Basic Type Account
(3) Effect
No transaction at this point in time (see Apr. 28).
25
Owner’s Equity
N. Dhaliwal, Drawings
+ $960
Asset
Cash
– $960
28
Asset
Cash
+ $1,270
Owner’s Equity
Service Revenue
+ $1,270
29
Asset
Cash
+ $1,800
Liability
Unearned Revenue
+ $1,800
30
Liability
Accounts Payable
– $5,000
Asset
Cash
– $5,000
*Solution provided in text.
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-1A (Continued) (b) Date Apr.
GENERAL JOURNAL Account Titles
Debit
Credit
1 Cash ....................................................... 12,800 N. Dhaliwal, Capital...........................
12,800
2 Equipment.............................................. Accounts Payable .............................
5,000 5,000
2 Insurance Expense................................ Cash...................................................
134
2 Supplies ................................................. Cash...................................................
590
7 Advertising Expense ............................. Cash...................................................
600
8 Cash ....................................................... Service Revenue ...............................
630
134
590
600
630
10 No transaction at this time. 25 N. Dhaliwal, Drawings ........................... Cash...................................................
960
28 Cash ....................................................... Service Revenue ...............................
1,270
29 Cash ....................................................... Unearned Revenue ...........................
1,800
30 Accounts Payable ................................. Cash...................................................
5,000
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960
1,270
1,800 5,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-1A (Continued) Taking It Further The investment by the owner increases cash, an asset. Assets are on the left (or debit) side of the accounting equation. The same transaction also increases the right (or credit) side of the accounting equation and increases the owner’s capital. Since both the left and right side of the accounting equation must remain in balance, a transaction must have both a debit and a credit.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-2A GENERAL JOURNAL Date May
Account Titles
Debit
1 Cash ...................................................... 73,800 A. Mawani, Capital ...........................
Credit
73,800
2 Land ...................................................... 108,500 Building................................................. 84,300 Equipment............................................. 59,100 Cash.................................................. 60,300 Notes Payable ($251,900 – $60,300) 191,600 4 Equipment............................................. 17,000 Accounts Payable ............................
17,000
5 No entry required. 6 Prepaid Insurance ................................ Cash..................................................
2,580
15 Cash ...................................................... Fees Earned .....................................
1,830
19 Accounts Payable ................................ Cash..................................................
5,480
20 Cash ...................................................... Accounts Receivable ........................... Fees Earned .....................................
350 1,060
30 Cash ...................................................... Accounts Receivable .......................
1,060
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2,580
1,830
5,480
1,410 1,060
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-2A (Continued) Date
Account Titles
Debit
May 31 Cash ...................................................... Fees Earned .....................................
3,100
31 Salaries Expense .................................. Cash..................................................
2,220
31 Interest Expense.................................. Cash..................................................
710
31 A. Mawani, Drawings............................ Cash..................................................
1,540
Credit
3,100
2,220
710 1,540
Taking It Further The purpose of the journal entries is to show the debit and credit effects of each transaction on specific accounts. This helps to prevent and locate errors because the debit and credit amounts in the entry have to balance. The journal entries also provide a chronological record of transactions, give an explanation of the transaction, and identify source documents.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-3A Aug.
2 Cash ....................................................... 35,000 J. Green, Capital ............................... 2 Supplies ................................................. Accounts Payable ............................
35,000
550 550
5 Equipment.............................................. 10,000 Notes Payable ...................................
10,000
9 Cash ....................................................... Accounts Receivable ............................ Service Revenue ...............................
7,500 7,500 15,000
14 Salaries Expense ................................... Cash...................................................
1,200
15 J. Green, Drawings ................................ Cash...................................................
4,300
19 Cash ....................................................... Unearned Revenue ...........................
2,450
22 Accounts Payable ................................. Cash...................................................
550
25 Cash ....................................................... Accounts Receivable ........................
7,500
26 Office Expense ...................................... Cash...................................................
3,200
30 Interest Expense.................................... Cash...................................................
50
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1,200
4,300
2,450
550
7,500
3,200 50
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-3A (Continued) Taking It Further Service revenue and salaries expense are considered equity accounts because transactions that cause increases in service revenue will cause increases in equity and transactions that cause increases in salaries expense will cause decreases in equity. Increases in revenues are recorded on the credit side of the account and so the credit side of the equity account represents an increase. On the other hand, increases in salaries expense are recorded on the debit side of the account and so the debit side of the equity account represents a decrease.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-4A (a) Date
Account Titles
Ref.
Debit
Apr. 1
Cash............................................ E. Valley, Capital................
101 301
20,000 20,000
1
No entry—not a transaction.
2
Rent Expense ............................. Cash ...................................
729 101
1,100
Supplies ..................................... Accounts Payable .............
126 201
4,000
Accounts Receivable................. Service Revenue................
112 400
5,100
Cash............................................ Unearned Revenue ............
101 209
1,000
Cash............................................ Service Revenue................
101 400
2,100
Salaries Expense ....................... Cash ...................................
726 101
2,800
Accounts Payable ..................... Cash ...................................
201 101
2,400
3 10
11 20 30
30
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J1 Credit
1,100 4,000 5,100 1,000 2,100 2,800
2,400
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-4A (Continued) (b)
Date Apr. 1 2 11 20 30 30
Explanation
Cash Ref. Debit J1 20,000 J1 J1 1,000 J1 2,100 J1 J1
Date Apr. 10
Accounts Receivable Explanation Ref. Debit J1 5,100
Date Apr. 3
Explanation
Supplies Ref. Debit 4,000 J1
Explanation
Accounts Payable Ref. Debit J1 J1 2,400
Explanation
Unearned Revenue Ref. Debit J1
Date Apr. 3 30
Date Apr. 11
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Credit 1,100
2,800 2,400
No. 101 Balance 20,000 18,900 19,900 22,000 19,200 16,800
Credit
No. 112 Balance 5,100
Credit
No. 126 Balance 4,000
Credit 4,000
No. 201 Balance 4,000 1,600
Credit 1,000
No. 209 Balance 1,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-4A (Continued) E. Valley, Capital Date Apr. 1
Date Apr. 10 20
Explanation
Explanation
Ref. J1
No. 301 Debit
Service Revenue Ref. Debit J1 J1
Credit 20,000
Balance 20,000
No. 400 Credit Balance 5,100 5,100 2,100 7,200
Salaries Expense Date Apr. 30
Explanation
Ref. J1
No. 726 Debit 2,800
Credit
Balance 2,800
Rent Expense Date Apr. 2 (c)
Explanation
Ref. J1
No. 729 Debit 1,100
Credit
Balance 1,100
EMILY VALLEY, DENTIST Trial Balance April 30, 2017 Cash.......................................................... Accounts Receivable............................... Supplies ................................................... Accounts Payable .................................... Unearned Revenue .................................. E. Valley, Capital ...................................... Service Revenue ...................................... Salaries Expense ..................................... Rent Expense ...........................................
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Debit $16,800 5,100 4,000
Credit
$ 1,600 1,000 20,000 7,200 2,800 1,100 $29,800
$29,800 Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-4A (Continued) Taking It Further The next step in the accounting cycle will be the preparation of a trial balance. The main purpose of the trial balance is to prove that the debits equal the credits after posting. It is also useful in preparing financial statements.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5A
(a) Date
GENERAL JOURNAL Account Titles
Ref.
Debit
Sept. 1 Cash ............................................... 101 G. Rodewald, Capital ................ 301
9,630
2 Rent Expense ................................ 726 Cash........................................... 101
690
2 Prepaid Insurance ......................... 130 Cash........................................... 101
750
5 Equipment...................................... 151 Accounts Payable ..................... 201
2,640
7 Advertising Expense ..................... 610 Cash........................................... 101
420
13 Cash ............................................... 101 Service Revenue ....................... 400
500
21 Accounts Receivable .................... 112 Service Revenue ....................... 400
800
24 Cash ............................................... 101 Accounts Receivable ................ 112
540
28 Utilities Expense ........................... 737 Cash........................................... 101
210
29 Accounts Payable ......................... 201 Cash........................................... 101
1,470
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Credit
9,630
690
750
2,640
420
500
800
540
210 1,470
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5A (Continued) (a) (Continued) Date
Account Titles
Ref.
Debit
Sept. 30 Cash ............................................ 101 Unearned Revenue ................ 209
860
30 Cash ............................................ 101 Service Revenue .................... 400
1,045
30 G. Rodewald, Drawings.............. 306 Cash........................................ 101
1,490
Credit
860
1,045 1,490
(b) Cash Date
Explanation
Sept. 1 2 2 7 13 24 28 29 30 30 30
Date
Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1
Debit 9,630
690 750 420 500 540 210 1,470 860 1,045 1,490
Accounts Receivable Explanation Ref. Debit
Sept. 21 24
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J1 J1
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No. 101 Credit Balance 9,630 8,940 8,190 7,770 8,270 8,810 8,600 7,130 7,990 9,035 7,545
No. 112 Credit Balance
800 540
800 260
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5A (Continued) (b) (Continued)
Date
Prepaid Insurance Explanation Ref.
Debit
No. 130 Credit Balance
J1
750
750
Debit
No. 151 Credit Balance
Sept. 2 Equipment Date
Explanation
Sept. 5
Date
J1 Accounts Payable Explanation Ref.
Sept. 5 29
Date
J1 J1 Unearned Revenue Explanation Ref.
Sept. 30
Date
2,640
Debit
Debit
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1,490
860
No. 301 Credit Balance 9,630
G. Rodewald, Drawings Explanation Ref. Debit
2,640 1,170
No. 209 Credit Balance 860
J1
J1
No. 201 Credit Balance
1,470
G. Rodewald, Capital Explanation Ref. Debit
Sept. 30
2,640
2,640
J1
Sept. 1
Date
Ref.
9,630
No. 306 Credit Balance 1,490
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5A (Continued) (b) (Continued)
Date
Service Revenue Explanation Ref.
Sept. 13 21 30
Date
J1 J1 J1
J1
500 1,300 2,345
No. 610 Credit Balance
420
420
Rent Expense Explanation Ref.
Debit
No. 726 Credit Balance
J1
690
690
Utilities Expense Explanation Ref.
Debit
No. 737 Credit Balance
J1
210
210
Sept. 2
Date
500 800 1,045
Advertising Expense Explanation Ref. Debit
Sept. 7
Date
Debit
No. 400 Credit Balance
Sept. 28
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Chapter 2
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Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5A (Continued) (c) GRETE KANINES Trial Balance September 30, 2017 Debit Cash............................................................. $7,545 Accounts receivable ................................... 260 Prepaid insurance....................................... 750 Equipment ................................................... 2,640 Accounts payable ....................................... Unearned revenue ...................................... G. Rodewald, capital................................... G. Rodewald, drawings .............................. 1,490 Service revenue .......................................... 420 Advertising expense................................... Rent expense .............................................. 690 Utilities expense ......................................... 210 $14,005
Credit
$1,170 860 9,630 2,345
$14,005
Taking It Further While Grete is correct in making the connection that transactions involving investments, drawings, revenues, and expenses ultimately have an impact on the owner’s capital account, there remains a need for these separate accounts. Without them, a business is unable to report the revenues and expenses on the income statement, and the investments and drawings by the owner on the statement of owner’s equity. This detailed information is relevant and necessary to the users of the financial statements.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6A (a) Date May
GENERAL JOURNAL Account Titles
Debit
1 Cash .................................................... Equipment........................................... J. Abramson, Capital .....................
Credit
44,810 10,690 55,500
1 No entry—not a transaction. 2 Prepaid Insurance .............................. Cash................................................
3,255
5 Rent Expense ..................................... Prepaid Rent ....................................... Cash................................................
2,275 2,275
8 Equipment........................................... Cash................................................ Notes Payable ................................
15,870
9 Supplies .............................................. Cash................................................
570
15 Supplies .............................................. Accounts Payable ..........................
730
17 Accounts Receivable ......................... Service Revenue ............................
3,200
22 Telephone Expense............................ Cash................................................
320
25 Cash .................................................... Service Revenue ............................
1,120
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3,255
4,550 7,150 8,720
570
730
3,200
320 1,120
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6A (Continued) (a) (Continued) Date
Account Titles
Debit
May 26 J. Abramson, Drawings...................... Cash................................................
1,980
28 Cash .................................................... Accounts Receivable .....................
2,720
30 Accounts Payable .............................. Cash................................................
730
30 Interest Expense................................. Cash................................................
67
31 Cash .................................................... Unearned Revenue ........................
500
31 Salaries Expense ................................ Cash................................................
2,340
Credit
1,980
2,720
730
67
500
2,340
(b) May 1 25 28 31
Bal.
Cash May 44,810 2 1,120 5 2,720 8 500 9 22 26 30 30 31 28,188
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3,255 4,550 7,150 570 320 1,980 730 67 2,340
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Accounts Receivable 3,200 May 2,720 May 17 28 Bal.
480
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6A (Continued) (b) (Continued) Supplies 570 730 1,300
May 9 15 Bal.
J. Abramson, Capital May 1 55,500 Bal.
Prepaid Insurance May 2 3,255 Bal. 3,255
May 5
Prepaid Rent 2,275
Bal.
2,275
May 1 8 Bal.
Equipment 10,690 15,870 26,560 Unearned Revenue May 31 Bal. Notes Payable May 8 Bal.
Accounts Payable May 30 730 May 15 Bal.
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55,500
J. Abramson, Drawings May 26 1,980 Bal. 1,980 Service Revenue May 17 3,200 25 1,120 Bal. 4,320 Interest Expense May 30 67 Bal.
67
500 500
Rent Expense May 5 2,275 Bal. 2,275
8,720 8,720
Salaries Expense May 31 2,340 Bal. 2,340
730 0
2-72
Telephone Expense May 22 320 Bal. 320
Chapter 2
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Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6A (Continued) (c) ABRAMSON FINANCIAL SERVICES Trial Balance May 31, 2017 Debit Cash............................................................. $28,188 Accounts receivable ................................... 480 Supplies ...................................................... 1,300 Prepaid insurance....................................... 3,255 Prepaid rent................................................. 2,275 Equipment ................................................... 26,560 Unearned revenue ...................................... Notes payable ............................................. J. Abramson, capital................................... J. Abramson, drawings .............................. 1,980 Service revenue .......................................... Interest expense ......................................... 67 Rent expense .............................................. 2,275 Salaries expense......................................... 2,340 Telephone expense .................................... 320 $69,040
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Credit
$ 500 8,720 55,500 4,320
$69,040
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PROBLEM 2-6A (Continued) Taking It Further This is not true. The cash account shows an increase of $28,188 during the month of May, whereas the company shows a loss of $682 for the month ($4,320 – $67 – $2,275 – $2,340 – $320). The change in the cash account does not reflect profit or loss because not all transactions that changed cash represent increases in revenues or expenses. One of the major sources of cash during the month is an investment by the owner of $55,500. This increases owner’s equity, but is not a source of revenue for the company. The company received cash in advance of doing work (unearned revenue of $500) and performed services in advance of payment (accounts receivable of $480), as well as making non-expense payments for services in advance (prepaid rent and insurance), equipment, and owner drawings. The statement of cash flows reconciles the changes in the cash account to its various uses and sources.
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PROBLEM 2-7A (a) GENERAL JOURNAL Date May
Account Titles
Debit
1 Film Rental Expense ......................... Cash............................................... Accounts Payable.........................
Credit
25,000 10,784 14,216
2 No entry—not a transaction. 7 Advertising Expense ......................... Cash...............................................
1,090
10 Cash ................................................... Admission Revenue .....................
35,940
10 Accounts Payable ............................. Cash...............................................
14,216
15 Film Rental Expense ......................... Cash............................................... Accounts Payable.........................
28,600
25 Accounts Payable ............................. Cash...............................................
4,990
30 Salaries Expense............................... Cash...............................................
6,230
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1,090
35,940
14,216 14,300 14,300
4,990 6,230
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PROBLEM 2-7A (Continued) (a) (Continued) Date
Account Titles
Debit
May 31
Cash ................................................... Accounts Receivable ........................ Concession Revenue ...................
2,370 1,785
31 Cash ................................................... Admission Revenue .....................
41,800
31
1,185 605
Mortgage Payable ............................. Interest Expense ............................... Cash...............................................
Credit
4,155
41,800
1,790
(b) and (c) Cash Date May
Explanation 1 Balance 1 7 10 10 15 25 30 31 31 31
Date
Ref. Debit
Credit Balance 18,900 10,784 8,116 1,090 7,026 35,940 42,966 14,216 28,750 14,300 14,450 4,990 9,460 6,230 3,230 2,370 5,600 41,800 47,400 1,790 45,610
Accounts Receivable Explanation Ref. Debit
Credit Balance
1,785
1, 785
May 31
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PROBLEM 2-7A (Continued) (b) and (c) (Continued) Land Date May
Explanation
Ref.
Debit
Credit Balance
1 Balance
75,000
Buildings Date May
Explanation
Ref.
Debit
Credit Balance
1 Balance
69,800
Equipment Date May
Date May
Date May
Date May
Explanation 1 Balance
Ref.
Credit Balance
Accounts Payable Explanation Ref.
17,000
Debit
Credit Balance
1 Balance 1 10 15 25
14,216 14,216 14,300 4,990
Mortgage Payable Explanation Ref.
Debit
1 Balance 31
1,185
N. Wood, Capital Explanation Ref.
1 Balance
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Debit
4,990 19,206 4,990 19,290 14,300
Credit Balance 106,300 105,115
Credit Balance 69,410
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Accounting Principles, Seventh Canadian Edition
PROBLEM 2-7A (Continued) (b) and (c) (Continued) Admission Revenue Explanation Ref.
Date
Debit
May 10 31
35,940 41,800 Concession Revenue Explanation Ref. Debit
Date May 31
May
7 Film Rental Expense Explanation Ref.
Date May
1,090
1 15
Date
25,000 28,600 Interest Expense Explanation Ref.
May 31
Date
Debit
Salaries Expense Explanation Ref.
May 30
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4,155
Credit Balance 1,090
Credit Balance 25,000 53,600
Debit
Credit Balance
605
605
Debit
Credit Balance
6,230
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35,940 77,740
Credit Balance 4,155
Advertising Expense Explanation Ref. Debit
Date
Credit Balance
6,230
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PROBLEM 2-7A (Continued) (d) SEQUEL THEATRE Trial Balance May 31, 2017 Debit Cash ....................................................... Accounts receivable ............................. Land........................................................ Buildings ................................................ Equipment .............................................. Accounts payable .................................. Mortgage payable .................................. N. Wood, capital..................................... Admission revenue................................ Concession revenue.............................. Advertising expense.............................. Film rental expense ............................... Interest expense .................................... Salaries expense ...................................
Credit
$45,610 1,785 75,000 69,800 17,000 $ 14,300 105,115 69,410 77,740 4,155 1,090 53,600 605 6,230 $270,720 $270,720
Taking It Further The revenues less the expense in the trial balance show a profit for the month of May of $20,370 ($77,740 + $4,155 – $1,090 – $53,600 – $605 – $6,230). Although a positive profit is a good indication of the company’s profitability, it is not sufficient information to determine whether Sequel Theatre is a sound business. One month’s transactions do not indicate a pattern of profitability, in particular for businesses such as theatres where revenues tend to be seasonal. The financial results for the entire year should be examined, along with comparative amounts for previous years, to determine if the company has a trend of profitability.
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PROBLEM 2-8A (b) Date Dec.
GENERAL JOURNAL Account Titles
Debit
Credit
1 Rent Expense ............................................... 475 Cash.....................................................
475
1 Equipment.................................................. 3,500 Cash..................................................... Accounts Payable ...............................
1,500 2,000
3 Cash ........................................................... 2,500 Notes Payable .....................................
2,500
4 Accounts Payable ..................................... 2,000 Cash.....................................................
2,000
4 Cash ........................................................... 1,800 Accounts Receivable ..........................
1,800
7 Insurance Expense....................................... 310 Cash.....................................................
310
8 Supplies ........................................................ 150 Cash.....................................................
150
10 Accounts Payable ..................................... 2,130 Cash.....................................................
2,130
15 Unearned Revenue ....................................... 825 Fees Earned ........................................
825
20 Cash ........................................................... 3,300 Fees Earned ........................................
3,300
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PROBLEM 2-8A (Continued) (b) (Continued) Dec. 21 Telephone Expense................................. Cash.....................................................
135 135
22 Accounts Receivable .............................. 2,250 Fees Earned ........................................
2,250
24 A. Zhawaki, Drawings.............................. 3,000 Cash.....................................................
3,000
29 Cash ......................................................... Unearned Revenue .............................
525
30 Travel Expense ........................................ Cash.....................................................
695
31 Notes Payable.......................................... Interest Expense...................................... Cash.....................................................
200 10
525
695
210
(a) and (c) Nov.30 3 4 20 29
Bal.
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Cash 2,965 Dec. 1 2,500 1 1,800 4 3,300 7 525 8 10 21 24 30 31 485
Accounts Receivable Nov.30 2,200 Dec. 4 1,800 22 2,250 Bal. 2,650
475 1,500 2,000 310 150 2,130 135 3,000 695 210
Supplies Nov. 30 1,450 Dec. 8 150 Bal. 1,600
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PROBLEM 2-8A (Continued) (a) and (c) (Continued)
Equipment Nov.30 17,500 Dec. 1 3,500 Bal. 21,000 Notes Payable Dec. 31 200 Dec. 3 Bal.
Fees Earned Nov.30 47,075 Dec. 15 825 20 3,300 22 2,250 Bal. 53,450 2,500 2,300
Insurance Expense Nov.30 3,410 Dec. 7 310 Bal. 3,720
Accounts Payable Dec. 4 2,000 Nov.30 4,235 10 2,130 1 2,000 Bal. 2,105 Unearned Revenue Dec. 15 825 Nov. 30 Dec. 29 Bal.
Rent Expense Nov.30 5,225 Dec. 1 475 Bal. 5,700
825 525 525
Telephone Expense Nov.30 1,485 Dec. 21 135 Bal. 1,620
A. Zhawaki, Capital Nov.30 19,500 A. Zhawaki, Drawings Nov.30 31,350 Dec. 24 3,000 Bal. 34,350
Travel Expense Nov.30 6,050 Dec. 30 695 Bal. 6,745 Interest Expense Dec. 31 10 Bal. 10
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PROBLEM 2-8A (Continued) (d) A TO Z MUSIC Trial Balance December 31, 2017 Debit Cash............................................................. $ 485 Accounts receivable ....................................... 2,650 Supplies .......................................................... 1,600 Equipment ................................................... 21,000 Notes payable ............................................. Accounts payable ....................................... Unearned revenue ...................................... A. Zhawaki, capital...................................... A. Zhawaki, drawings ................................. 34,350 Fees earned................................................. Insurance expense ..................................... 3,720 Rent expense .............................................. 5,700 Telephone expense .................................... 1,620 Travel expense............................................ 6,745 Interest expense ......................................... 10 $77,880
Credit
$ 2,300 2,105 525 19,500 53,450
$77,880
Taking It Further The cash balance has decreased from $2,965 to $485 during the month of December. This is a substantial decrease from the opening balance and exposes the company to the possibility of not being able to pay its outstanding liabilities. The company borrowed $2,500 at the beginning of December and used this cash to purchase used equipment for $3,500. Had the company not borrowed or purchased the additional equipment, the cash balance for the month would have been $1,695 ($485 + $3,500 – $2,500 + $210 payment on the note payable). This still represents a substantial decrease from the November ending balance and is cause for concern. Solutions Manual .
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PROBLEM 2-8A (Continued) Taking It Further (Continued) During the month of January, the company should collect outstanding receivables as quickly as possible (in particular those amounts still outstanding from November) and reduce owner drawings. The company will also need to ensure the additional used equipment generates additional cash as soon as possible.
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PROBLEM 285A J. SAGGIT Trial Balance June 30, 2017 Debit
Credit
Cash ............................................................ $ 8,000 Accounts receivable .................................. 10,250 Supplies ...................................................... 5,000 Prepaid expenses....................................... 3,000 Land ............................................................ 64,000 Equipment................................................... 18,250 Accounts payable....................................... $ 12,500 Notes payable ............................................. 30,000 J. Saggit, capital ......................................... 28,000 J. Saggit, drawings..................................... 12,000 Service revenue.......................................... 63,050 Rent expense .............................................. 4,500 Utilities expense ......................................... 550 Salaries expense ........................................ 7,500 Interest expense ........................................ 500 $133,550 $133,550 Taking It Further J. Saggit is incorrect in his belief. While the ledger and the trial balance may be in balance, omissions or duplications of entries as well as entries to incorrect accounts may cause the financial statements to be incorrect and therefore not error free.
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PROBLEM 2-10A (a) ABRAMSON FINANCIAL SERVICES Income Statement Month Ended May 31, 2017
Revenues Service revenue .................................................. Expenses Interest expense ................................. $ 67 Rent expense ...................................... 2,275 Salaries expense................................. 2,340 Telephone expense ................................ 320 Total expenses ............................................... Loss .........................................................................
$4,320
5,002 $( 682)
(b) ABRAMSON FINANCIAL SERVICES Statement of Owner's Equity Month Ended May 31, 2017
J. Abramson, capital, May 1, 2017.......................... Add: Investment ...................................................... Less: Loss ............................................... $ 682 Drawings........................................ 1,980 J. Abramson, capital, May 31, 2017........................
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$ 0 55,500 55,500 2,662 $52,838
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PROBLEM 2-10A (Continued) (c) ABRAMSON FINANCIAL SERVICES Balance Sheet May 31, 2017 Assets Cash ........................................................................... $28,188 Accounts receivable ................................................. 480 Supplies ..................................................................... 1,300 Prepaid insurance ..................................................... 3,255 Prepaid rent ............................................................... 2,275 Equipment ................................................................. 26,560 Total assets ........................................................... $62,058 Liabilities and Owner's Equity Liabilities Notes payable ....................................................... Unearned service revenue ...................................
$ 8,720 500 9,220
Owner's Equity J. Abramson, Capital ............................................ 52,838 Total liabilities and owner's equity ................. $62,058 Taking It Further In its first month of operations Abramson Financial Services incurred more expenses than it generated in revenues resulting in a loss of $682. Since this is a new business, it may take a few months for revenues to reach and exceed the level of expenses. Jacob will need to monitor the revenues generated as compared to expenses incurred to ensure the company reaches profitability as soon as possible.
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PROBLEM 2-11A (a)
GENERAL JOURNAL
Date
Account Titles
Feb. 1
Advertising Expense ............................. Cash...................................................
2
3
4
6
14
15
23
26
27
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Debit
Credit
430 430
Rent Expense ........................................ 1,050 Cash...................................................
1,050
Cash ....................................................... 4,240 Fees Earned ......................................
4,240
Cash ....................................................... Accounts Receivable........................
720
Accounts Payable ................................. Cash...................................................
970
Salaries Expense................................... Cash...................................................
400
720
970
400
Rent Expense ........................................ 1,050 Cash...................................................
1,050
Accounts Receivable ............................ 1,475 Fees Earned ......................................
1,475
Internet Expense ................................... Cash...................................................
185 185
Cash ....................................................... 2,830 Unearned Revenue ...........................
2,830
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PROBLEM 2-11A (Continued) (a) (Continued) 27
28
28
D. Scoffin, Drawings ............................. Cash...................................................
575
Salaries Expense................................... Cash...................................................
400
575
400
Prepaid Rent .......................................... 1,050 Cash...................................................
1,050
(b) and (c) Jan.31 3 4
27
Bal.
Cash 2,100 Feb. 1 4,240 2 720 6 14 15 2,830 26 27 28 28 3,780
Accounts Payable Jan.31 1,470 Feb. 6 970 Bal. 500
430 1,050 970 400 1,050 185 575 400 1,050
Unearned Revenue Feb. 27 2,830 Bal. 2,830
D. Scoffin, Capital Jan.31 13,750
Accounts Receivable Jan.31 720 Feb. 4 720 23 1,475 Bal. 1,475
Bal.
13,750
D. Scoffin, Drawings Feb. 27 575 Bal. 575
Prepaid Rent Feb.28 1,050 Bal. 1,050 Equipment Jan.31 12,400 Bal. 12,400
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PROBLEM 2-11A (Continued) (b) and (c) (Continued) Fees Earned Feb. 3 Feb. 23 Bal.
4,240 1,475 5,715
Feb. 1
Advertising Expense 430
Feb. 26
Internet Expense 185
Feb. 2 Feb. 15 Bal.
Rent Expense 1,050 1,050 2,100
Feb. 14 Feb. 28 Bal.
Salaries Expense 400 400 800
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PROBLEM 2-11A (Continued) (d) YH CURLING SCHOOL Trial Balance February 28, 2017 Debit Cash ................................................................. Accounts receivable ....................................... Prepaid rent ..................................................... Equipment ....................................................... Accounts payable ........................................... Unearned revenue ........................................... D. Scoffin, capital ............................................ D. Scoffin, drawings........................................ Fees earned ..................................................... Advertising expense ....................................... Internet expense.............................................. Rent expense................................................... Salaries expense .............................................
Credit
$ 3,780 1,475 1,050 12,400 $
500 2,830 13,750
575 5,715 430 185 2,100 800 $22,795
$22,795
Taking It Further The payments to YH Curling Club for February ice rental are an expense as they are a cost of the month to have a rink available to deliver the services performed by the school during the month. They are not an asset because there is no future benefit beyond the end of the month. However, the February 28 ice rental payment is for March ice rental, and thus has not been used yet, therefore it is an asset as it has a future benefit.
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PROBLEM 2-12A (a) YH CURLING SCHOOL Income Statement Month Ended February 28, 2017 Revenues Fees earned................................................................. Expenses Advertising expense.................................... $ 430 Internet expense .......................................... 185 Rent expense ............................................... 2,100 Salaries expense ......................................... 800 Total expenses ....................................................... Profit ................................................................................
$5,715
3,515 $2,200
(b) YH CURLING SCHOOL Statement of Owner's Equity Month Ended February 28, 2017 D. Scoffin, capital, February 1, 2017 ...................................$13,750 Add: Profit ..................................................................... 2,200 15,950 Less: Drawings................................................................ 575 D. Scoffin, capital, February 28, 2017 .................................$15,375
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PROBLEM 2-12A (Continued) (c) YH CURLING SCHOOL Balance Sheet February 28, 2017 Assets Cash .................................................................................... $ 3,780 Accounts receivable .......................................................... 1,475 Prepaid rent ........................................................................ 1,050 Equipment .......................................................................... 12,400 Total assets.................................................................... $18,705 Liabilities and Owner's Equity Liabilities Accounts payable .......................................................... $ 500 Unearned revenue ............................................................. 2,830 Total liabilities ........................................................... 3,330 Owner's Equity D. Scoffin, capital...............................................................15,375 Total liabilities and owner's equity ............................$18,705 Taking It Further There is a difference between cash collected from customers and revenue in any specific month. Although the school has earned revenue, it has not necessarily collected all of the cash from providing the services. In addition, the school has received cash in advance of providing the services so this amount is not yet included in fees earned.
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PROBLEM 2-13A (a) SUPER DELIVERY SERVICE Trial Balance August 31, 2017
Debit Credit Cash (to balance debits = credits*) ........... $ 6,301 Accounts receivable .................................. 4,226 Supplies ...................................................... 299 Prepaid insurance ...................................... 358 Equipment .................................................. 49,660 Notes payable............................................. $19,480 Accounts payable ...................................... 3,250 Salaries payable ......................................... 883 Unearned revenue ...................................... 643 T. Rowe, capital .......................................... 48,840 T. Rowe, drawings...................................... 25,000 Service revenue.......................................... 37,800 Gas expense ............................................... 12,177 Insurance expense ..................................... 2,016 Interest expense ......................................... 1,006 Repairs expense......................................... 1,549 Salaries expense ........................................ 5,698 Supplies expense ...................................... 2,606 $110,896 $110,896 * Total debits without cash = $104,595 $110,896 – $104,595 = $6,301
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PROBLEM 2-13A (Continued) (b) SUPER DELIVERY SERVICE Income Statement Year Ended August 31, 2017 Revenues Service revenue .......................................................$37,800 Expenses Gas expense ............................................. $12,177 Insurance expense .................................. 2,016 Interest expense ...................................... 1,006 Repairs expense ...................................... 1,549 Salaries expense ..................................... 5,698 Supplies expense .................................... 2,606 Total expenses ......................................................25,052 Profit .............................................................................$12,748
SUPER DELIVERY SERVICE Statement of Owner's Equity Year Ended August 31, 2017 T. Rowe, capital, August 31, 2016 ............................. $48,840 Plus: Profit ............................................................... 12,748 61,588 Less: Drawings ......................................................... 25,000 T. Rowe, capital, August 31, 2017 ............................. $36,588
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PROBLEM 2-13A (Continued) (b) (Continued) SUPER DELIVERY SERVICE Balance Sheet August 31, 2017 Assets Cash ............................................................................ Accounts receivable .................................................. Supplies ...................................................................... Prepaid insurance ...................................................... Equipment ..................................................................
$6,301 4,226 299 358 49,660
Total assets............................................................ $60,844 Liabilities and Owner's Equity Liabilities Notes payable ..........................................................$19,480 Accounts payable .................................................. 3,250 Salaries payable .................................................... 883 Unearned revenue .................................................. 643 Total liabilities .......................................................24,256 Owner's Equity T. Rowe, capital........................................................36,588 Total liabilities and owner's equity ....................$60,844
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PROBLEM 2-13A (Continued) Taking It Further Tom Rowe has withdrawn almost twice as much cash compared to the profit. This has resulted in a net decrease to the owner’s capital account. Tom’s drawings have left the company with a low level of liquid assets (Cash of $6,301 + Accounts receivable of $4,226 = $10,527) to pay off liabilities (Notes payable of $19,480 + Accounts payable of $3,250 + Salaries payable of $883 = $23,613). Tom’s drawings should be based on his cash budget for the coming year and leave the company with sufficient cash to meet its liabilities and to be able to grow.
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PROBLEM 2-14A (a) 1. Correct 2. Correct 3. Incorrect 4. Incorrect 5. Incorrect 6. Incorrect 7. Incorrect 8. Incorrect 9. Incorrect 10. Incorrect (b) 1 1 2 3 4
5
2
No
Interest Revenue Yes Salaries Expense Drawings
6
Yes Unearned Revenue Service Revenue No Supplies
7
No
8
Unearned Revenue Yes Cash Salaries Payable
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3
4
Understated $750 Overstated $1,000 Understated $1,000 Overstated $325 Understated $325 Understated $1,540 Understated $500 Overstated $495 Overstated $495
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Yes Yes
Yes
Increase $1,540 Yes Decrease by $495
5
Increase by $750 Yes
Decrease by $325 Increase by $325 Yes Increase by $500 Decrease by $495
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-14A (Continued) (b) (Continued) 2 Equipment
3 Overstated $3,600
4 Decrease by $3,600
Yes
10 Yes Utilities Expense Accounts Payable
Understated $650 Understated $650
Increase by $650
Increase by $650
9
1 No
5
Taking It Further Disagree. Even though the trial balance is balanced, uncorrected errors misstate the financial position of the company. For example: 4. This error overstates Salaries Expense and thereby lowers profit on the income statement. 8. This error shows higher liabilities by overstating Salaries Payable and higher assets by overstating Cash. 10. This error understates Utilities Expense and understates Accounts Payable. It results in a higher profit on the income statement because of the unrecorded expense that was consumed in generating the profits.
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PROBLEM 2-15A (a) WINTER CO. Trial Balance June 30, 2017
Debit
Credit
Cash ($2,835 + $570 - $750) ................................... $ 2,655 Accounts receivable ($1,861 + $750 – $570 + $980 – $98) ................................................... 2,923 Prepaid insurance (correct balance provided).... 655 Supplies ($500 + $360) .......................................... 860 Equipment ($7,900 – $360) ................................... 7,540 Accounts payable ($2,695 + $608– $806)............. $ 2,497 Unearned fees (correct balance provided) .......... 1,855 F. Winter, capital (correct balance provided) ...... 11,231 F. Winter, drawings ($800 + $400) ........................ 1,200 Service revenue ($3,460– $3,460 + $4,360) .......... 4,360 Office expense ($1,010 + $500)............................. 1,510 Salaries expense ($3,000 – $400) ......................... 2,600 $19,943 $19,943 Taking It Further There could still be errors after correcting the items identified. The errors could be counter-balancing errors that affect both the debit and credit side equally, such as a transposition error in recording a journal entry that affects both the debit and credit sides, or errors that counter-balance on the debit side, or on the credit side, of the trial balance (items #1, 2, and 6). The trial balance could also be in balance and not show transactions that have been omitted but that should have been recorded.
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PROBLEM 2-1B (a) (1) Transaction Jan. 2* 4
Basic Type Owner’s Equity Asset
5
Asset
7 10
Account Debited (2) Specific Account Rent Expense
Effect + $525
Cash
+ $1,055
Supplies
+ $420
(3)
Account Credited (1) (2) Specific Basic Type Account Asset Cash Owner’s Equity Liability
No transaction at this point in time (see Jan. 18). Asset Cash + $1,500 Liability
+ $1,055
+ $1,500
+ $420
Asset
+ $1,085
Service Revenue Cash
+ $1,085
– $420
Owner’s Equity Asset
+ $1,085
Asset
Accounts Receivable Notes Payable Cash
– $1,085
18 25
Liability
27
Asset
28
Asset
Cash
+ $5,000
Liability
29
Asset
Equipment
+ $1,950
Asset
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Service Revenue Accounts Payable
+ $500
K. Battistella, Drawings Accounts Receivable Accounts Payable Cash
Solutions Manual .
Effect – $525
Unearned Revenue Cash
Owner’s Equity Asset
12
(3)
Chapter 2
– $500
– $420
+ $5,000 – $1,950
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-1B (Continued) *Solution provided in text. (b) GENERAL JOURNAL Date Jan.
Account Titles
Debit
2 Rent Expense ........................................ Cash...................................................
525
4 Cash ....................................................... Service Revenue ...............................
1,055
5 Supplies ................................................. Accounts Payable .............................
420
Credit
525
1,055
420
7 No transaction at this time. 10 Cash ....................................................... Unearned Revenue ...........................
1,500
12 K. Battistella, Drawings......................... Cash...................................................
500
18 Accounts Receivable ............................ Service Revenue ...............................
1,085
25 Accounts Payable ................................. Cash...................................................
420
27 Cash ....................................................... Accounts Receivable ........................
1,085
28 Cash ....................................................... Notes Payable ...................................
5,000
29 Equipment.............................................. Cash...................................................
1,950
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1,500
500
1,085
420
1,085
5,000 1,950 Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-1B (Continued) Taking It Further
Cash is an asset and is on the left-hand side of the accounting equation. When cash is received, it increases the balance, and when cash is paid out, it decreases the balance. To decrease an asset, it is credited, so a credit to cash decreases cash.
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PROBLEM 2-2B GENERAL JOURNAL Date May
Account Titles
Debit
Credit
1 Cash .......................................................... 70,000 D. Tanner, Capital ............................... 70,000 3 Land ...................................................... 225,000 Building................................................. 75,000 Equipment............................................. 55,000 Cash.................................................. 35,000 Notes Payable .................................. 320,000 3 Insurance Expense.................................. Cash.....................................................
780 780
8 Advertising Expense ............................... 1,950 Cash.....................................................
1,950
15 Cash ......................................................... 5,400 Admissions Revenue..........................
5,400
16 Salaries Expense ..................................... 2,600 Cash.....................................................
2,600
20 Cash ......................................................... 500 Accounts Receivable .............................. 2,250 Admissions Revenue..........................
2,750
22 No entry required 29 Cash ......................................................... 2,250 Accounts Receivable ..........................
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2,250
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-2B (Continued) Date
Account Titles
Ref.
Debit
Credit
May 30 Cash ......................................................... 5,750 Admissions Revenue..........................
5,750
31 Interest Expense...................................... 1,200 Notes Payable.......................................... 5,333 Cash.....................................................
6,533
31 D. Tanner, Drawings................................ 1,800 Cash.....................................................
1,800
31 Salaries Expense ..................................... 3,800 Cash.....................................................
3,800
Taking It Further The purpose of the journal entries is to show the debit and credit effects of each transaction on specific accounts. This helps to prevent and locate errors because the debit and credit amounts in the entry have to balance. The journal entries also provide a chronological record of transactions, give an explanation of the transaction, and identify source documents. The next step in the recording process is to transfer the information to the ledger by posting the transactions to specific ledger accounts. Dustin should find the information generated by this next step more useful since posting transactions to the ledger will update the ledger account balances. Once this step is completed, a trial balance can be prepared from the ledger accounts as can the financial statements.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-3B Apr.
1 Cash ....................................................... 27,750 A. Rai, Capital....................................
27,750
2 Equipment.............................................. Notes Payable ...................................
5,000 5,000
3 Supplies ................................................. Accounts Payable ............................
250
5 Cash ....................................................... Accounts Receivable ............................ Service Revenue ...............................
6,300 5,950
10 A. Rai, Drawings .................................... Cash...................................................
4,300
13 Accounts Payable ................................. Cash...................................................
250
15 Cash ....................................................... Unearned Revenue ...........................
2,450
25 Cash ....................................................... Accounts Receivable ........................
5,950
26 Office Expense ...................................... Cash...................................................
1,200
30 Interest Expense.................................... Cash...................................................
45
Solutions Manual .
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250
12,250
4,300
250
2,450
5,950
1,200 45
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-3B (Continued) Taking It Further Assets are on the left side of the basic accounting equation and liabilities and owner’s equity are on the right side of the basic accounting equation. Since debits are on the left side, and assets are also on the left side, the normal balance of an asset is a debit balance. Since credits are on the right side and liabilities are on the right side, the normal balance of a liability is a credit balance. The same is also true for owner’s equity. Revenues increase owner’s equity and therefore also have a normal credit balance. But expenses and drawings are decreases to owner’s equity and thus have a normal debit balance.
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PROBLEM 2-4B (a) J1 Credit
Date
Account Titles
Ref.
Debit
Apr. 1
Cash................................................. B. Fair, Capital ........................
101 301
45,000 45,000
1
No entry—not a transaction.
2
Rent Expense .................................. Cash ........................................
729 101
800
Supplies .......................................... Accounts Payable ..................
126 201
1,500
Accounts Receivable...................... Service Revenue.....................
112 400
1,800
Cash................................................. Unearned Service Revenue ...
101 209
500
Cash................................................. Service Revenue.....................
101 400
1,500
Salaries Expense ............................ Cash ........................................
726 101
2,000
30 Accounts Payable .......................... Cash ........................................
201 101
600
3 10
11 20 30
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800 1,500 1,800 500 1,500 2,000
600
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-4B (Continued) (b) Cash Date Apr. 1 2 11 20 30 30
Date Apr. 10
Date Apr. 3
Explanation
Ref. J1 J1 J1 J1 J1 J1
Accounts Receivable Explanation Ref. J1 Supplies Explanation Ref. J1
Debit 45,000
Credit 800
500 1,500 2,000 600
Debit 1,800
Debit 1,500
No. 101 Balance 45,000 44,200 44,700 46,200 44,200 43,600
Credit
No. 112 Balance 1,800
Credit
No. 126 Balance 1,500
Credit 1,500
Date Apr. 3 30
Accounts Payable Explanation Ref. J1 J1
600
No. 201 Balance 1,500 900
Date Apr. 11
Unearned Service Revenue Explanation Ref. Debit J1
No. 209 Balance 500
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Debit
Credit 500
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-4B (Continued) B. Fair, Capital Date Apr. 1
Date Apr. 10 20
Explanation
Ref. J1
Service Revenue Explanation Ref. J1 J1
No. 301 Debit
Debit
Credit 45,000
Balance 45,000
Credit 1,800 1,500
No. 400 Balance 1,800 3,300
Salaries Expense Date Apr. 30
Explanation
Ref. J1
No. 726 Debit 2,000
Credit
Rent Expense Date Apr. 2
(c)
Explanation
Ref. J1
Balance 2,000
No. 729 Debit 800
Credit
Balance 800
BARBARA FAIR, ARCHITECT Trial Balance April 30, 2017 Cash.......................................................... Accounts Receivable............................... Supplies ................................................... Accounts Payable .................................... Unearned Revenue .................................. B. Fair, Capital ......................................... Service Revenue ...................................... Salaries Expense ..................................... Rent Expense ...........................................
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Debit $43,600 1,800 1,500
Credit
$ 900 500 45,000 3,300 2,000 800 $49,700
$49,700 Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-4B (Continued) Taking It Further Barbara is not correct. Debits mean left and credits mean right. Whether we debit or credit an account depends on the type of account (asset, liability, or owner’s equity) and whether the account is increasing or decreasing. For example, if we buy equipment with cash, we debit an equipment account and credit a cash account. Just because this transaction reduces (credits) the cash account, it does not mean it is bad. It means a transaction has taken place that has used some of the cash of the entity and this needs to be reflected in the books.
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PROBLEM 2-5B (a) GENERAL JOURNAL Date Aug.
Account Titles
Ref.
Debit
1 Cash ............................................... 101 T. Nguyen, Capital .................... 301
25,000
1 Rent Expense ................................ 726 Cash........................................... 101
750
2 Utilities Expense ........................... 737 Cash........................................... 101
250
3 Equipment...................................... 151 Cash........................................... 101
5,250
5 Supplies ......................................... 126 Accounts Payable ..................... 201
675
8 Accounts Receivable .................... 112 Service Revenue ....................... 400
1,270
12 Advertising Expense ..................... 610 Cash........................................... 101
945
20 Cash ............................................... 101 Service Revenue ....................... 400
1,320
24 Cash ............................................... 101 Unearned Revenue ................... 209
2,500
25 Accounts Payable ......................... 201 Cash........................................... 101
675
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Credit
25,000
750
250
5,250
675
1,270
945
1,320
2,500 675
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5B (Continued) (a) (Continued) Aug. 28 Cash ............................................. 101 Accounts Receivable .............. 112
970
29 T. Nguyen, Drawings ................... 306 Cash......................................... 101
1,225
31 Utilities Expense.......................... 737 Accounts Payable ................... 201
225
CASH
No. 101 Credit Balance
970
1,225
225
(b)
Date Aug.
Explanation 1 1 2 3 12 20 24 25 28 29
Debit
J1 J1 J1 J1 J1 J1 J1 J1 J1 J1
25,000 750 250 5,250 945 1,320 2,500 675 970 1,225
ACCOUNTS RECEIVABLE Explanation Ref. Debit
Date Aug.
Ref.
8 28
Solutions Manual .
J1 J1
2-113
25,000 24,250 24,000 18,750 17,805 19,125 21,625 20,950 21,920 20,695
No. 112 Credit Balance
1,270 970
1,270 300
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5B (Continued) (b) (Continued) SUPPLIES Date Aug.
Explanation 5
3
675
675
Debit
No. 151 Credit Balance
J1
5 25 31
5,250
J1 J1 J1
Aug. 24
J1
1
Solutions Manual .
J1
2-114
No. 201 Credit Balance
675
T. NGUYEN, CAPITAL Explanation Ref. Debit
Date
5,250
675
UNEARNED REVENUE Explanation Ref. Debit
Date
Aug.
J1
ACCOUNTS PAYABLE Explanation Ref. Debit
Date Aug.
Debit
EQUIPMENT Explanation Ref.
Date Aug.
Ref.
No. 126 Credit Balance
225
675 0 225
No. 209 Credit Balance 2,500
2,500
Credit
No. 301 Balance
25,000
25,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5B (Continued) (b) (Continued)
T. NGUYEN, DRAWINGS Explanation Ref. Debit
Date Aug. 30
SERVICE REVENUE Explanation Ref.
Date Aug.
J1
8 20
Date
J1
1,225
No. 400 Credit Balance 1,270 1,320
1,270 2,590
No. 610 Credit Balance
945
945
RENT EXPENSE Explanation Ref.
Debit
No. 726 Credit Balance
J1
750
750
UTILITIES EXPENSE Explanation Ref.
Debit
No. 737 Credit Balance
J1 J1
250 225
250 475
1
Date Aug.
Debit
J1 J1
Aug. 12
Aug.
1,225
ADVERTISING EXPENSE Explanation Ref. Debit
Date
Credit
No. 306 Balance
2 31
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-5B (Continued) (c) NGUYEN IMPORT SERVICES Trial Balance August 31, 2017
Debit Cash ............................................................ $20,695 Accounts receivable .................................. 300 Supplies ...................................................... 675 Equipment................................................... 5,250 Accounts payable....................................... Unearned revenue ...................................... T. Nguyen, capital....................................... T. Nguyen, drawings .................................. 1,225 Service revenue.......................................... Advertising expense .................................. 945 Rent expense .............................................. 750 Utilities expense ......................................... 475 $30,315
Credit
$
225 2,500 25,000 2,590
$30,315
Taking It Further While Thanh is correct in making the connection that transactions recorded to the drawings, revenue, and expense accounts ultimately impact the owner’s capital account, there remains a need for these separate accounts. Without them, a business is unable to report the revenues and expenses on the income statement, and the drawing by the owner as reported on the statement of owner’s equity. This detailed information is relevant and necessary to the users of the financial statements.
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PROBLEM 2-6B (a) Date Nov.
GENERAL JOURNAL Account Titles
Debit
1 Cash .................................................... Equipment........................................... H. Kiersted, Capital ........................
Credit
35,000 12,000 47,000
2 No entry—not a transaction. 3 Rent Expense ..................................... Prepaid Rent ....................................... Cash................................................
2,140 2,140
4 Insurance Expense............................. Cash ($4,740 ÷ 12)..........................
395
5 Equipment........................................... Cash................................................ Notes Payable ................................
18,000
6 Supplies .............................................. Accounts Payable ..........................
1,550
7 Supplies .............................................. Cash................................................
475
16 Cash .................................................... Service Revenue ............................
990
20 Accounts Receivable ......................... Service Revenue ............................
4,500
26 Accounts Payable .............................. Cash................................................
1,000
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4,280
395 6,000 12,000
1,550
475
990
4,500 1,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6B (Continued) (a) (Continued) Date
Account Titles
Debit
Nov. 27 Telephone Expense............................ Accounts Payable ..........................
220
27 Cash .................................................... Unearned Revenue ........................
750
29 Cash .................................................... Accounts Receivable .....................
2,800
30 Interest Expense................................. Cash................................................
60
30 Salaries Expense ................................ Cash................................................
2,825
30 H. Kiersted, Drawings ........................ Cash................................................
700
30 H. Kiersted, Drawings ........................ Cash................................................
1,150
Credit
220
750
2,800
60
2,825
700
1,150
(b) Nov. 1 16 27 29
Bal. Solutions Manual .
Cash 35,000 Nov3 990 4 750 5 2,800 7 26 30 30 30 30 22,655
4,280 395 6,000 475 1,000 60 2,825 700 1,150
2-118
Accounts Receivable Nov.20 4,500 Nov 29 2,800 Bal. 1,700
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6B (Continued) (b) (Continued)
Nov.6 7 Bal.
Supplies 1,550 475 2,025
Nov.3
Prepaid Rent 2,140
Bal.
2,140
Nov. 1 5 Bal.
Equipment 12,000 18,000 30,000
Insurance Expense Nov. 4 395
Accounts Payable Nov26 1,000 Nov 6 1,550 Nov 27 220 Bal. 770
Interest Expense Nov. 30 60
Unearned Revenue Nov27 Bal. Notes Payable Nov.5 Bal.
H. Kiersted, Drawings Nov.30 700 Nov.30 1,150 Bal. 1,850 Service Revenue Nov.16 990 20 4,500 Bal. 5,490
Bal.
750 750
12,000 12,000
H. Kiersted, Capital Nov. 1 47,000 Bal. 47,000
Solutions Manual .
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Bal.
Nov. 3 Bal.
395
60 Rent Expense 2,140 2,140
Salaries Expense Nov 30 2,825 Bal. 2,825 Telephone Expense Nov. 27 220 Bal. 220
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6B (Continued) (c)
KIERSTED FINANCIAL SERVICES Trial Balance November 30, 2017 Debit Cash............................................................. $22,655 Accounts receivable ................................... 1,700 Supplies ...................................................... 2,025 Prepaid rent................................................. 2,140 Equipment ................................................... 30,000 Accounts payable ....................................... Unearned revenue ...................................... Notes payable ............................................. H. Kiersted, capital ..................................... H. Kiersted, drawings ................................. 1,850 Service revenue .......................................... Insurance expense ..................................... 395 Interest expense ......................................... 60 Rent expense .............................................. 2,140 Salaries expense......................................... 2,825 Telephone expense .................................... 220 $66,010
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Credit
$ 770 750 12,000 47,000 5,490
$66,010
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-6B (Continued) Taking It Further This is not true. The cash account shows an increase of $22,655 during the month of November, whereas the company shows a loss of $150 for the month ($5,490 – $395 – $60 – $2,140 – $2,825 – $220). The change in the cash account does not reflect profit or loss because not all transactions represent increases in revenues or expenses. One of the major sources of cash during the month is an investment by the owner of $35,000. This increases owner’s equity, but is not a source of revenue for the company. The company received cash in advance of doing work (unearned service revenue of $750) and performed services in advance of payment (accounts receivable of $1,700), as well as making non-expense payments for services in advance (prepaid rent), equipment and owner drawings. The statement of cash flows reconciles the changes in the cash account to its various uses and sources.
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PROBLEM 2-7B (a) Date July
GENERAL JOURNAL Account Titles
Debit
2 Film Rental Expense ........................... Cash.................................................
800
2 Advertising Expense ........................... Cash.................................................
620
Credit
800
620
3 No entry—not a transaction. 5 No entry—not a transaction. 10 Cash ..................................................... Admissions Revenue......................
1,950
11 Mortgage Payable................................ Interest Expense.................................. Cash.................................................
2,000 500
12 Repairs Expense ................................. Cash.................................................
350
16 Accounts Payable ............................... Cash.................................................
2,800
19 Film Rental Expense ........................... Accounts Payable ...........................
750
29 Cash ..................................................... Admissions Revenue......................
3,500
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1,950
2,500
350
2,800
750 3,500
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-7B (Continued) (a) (Continued) July 30 F. Ferguson, Drawings ........................ Cash.................................................
1,200
30 Prepaid Film Rental ............................. Cash.................................................
700
31 Salaries Expense ................................. Cash.................................................
1,900
31 Cash ..................................................... Accounts Receivable .......................... Concession Revenue......................
260 260
1,200
700
1,900
520
(b) and (c) Cash Date
Explanation
June 30 Balance July 2 2 10 11 12 16 29 30 30 31 31
Solutions Manual .
Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1
2-123
Debit
Credit Balance
800 620 1,950 2,500 350 2,800 3,500 1,200 700 1,900 260
6,000 5,200 4,580 6,530 4,030 3,680 880 4,380 3,180 2,480 580 840
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-7B (Continued) (b) and (c) (Continued) Accounts Receivable Date
Explanation
July 31
Ref.
Debit
Credit Balance
J1
260
260
Ref.
Debit
Credit Balance
J1
700
700
Ref.
Debit
Credit Balance
Prepaid Film Rental Date
Explanation
July 30 Land Date
Explanation
June 30 Balance
100,000
Buildings Date
Explanation
Ref.
Debit
June 30 Balance
Credit Balance 80,000
Equipment Date
Explanation
June 30 Balance
Solutions Manual .
Ref.
2-124
Debit
Credit Balance 25,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-7B (Continued) (b) and (c) (Continued) Accounts Payable Date
Explanation
Ref. J1 J1
June 30 Balance July 16 19
Debit
Credit Balance
2,800 750
5,000 2,200 2,950
Mortgage Payable Date
Explanation
June 30 Balance July 11
Ref. J1
Debit
Credit Balance 125,000 123,000
2,000
F. Ferguson, Capital Date
Explanation
June 30 Balance
Ref.
Debit
Credit Balance
81,000
F. Ferguson, Drawings Date
Explanation
July 30
Ref.
Debit
Credit Balance
J1
1,200
1,200
Debit
Credit Balance
Admissions Revenue Date
Explanation
July 10 29
Solutions Manual .
Ref. J1 J1
2-125
1,950 3,500
1,950 5,450
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-7B (Continued) (b) and (c) (Continued) Concession Revenue Explanation
Date July 31
Ref.
Debit
J1
Credit Balance 520
520
Advertising Expense Explanation
Date July
2
Ref. J1
Debit
Credit Balance
620
620
Ref.
Debit
Credit Balance
J1 J1
800 750
800 1,550
Ref.
Debit
Credit Balance
J1
500
500
Ref.
Debit
Credit Balance
J1
350
350
Film Rental Expense Explanation
Date July
2 19
Interest Expense Date
Explanation
July 11
Repairs Expense Date
Explanation
July 12
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PROBLEM 2-7B (Continued) (b) and (c) (Continued) Salaries Expense Date
Explanation
July 31
Ref.
Debit
Credit Balance
J1
1,900
1,900
(d) HIGHLAND THEATRE Trial Balance July 31, 2017
Debit Cash ....................................................... Accounts receivable ............................. Prepaid film rental ................................. Land ....................................................... Buildings................................................ Equipment.............................................. Accounts payable.................................. Mortgage payable .................................. F. Ferguson, capital .............................. F. Ferguson, drawings .......................... Admissions revenue ............................. Concession revenue ............................. Advertising expense ............................. Film rental expense ............................... Interest expense .................................... Repairs expense.................................... Salaries expense ...................................
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Credit
$840 260 700 100,000 80,000 25,000 $ 2,950 123,000 81,000 1,200 5,450 520 620 1,550 500 350 1,900 $212,920 $212,920
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-7B (Continued) Taking It Further The revenue and expense accounts in the trial balance show a profit for the month of July of $1,050 ($5,450 + $520 – $620– $1,550 – $500 – $350 – $1,900). Although a positive profit is a good indication of the company’s profitability, it is not sufficient information to determine whether Highland Theatre is a sound business. One month’s transactions do not indicate a pattern of profitability, in particular for businesses such as theatres where revenues tend to be seasonal. The financial results for the entire year should be examined, along with comparative amounts for previous years, to determine if the company has a trend of profitability.
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PROBLEM 2-8B (b) Date Dec.
GENERAL JOURNAL Account Titles and Explanation
J1 Debit
Credit
1 Rent Expense ............................................... 525 Cash.....................................................
525
1 Equipment.................................................. 3,270 Cash..................................................... Notes Payable .....................................
1,270 2,000
4 Cash ........................................................... 1,880 Accounts Receivable ..........................
1,880
7 Insurance Expense....................................... 308 Cash.....................................................
308
8 Supplies ........................................................ 135 Accounts Payable ...............................
135
10 Accounts Payable ..................................... 2,140 Cash.....................................................
2,140
12 Unearned Revenue ....................................... 765 Service Revenue .................................
765
20 Cash ........................................................... 3,480 Service Revenue .................................
3,480
21 Advertising Expense .................................... 115 Cash.....................................................
115
24 L. Kuznetsova, Drawings .......................... 2,860 Cash.....................................................
2,860
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PROBLEM 2-8B (Continued) (b) (Continued) Dec. 28 Accounts Receivable .............................. 2,280 Service Revenue .................................
2,280
29 Cash ......................................................... Unearned Revenue .............................
560 560
30 Salaries Expense ..................................... Cash.....................................................
655
31 Notes Payable.......................................... Interest Expense...................................... Cash.....................................................
160 10
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655
170
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 2-8B (Continued) (a) and (c) Cash Nov. 30 3,165 Dec. 1 1 4 1,880 7 10 20 3,480 21 29 560 24 30 31 Bal. 1,042
Accounts Payable Dec. 10 2,140 Nov. 30 4,245 Dec. 8 135
525 1,270
Bal. 308 2,140 115 2,860 655 170
2,240
Unearned Revenue Dec. 12 765 Nov. 30 Dec. 29 Bal.
765 560 560
L. Kuznetsova, Capital Nov. 30 19,300
Accounts Receivable Nov. 30 2,110 Dec. 4 1,880 Dec. 28 2,280 Bal. 2,510
L. Kuznetsova, Drawings Nov. 30 31,190 Dec. 24 2,860 Bal. 34,050
Supplies Nov. 30 1,340 Dec. 8 135 Bal. 1,475 Equipment Nov. 30 17,730 Dec. 1 3,270 Bal. 21,000 Notes Payable Dec.31 160 Nov. 30 2,000 Bal. 1,840
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PROBLEM 2-8B (Continued) (a) and (c) (Continued) Service Revenue Nov. 30 47,963 Dec. 12 765 20 3,480 28 2,280 Bal. 54,488 Advertising Expense Nov. 30 1,265 Dec. 21 115 Bal. 1,380 Insurance Expense Nov. 30 3,388 Dec. 7 308 Bal. 3,696 Rent Expense Nov. 30 5,775 Dec. 2 525 Bal. 6,300 Salaries Expense Nov. 30 6,310 Dec. 30 655 Bal. 6,965 Interest Expense Dec. 31 10
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PROBLEM 2-8B (Continued) (d) LVK COACHING SERVICES Trial Balance December 31, 2017 Debit Cash ............................................................ $ 1,042 Accounts receivable .................................. 2,510 Supplies ...................................................... 1,475 Equipment................................................... 21,000 Accounts payable....................................... Notes payable ............................................. Unearned revenue ...................................... L. Kuznetsova, capital................................ L. Kuznetsova, drawings ........................... 34,050 Service revenue.......................................... Advertising expense .................................. 1,380 Insurance expense ..................................... 3,696 Rent expense .............................................. 6,300 Salaries expense ........................................ 6,965 Interest expense ......................................... 10 $78,428
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Credit
$ 2,240 1,840 560 19,300 54,488
$78,428
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PROBLEM 2-8B (Continued) Taking It Further The cash balance has decreased from $3,165 to $1,042 or $2,123 during the month of December. This is a substantial decrease from the opening balance and exposes the company to the possibility of not being able to pay its outstanding liabilities. The company borrowed $2,000 at the beginning of December to purchase equipment. Had the company not purchased the additional equipment, the cash balance for the month would have been $2,482 ($1,042 + $1,270 + $170 payment on the note payable). This still represents a decrease from the December ending balance. Depending on the timing of the repayment of the note payable, the company may be able to generate sufficient cash from the collection of its account receivable to be able to honour its commitments on its liabilities. During the month of January, the company should collect outstanding receivables as quickly as possible (in particular those amounts still outstanding from November) and reduce owner drawings. The company will also need to ensure the new equipment generates additional cash as soon as possible.
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PROBLEM 2135B J. NIKKO Trial Balance November 30, 2017 Debit
Credit
Cash ............................................................ $ 8,000 Accounts receivable .................................. 10,250 Supplies ...................................................... 5,000 Prepaid expenses....................................... 3,000 Land ............................................................ 64,000 Equipment................................................... 18,250 Accounts payable....................................... $ 12,500 Notes payable ............................................. 30,000 J. Nikko, capital .......................................... 28,000 J. Nikko, drawings ...................................... 12,000 Service revenue.......................................... 63,050 Rent expense .............................................. 4,500 Utilities expense ......................................... 550 Salaries expense ........................................ 7,500 Interest expense ......................................... 500 $133,550 $133,550 Taking It Further The advantages of first recording the individual transactions in a journal and then posting to the ledger are: 1. The journal discloses in one place, the complete effect of a transaction. 2. The journal provides a chronological record of all transactions. 3. The journal helps to prevent or locate errors, because the debit and credit amounts for each entry can be readily compared. The advantage of the last step in the posting process is to indicate that the item has been posted, and to provide a crossreference. Solutions Manual .
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PROBLEM 2-10B (a) KIERSTED FINANCIAL SERVICES Income Statement Month Ended November 30, 2017 Revenues Service revenue ..................................................... $ 5,490 Expenses Insurance expense .................................. $ 395 Interest expense ...................................... 60 Rent expense ........................................... 2,140 Salaries expense...................................... 2,825 Telephone expense ................................. 220 Total expenses ..................................................... 5,640 Loss............................................................................. $ (150) (b) KIERSTED FINANCIAL SERVICES Statement of Owner's Equity Month Ended November 30, 2017 H. Kiersted, capital, November 1, 2017 .................. $ 0 Add: Investment ........................................................ 47,000 47,000 Less: Loss ................................................. $ 150 Drawings ......................................... 1,850 2,000 H. Kiersted, capital, November 30, 2017 .................... $45,000
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PROBLEM 2-10B (Continued) (c) KIERSTED FINANCIAL SERVICES Balance Sheet November 30, 2017 Assets Cash .......................................................................... Accounts receivable ................................................ Supplies .................................................................... Prepaid rent .............................................................. Equipment................................................................. Total assets ..........................................................
$22,655 1,700 2,025 2,140 30,000 $58,520
Liabilities and Owner's Equity Liabilities Notes payable ...................................................... Accounts payable ................................................ Unearned service revenue .................................. Total liabilities .................................................
$12,000 770 750 13,520
Owner's Equity H. Kiersted, capital................................................... 45,000 Total liabilities and owner's equity.................... $58,520 Taking It Further In its first month of operations, Kiersted Financial Services incurred more expenses than it generated in revenues resulting in a loss of $150. Since this is a new business, it may take a few months for revenues to reach and exceed the level of expenses. Haakon will need to monitor the revenues generated as compared to expenses incurred to ensure the company reaches profitability as soon as possible.
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PROBLEM 2-11B (a)
GENERAL JOURNAL Account Titles
Mar.
Debit
Credit
1 Cash ......................................................... 12,000 Notes Payable ....................................
12,000
2 Accounts Payable ...................................13,000 Cash....................................................
13,000
3 Insurance Expense................................. Cash....................................................
145
10 Advertising Expense .............................. Cash....................................................
550
145
550
16 Cash ........................................................ 8,000 Accounts Receivable .........................
8,000
18 Accounts Payable .................................. 5,000 Cash....................................................
5,000
30 Miscellaneous Expense ......................... Cash....................................................
580 580
31 Cash ........................................................ 2,000 Accounts Receivable ............................. 5,000 Service Revenue ................................
7,000
31 Salaries Expense .................................... 1,650 Cash....................................................
1,650
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PROBLEM 2-11B (Continued) (a) (Continued) Mar. 31 Interest Expense..................................... Notes Payable......................................... Cash....................................................
55 500
31 Rent Expense ......................................... Prepaid Rent ........................................... Cash....................................................
950 950
555
31 H. Nolan, Drawings................................. 1,000 Cash....................................................
1,900 1,000
(b) and (c) Cash Feb.28 3,500 2 13,000 Mar. 1 12,000 3 145 16 8,000 10 550 18 5,000 30 580 31 2,000 31 1,650 31 555 31 1,900 31 1,000 Bal. 1,120
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Accounts Receivable Feb.28 14,450 Mar.16 8,000 31 5,000 Bal. 11,450 Prepaid Rent Feb.28 950
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PROBLEM 2-11B (Continued) (b) and (c) (Continued) Service Revenue Feb.28 7,000
Equipment Feb.28 15,100
Advertising Expense Mar. 10 550
Accounts Payable Feb.28 18,750 Mar. 2 13,000 18 5,000 Bal. 750
Interest Expense Mar. 31 55 Miscellaneous Expense Mar. 30 580
Notes Payable Mar. 30 500 Feb.28 12,000 Bal.
11,500
Rent Expense Mar. 31 950
H. Nolan, Capital Feb.28 14,300
Insurance Expense Mar. 3 145
H. Nolan, Drawings Mar. 31 1,000
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Salaries Expense Mar. 31 1,650
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PROBLEM 2-11B (Continued) (d) HN HR CONSULTING Trial Balance March 31, 2017
Debit Cash ........................................................... $1,120 Accounts receivable ................................... 11,450 Prepaid rent ................................................. 950 Equipment.................................................... 15,100 Accounts payable........................................ Notes payable .............................................. H. Nolan, capital .......................................... H. Nolan, drawings ...................................... 1,000 Service revenue........................................... 550 Advertising expense ................................... Interest expense .......................................... 55 Miscellaneous expense............................... 580 Rent expense ............................................... 950 Insurance expense ...................................... 145 Salaries expense ........................................ 1,650 $33,550
Credit
$750 11,500 14,300 7,000
$33,550
Taking It Further The March rent payment of $1,900 is half asset and half expense. The asset portion of $950 is for the rent for April and the expense portion of $950 is for the March rent. April’s rent is a future benefit at March 31, and thus is an asset, whereas March’s rent has been used by March 31 and thus is an expense.
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PROBLEM 2-12B (a) HN HR CONSULTING Income Statement Month Ended March 31, 2017 Revenues Service revenue ....................................................... $ 7,000 Expenses Advertising expense................................ $ 550 Insurance expense .................................. 145 Interest expense ...................................... 55 Miscellaneous expense ........................... 580 Rent expense ........................................... 950 Salaries expense........................................ 1,650 Total expenses ....................................................... 3,930 Profit............................................................................... $3,070 (b) HN HR CONSULTING Statement of Owner's Equity Month Ended March 31, 2017 H. Nolan, capital, March 1, 2017 ................................. $14,300 Add: Profit..................................................................... 3,070 17,370 Less: Drawings............................................................. 1,000 H. Nolan, capital, March 31, 2017 ............................... $16,370
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PROBLEM 2-12B (Continued) (c) HN HR CONSULTING Balance Sheet March 31, 2017 Assets Cash ............................................................................. $ 1,120 Accounts receivable ..................................................... 11,450 Prepaid rent ................................................................. 950 Equipment...................................................................... 15,100 Total assets ............................................................. $28,620 Liabilities and Owner's Equity Liabilities Accounts payable ................................................... $ 750 Notes payable ......................................................... 11,500 Total liabilities ...................................................... 12,250 Owner's Equity H. Nolan, capital ........................................................ 16,370 Total liabilities and owner's equity.................... $28,620 Taking It Further Hobson would not be able to retire and take out cash from the business in an amount equal to his capital account balance of $16,370. The cash balance is only $1,120. All other assets would need to be converted to cash, and the debts paid first. Hobson would have the right to whatever cash remained.
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PROBLEM 2-13B (a) LAZDOWSKI MARKETING SERVICES Trial Balance October 31, 2017
Cash ......................................................... Accounts receivable ............................... Supplies ................................................... Prepaid rent ............................................. Furniture .................................................. Equipment................................................ Notes payable .......................................... Accounts payable.................................... Unearned revenue ................................... I. Lazdowski, capital ................................ I. Lazdowski, drawings ........................... Fees earned (to balance*) ....................... Advertising expense ............................... Insurance expense .................................. Interest expense ...................................... Supplies expense .................................... Rent expense ........................................... Salaries expense .....................................
Debit $ 4,930 6,010 1,240 975 56,685 25,970
Credit
$48,850 4,403 3,555 57,410 75,775 114,047 14,970 2,020 2,445 5,000 11,700 20,545 $228,265 $228,265
*Total credits without fees earned = $114,218 $228,265 – $114,218=$114,047
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PROBLEM 2-13B (Continued) (b) LAZDOWSKI MARKETING SERVICES Income Statement Year Ended October 31, 2017 Revenues Fees earned ........................................................... $114,047 Expenses Advertising expense ................................. $14,970 Insurance expense .................................. 2,020 Interest expense ...................................... 2,445 Supplies expense .................................... 5,000 Rent expense ..............................................11,700 Salaries expense.........................................20,545 Total expenses ............................................... 56,680 Profit............................................................................. $57,367
LAZDOWSKI MARKETING SERVICES Statement of Owner's Equity Year Ended October 31, 2017 I. Lazdowski, capital, November 1, 2016 ................ Add: Profit ............................................................ Less: Drawings....................................................... I. Lazdowski, capital, October 31, 2017..................
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$57,410 57,367 114,777 75,775 $39,002
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PROBLEM 2-13B (Continued) (b) (Continued) LAZDOWSKI MARKETING SERVICES Balance Sheet October 31, 2017 Assets Cash ........................................................................... Accounts receivable ................................................. Supplies ..................................................................... Prepaid rent ............................................................... Furniture .................................................................... Equipment..................................................................
$ 4,930 6,010 1,240 975 56,685 25,970
Total assets ........................................................... $95,810 Liabilities and Owner's Equity
I.
Liabilities Notes payable ......................................................... $48,850 Accounts payable ................................................. 4,403 Unearned revenue ................................................. 3,555 Total liabilities ...................................................... 56,808 Owner's Equity Lazdowski, capital ................................ 39,002 Total liabilities and owner's equity.................... $95,810
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PROBLEM 2-13B (Continued) Taking It Further Drawings exceeded profit. This has resulted in a net decrease to the owner’s capital account. Inga’s drawings have left the company with a low level of liquid assets (Cash of $4,930 + Accounts receivable of $6,010 = $10,940) to pay off liabilities (Notes payable of $48,850 + Accounts payable of $4,403 = $53,253). Inga’s drawings should be based on her cash budget for the coming year and should leave the company with sufficient cash to able to meet its liabilities and grow.
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PROBLEM 2-14B (a)
1. Incorrect 2. Incorrect 3. Correct 4. Incorrect 5. Incorrect 6. Incorrect 7. Incorrect 8. Incorrect 9. Incorrect 10. Incorrect
(b) Trans 1 1 No 2
3 4
2 Prepaid Insurance Yes Accounts Receivable Accounts Payable
3 Understated $3,600 Understated $500 Understated $500
4 Increase by $3,600 Increase by $500
Yes Salaries Payable Cash
Understated $1,200 Understated $1,200 Understated $250 Understated $1,200 Overstated $1,200
Increase by $1,200
Increase by $1,200
Increase by $250 Yes
Yes
5
No
Cash
6
Yes Drawings Salaries Expense
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5 Yes Increase by $500
Yes
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PROBLEM 2-14B (Continued) (b) (Continued) Trans 1 2 7 Yes Unearned Revenue Service Revenue 8 No Accounts Payable 9
10
3 Understated $400 Overstated $400 Understated $750 = ($375 × 2) No Equipment Overstated $1,800 Cash Overstated $8,600 Accounts Understated $6,800 Payable Yes Accounts Understated Receivable $950 Understated Service Revenue $950
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4
5
Yes
Yes
Yes
Increase by $750
Decrease by $10,400
Increase by $6,800
Increase by $950
Increase by $950
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PROBLEM 2-14B (Continued) Taking It Further 2. This error understates Accounts Receivable and Accounts Payable. It may lead to liabilities being unpaid and receivables being uncollected. 4. This error may lead to salaries to employees not being paid since the transaction was posted as a credit to Cash. It would show as already being paid. The error would also understate the company’s liabilities. 6. This error overstates Salaries Expense. It results in lower profits on the income statement because of the additional expense. 7. This error shows lower liabilities by understating Unearned Revenue. It results in higher profit on the income statement because of the overstated Service Revenue. 10. This error understates the asset Accounts Receivable and understates Service Revenue. It results in a lower profit on the income statement because of the unrecorded revenue.
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PROBLEM 2-15B SHAWNEE SLOPES COMPANY Trial Balance June 30, 2017 Debit Cash ($5,875 + $210 – $120 +$650) ................... $ 6,615 Accounts receivable ($3,620 – $385– $385) .......... 2,850 Supplies ($0 + $650) ........................................... 650 Equipment ($14,020 – $650 + $2,000) .................. 15,370 Notes payable ($0 + $2,000)............................... Accounts payable ($5,290 – $165– $165 +$650) Property taxes payable ($500 – $500) ............... A. Shawnee, capital ($17,900 + $750) ................ A. Shawnee, drawings ($0 + $750) .................... 750 Service revenue ($7,027– $560 + $650) ............. Advertising expense ($1,132 – $210 + $120) ........ 1,042 Property tax expense ($1,100 + $500) ................... 1,600 Salaries expense ($4,150 + $350) ..................... 4,500 $33,377
Credit
$ 2,000 5,610 0 18,650 7,117
$33,377
Taking It Further There could still be errors after correcting the items identified. The errors could be counter-balancing errors that affect both the debit and credit side equally, such as a transposition error in recording a journal entry that affects both the debit and credit sides (item #6), or errors that counter-balance on the debit side or on the credit side of the trial balance. The trial balance could also be in balance and not show transactions that have been omitted but that should have been recorded.
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BYP2-1 FINANCIAL REPORTING PROBLEM (1) Financial Statement
(a) Account Interest expense Cash and cash equivalents Unearned revenues Inventories Long-term debt Prepaid expenses Sales Accounts payable and accrued expenses
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(2)
(3) Normal Balance
(4) Increase Side
(4) Decrease Side
Expense
Debit
Debit
Credit
Asset
Debit
Debit
Credit
Liability
Credit
Credit
Debit
Asset
Debit
Debit
Credit
Liability
Credit
Credit
Debit
Asset
Debit
Debit
Credit
Revenue
Credit
Credit
Debit
Liability
Credit
Credit
Debit
Account
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BYP2-1 (Continued) (b) 1. 2. 3. 4.
Cash is decreased. Cash is increased. Cash and/or Accounts Receivable are increased. Accounts Payable and Accrued Liabilities is increased or Cash is decreased. 5. Cash is decreased.
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BYP2-2 INTERPRETING FINANCIAL STATEMENTS (a) 1. Deferred income tax liability. 2. Income tax expense. 3. Also in a corporation the owners are called shareholders. So the final two amounts listed would only exist in a corporation and not in a proprietorship.
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BYP2-2 (Continued) (b) WESTJET AIRLINES LTD. Trial Balance December 31, 2014
Cash....................................................................... Accounts receivable ............................................. Inventory ............................................................... Prepaid expenses and deposits........................... Property and equipment....................................... Intangibles............................................................. Other assets .......................................................... Accounts payable and accrued liabilities ........... Advance ticket sale liability ................................. Non-refundable guest credits liability ................. Maintenance provisions liability .......................... Other liabilities ...................................................... Deferred income tax liability ................................ Long-term debt ..................................................... Shareholders’ (owners’) equity, January 1, 2015 Shareholders’ (owners’) “drawings” .................. Guest revenues ..................................................... Other revenues ..................................................... Aircraft fuel, leasing, and maintenance expense Airport operations expense ................................. Flight operations and navigational charges ....... Depreciation and amortization expense.............. Sales and distribution expense ........................... Marketing, general, and administration expense In flight expense ................................................... Employee profit share expense ........................... Non-operating expenses ...................................... Income tax expense ..............................................
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$1,416,220 54,950 36,658 144,192 2,793,194 122,913 78,306 $502,432 575,781 45,434 191,768 227,804 296,892 1,028,820 1,589,840 96,295 3,599,157 377,395 1,466,465 507,743 458,146 226,740 376,676 224,783 171,741 68,787 85,164 106,350 $8,435,323
$8,435,323
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BYP2-2 (Continued) (c)
Items have been grouped on the WestJet income statement based on the nature of the expenses such as expenses related to marketing, general, and administrative. Preparing a more condensed statement of income is preferable for large organizations such as WestJet as the users of the financial statements are generally investors who are not interested in any greater detail concerning expenses than what has been presented by management.
(d)
Most customers using WestJet services book their flights well in advance of their trip. The customers also pay for their tickets before the flight. The cash obtained by WestJet represents unearned revenue until the service of the flight has been delivered to the customer. WestJet has used two main accounts for unearned revenue: Advance Ticket Sale Liability and Non-refundable Guest Credits Liability.
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BYP2-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP2-4 COMMUNICATION ACTIVITY
e-mail: Hello instructor, As requested, following is an explanation and illustration of the steps in the recording process as they relate to the March 15 transactions for White Glove Company: (1)
In the first example, a transaction has not yet taken place. White Glove’s financial position (assets, liabilities, and owner’s equity) is not changed as a result of the contract. There has been no exchange between the parties involved in the event.
(2)
In the second example, bills totalling $6,000 were sent to customers for services performed. First, we analyze the transaction to determine the accounts involved and the debits/credits required. We determine that the asset Accounts Receivable is increased $6,000 and Service Revenue is increased $6,000. Debits increase assets and credits increase revenues, so the next step is preparing the journal entry: Accounts Receivable ......................................... 6,000 Service Revenue ............................................ Billed customer for services performed.
6,000
The third step is posting the entry. 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.
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BYP2-4 (Continued) (3)
In the third example, $2,000 was paid in salaries to employees. First we analyze the transaction to determine the accounts involved and the debits/credits required. We determine that the expense Salaries Expense is increased $2,000 and the asset Cash is decreased $2,000. Debits increase expenses and credits decrease assets, so the next step is preparing the journal entry: Salaries Expense ................................................. 2,000 Cash................................................................ 2,000 Paid salaries. The third step is posting the entry. The $2,000 amount is then posted to the debit side of the general ledger account Salaries Expense and to the credit side of the general ledger account Cash.
I trust that the foregoing is satisfactory. Please let me know if anything further is required.
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BYP2-5 “All About You” Activity (a) On September 1, 2017, my personal equity would be as follows: Cash ($4,000 + $14,000) ......... Clothes.................................... Cell phone................................ Total assets ............................ Less Student loan .................. Personal equity, Sept. 1, 2017
$18,000 1,000 200 19,200 (14,000) $5,200
(b) Personal Trial Balance December 15, 2017
Debit Cash ............................................................... $6,000 Clothes ($1,000 + $1,500) .............................. 2,500 Cell phone...................................................... 200 Computer ....................................................... 1,000 Damage deposit on apartment ..................... 400 Unused bus pass........................................... 250 Student loan .................................................. Personal equity ............................................. Rent expense ................................................. 1,600 Groceries expense ........................................ 1,200 Tuition for September to December............. 2,800 Textbooks for September to December ....... 600 Entertainment expense ................................. 1,500 Cell phone expense....................................... 250 Cable TV and Internet expense .................... 200 Bus pass expense ......................................... 250 Airfare ............................................................ 450 $19,200
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Credit
$14,000 5,200
$19,200
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BYP2-5 (Continued) (b) (Continued) Errors in the Trial Balance: The cash amount should be the amount in the bank account at December 15th. The computer was recorded at $100 rather than the actual cost of $1,000. Rent expense of $2,000 should be split between the actual expense of $1,600 ($400 per month for September to December inclusive) and the damage deposit on the apartment which is an asset and not an expense. Groceries are an expense and should be listed in the debit column. Bus pass expense of $500 should be split between the amount used for September through December $250 and the amount of the bus pass that represents an asset as at the end of December 2013 of $250. The airfare is $450, not $540. (c) Personal equity, September 1 Net loss * Personal equity (deficit), December 15th
$5,200 (8,850) $(3,650)
Rent expense....................................................... Groceries expense .............................................. Tuition for September to December................... Textbooks for September to December............. Entertainment expense....................................... Cell phone expense ............................................ Cable TV and internet expense .......................... Bus pass for September to December............... Airfare expense ................................................... * Net loss ................................................................
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$1,600 1,200 2,800 600 1,500 250 200 250 450 $8,850
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BYP2-5 (Continued) (d) Personal Balance Sheet December 15, 2017 Assets Cash .......................................................................... Clothes ...................................................................... Cell phone................................................................. Damage deposit on apartment ................................ Unused bus pass...................................................... Computer .................................................................. Total assets ..........................................................
$6,000 2,500 200 400 250 1,000 $10,350
Liability and Deficit Liability Student loan ............................................................ $14,000 Personal equity (deficit) ........................................... (3,650) Total liabilities and owner's equity ........................ $10,350 (e) The amount of expenses in the September to December semester totalled $8,850. Of this amount, it will not be necessary to use cash to pay for the $250 bus pass next semester as it has already been purchased. If the other expenses are kept at the same level, I will need $8,600 ($8,850 – $250) of cash which exceeds my current cash balance of $6,000 by $2,600. The cash balance is inadequate. (f) Expenses that can be avoided in the second semester include entertainment expenses of $1,500 and the airfare of $450. Another expense that can be reduced substantially but not eliminated is the cell phone expense. (g) Additional cash expenditures that could occur in the second semester may possibly include repair to the computer or the loss of the damage deposit and additional payments to the landlord for damage to the apartment. Textbooks are another likely expense. Solutions Manual .
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BYP2-5 (Continued) (h) Unless I get a part-time job, or cut expenses in addition to the entertainment and airfare expenses mentioned in (f), it will be necessary to ask for more money from my parents.
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BYP2-6 Santé Smoothie Saga (a) Apr. 12 No entry required for cashing Canada Savings Bonds—this is a personal transaction. 13 Cash ....................................................... N. Koebel, Capital .............................
900 900
15 Cash .......................................................... 3,000 Notes Payable ................................... 18 Advertising Expense............................. Cash...................................................
325
20 Supplies ................................................. Cash...................................................
198
22 Equipment ............................................. N. Koebel, Capital .............................
825
23 Account Receivable .............................. Revenue ............................................
300
24 Telephone Expense............................... Accounts Payable.............................
98
28 Cash ....................................................... Unearned Revenue ...........................
125
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3,000
325
198
825
300
98 125
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BYP2-6 (Continued) (b) Apr. 13 Apr. 15 Apr.28
Cash 900 3,000 Apr. 18 125 Apr. 20
Bal.
3,502
Apr. 23
Accounts Receivable 300
Apr. 20
Supplies 198
Apr. 22
Equipment 825
Solutions Manual .
325 198
Accounts Payable Apr. 24
98
Unearned Revenue Apr. 28
125
Notes Payable Apr. 15
3,000
N. Koebel, Capital Apr. 13 Apr. 22 Bal.
900 825 1,725
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BYP2-6 (Continued) (b) (Continued) Revenue Apr. 23
Apr. 18
Advertising Expense 325
Apr. 24
Telephone Expense 98
300
(c) SANTÉ SMOOTHIES Trial Balance April 30, 2017
Cash ......................................................... Accounts receivable ............................... Supplies ................................................... Equipment................................................ Accounts payable.................................... Unearned revenue ................................... Notes payable .......................................... N. Koebel, capital .................................... Revenue ................................................... Advertising expense ............................... Telephone expense .................................
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Debit $3,502 300 198 825
Credit
$
98 125 3,000 1,725 300
325 98 $5,248
$5,248
Chapter 2
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CHAPTER 3 Adjusting the Accounts ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Explain accrual basis accounting, and when to recognize revenues and expenses.
1, 2, 3, 4
1, 3
1, 2
1
1
2. Prepare adjusting entries for prepayments.
5, 6, 7, 8, 2, 3, 4, 5, 9, 10, 11, 6, 7, 8, 9, 14, 15, 16, 13 17 12, 13, 10, 11, 14, 15, 12, 13 16, 17
3, 4, 5, 6, 7, 8, 9, 10, 11, 14, 15 3, 4, 7, 8, 9, 10,11, 12, 13, 14, 15 14, 15, 16
2, 4, 5, 6, 7, 8, 10, 11, 12, 13
3. Prepare adjusting entries for accruals.
4. Describe the nature and purpose of an adjusted trial balance, and prepare one.
Solutions Manual .
18, 19, 20
14, 15, 16
3-1
2, 4, 5, 6, 7, 8, 10, 11, 12, 13 3, 4, 5, 6, 3, 4, 5, 6, 7, 8, 9, 10, 7, 8, 9, 11, 12, 13 10, 11, 12, 13 10, 11, 12, 10, 11, 13 12, 13
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Determine profit on cash and accrual bases; recommend method.
Complex
20-25
2A
Prepare and post prepayment transaction entries. Prepare basic analysis, debit/credit analysis, and journal entry, and post adjustments for the prepayments.
Moderate
25-35
3A
Prepare entries for accrual subsequent cash transactions.
Moderate
25-35
4A
Prepare adjusting journal entries.
Simple
15-20
5A
Moderate
25-35
6A
Prepare adjusting entries and subsequent cash payments. Prepare transaction and adjusting entries.
Moderate
25-35
7A
Prepare adjusting entries.
Moderate
25-35
8A
Prepare adjusting entries.
Moderate
25-35
9A
Prepare transaction and adjusting entries for notes and interest.
Moderate
25-35
10A
Prepare and post adjusting entries, and prepare adjusted trial balance.
Moderate
50-60
11A
Prepare and post adjusting entries, and prepare adjusted trial balance and financial statements.
Moderate
50-60
12A
Journalize transactions, and adjusting entries, flow the entries through the accounting cycle to the preparation of the financial statements. Prepare adjusting entries, adjusted trial balance, and financial statements.
Complex
60-70
Moderate
50-60
13A
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and
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Difficulty Level
Time Allotted (min.)
Determine profit on cash and accrual bases; recommend method.
Complex
20-25
2B
Prepare and post prepayment transaction entries. Prepare basic analysis, debit/credit analysis, and journal entry, and post adjustments for the prepayments.
Moderate
25-35
3B
Prepare entries for accrual subsequent cash transactions.
Moderate
25-35
4B
Prepare adjusting journal entries,
Simple
15-20
5B
Moderate
25-35
6B
Prepare adjusting entries and subsequent cash payments. Prepare transaction and adjusting entries.
Moderate
25-35
7B
Prepare adjusting entries.
Moderate
25-35
8B
Prepare adjusting entries.
Moderate
25-35
9B
Prepare transaction and adjusting entries for notes and interest.
Moderate
25-35
10B
Prepare and post adjusting entries, and prepare adjusted trial balance.
Moderate
50-60
11B
Prepare and post adjusting entries, and prepare adjusted trial balance and financial statements.
Moderate
50-60
12B
Journalize transactions, and adjusting entries, flow the entries through the accounting cycle to the preparation of the financial statements. Prepare adjusting entries, adjusted trial balance, and financial statements.
Complex
60-70
Moderate
50-60
1B
13B
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Description
3-3
adjustments
and
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Study Objectives 1. Explain accrual basis accounting, and when to recognize revenues and expenses.
Knowledge Q3-1
Comprehension Q3-2 Q3-3 Q3-4 Q3-5
Application BE3-1 BE3-3 E3-1 E3-2 E3-8
Analysis
Synthesis
P3-1B
2. Prepare adjusting entries for prepayments.
3. Prepare adjusting entries for accruals.
Solutions Manual .
Q3-6 Q3-8 Q3-15 Q3-16
Q3-15 Q3-16
Q3-7 Q3-9 Q3-10 Q3-11 Q3-14 Q3-17 BE3-13
BE3-2 BE3-3 BE3-4 BE3-5 BE3-6 BE3-7 BE3-8 BE3-9 BE310 BE312
E3-4 E3-5 E3-6 E3-7 E3-8 E3-9 E3-10 E3-11 E3-15 Q3-13 Q3-15 BE3-11 BE3-12 E3-3 E3-4 E3-7 E3-8 E3-9 E3-10 E3-11 E3-12 E3-13 E3-15 P3-3A P3-4A P3-5A P3-6A
Q3-12 Q3-14 Q3-17 BE3-13
3-4
P3-2A P3-4A P3-5A P3-6A P3-7A P3-8A P3-10A P3-11A P3-12A P3-13A P3-2B P3-4B P3-5B P3-6B P3-7B P3-8B P3-10B P3-11B P3-12B P3-13B
E3-14
P3-7A P3-8A P3-9A P3-10A P3-11A P3-12A P3-13A P3-3B P3-4B P3-5B P3-6B P3-7B P3-8B P3-9B P3-10B P3-11B P3-12B P3-13B
E3-14
Chapter 3
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued) Study Objectives 4. Describe the nature and purpose of an adjusted trial balance, and prepare one.
Broadening Your Perspective
Solutions Manual .
Knowledge
Comprehension Q3-18 Q3-19 Q3-20
Application BE3-14 P3-13A BE3-15 P3-8B BE3-16 P3-9B E3-15 P3-10B E3-16 P3-11B P3-10A P3-12B P3-11A P3-13B P3-12A Cumulative Coverage, BYP3-2 BYP3-3 BYP3-5 BYP3-6 Santé
BYP3-1
3-5
Analysis E3-14
Synthesis
BYP3-4
Chapter 3
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
(a) Accountants divide the life of a business into specific time periods so that they can provide feedback on how the business is doing. The periods chosen are of equal lengths so that the information provided is comparable, period to period. Management usually wants monthly financial statements. Investors want to view the results of publicly traded companies at least quarterly. The Canada Revenue Agency (CRA) requires financial statements to be filed with annual income tax returns. Consequently, accountants divide the life of a business into specific time periods, such as a month, a three-month quarter, or a year. (b) A fiscal year is an accounting period that is one year long, but does not need to start and end on the same days as does the calendar year. A calendar year begins on January 1 and ends on December 31.
2.
The accrual basis provides useful information for decision making as it reflects transactions in the period in which they occur. Compared to the cash basis, the accrual basis gives a more realistic measure of the performance and future earnings potential of the business.
3.
The law firm should recognize the revenue in April. The revenue should be recognized in the accounting period in which it is earned (i.e., when the work is done).
4.
Expenses of $3,000 ($500 + $2,500) should be deducted from the revenues in April since April was when the revenue was recognized as earned. Expense recognition is tied to revenue recognition when there is a direct association between costs incurred and the earning of revenue. Wages are the costs related to earning the fee revenue.
5.
Prepaid expenses are costs paid before they are used or consumed. For example, rent or insurance is often paid in advance. Prepaid expenses need to be adjusted at the end of each accounting period to reflect the fact that part of the asset has been used up or consumed.
6.
Normally, adjusting entries to prepaid expense cause expenses to be increased with the debit side of the adjustment and an asset to be decreased with the credit side of the adjustment.
7.
No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Depreciation results in the presentation of the carrying amount of the asset, not its fair value.
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 8.
9.
(a)
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 total of all the depreciation that has been recognized from the date of acquisition of an asset to the balance sheet date.
(b)
Cost includes the amount paid to purchase the asset. Carrying amount is the cost of the asset reduced by the accumulated depreciation.
The Accumulated Depreciation contra asset account is used in order to show both the original cost of an asset and the portion of the cost that has been allocated to expense to date.
10. The equipment will be shown on the balance sheet at its carrying amount of $12,000. The Accumulated Depreciation account is offset (deducted) against the related asset account which remains at its cost on the balance sheet in order to show the asset`s carrying amount as follows: Property, plant, and equipment Equipment ....................................................... Less: Accumulated depreciation...................... Carrying amount ..............................................
$18,000 6,000 $12,000
11. Unearned revenue exists when cash is received for goods or services to be provided in the future. It represents a liability and belongs on the balance sheet because the cash has not yet been earned – the company has a future obligation to provide the goods or services. As the business provides the goods or the services, adjusting journal entries are recorded at the end of the period to recognize the corresponding amount of revenue earned that will then appear on the income statement. 12. It is necessary to prepare an adjusting entry to record the revenue earned during the month and to show the receivable that exists at the end of the month. When the interest payment is received at the beginning of each month, Waiparous will increase (debit) the Cash account and decrease (credit) the Interest Receivable account. 13. Accrued Expense: On the balance sheet, liabilities (accounts payable) are understated $600 and owner’s equity is overstated $600. On the income statement, expenses are understated $600 and profit is overstated $600.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 14. (a) Type of adjusting entry 1. Accrued revenue 2. Unearned revenue 3. Accrued expense 4. Prepaid expense 5. Prepaid expense 6. Accrued revenue
15.
(b) Related account Revenue Revenue Interest expense Supplies Insurance expense Interest receivable
First half of the entry:
Balance understated understated understated overstated understated understated
Second half of the entry:
(a)
Salaries Expense is debited Salaries Payable is credited
(b)
Depreciation Expense is debited Accumulated Depreciation is credited Interest Payable is credited Interest
(c) Expense is debited (d)
Supplies is credited
Supplies Expense
is debited (e)
Accounts Receivable is debited Service Revenue is credited Unearned Revenue is debited Service Revenue is credited
(f)
16. Disagree. The Cash account is never involved in adjusting journal entries. Adjusting entries are intended to implement the accrual basis of accounting. Accrued revenues and expenses are recorded by adjusting journal entries before the cash is received or paid. Prepayments and unearned revenues require adjustments after the cash has been received or paid. 17. Disagree. An adjusting entry affects only one balance sheet account and one income statement account. 18. Both the trial balance and the adjusted trial balance list the balances of all accounts and prove the equality of the total debit and credit balances. The trial balance lists the balances in the accounts prior to adjusting entries; the adjusted trial balance lists the balances after all adjustments have been posted. The adjusted trial balance is used to prepare the financial statements. 19. An adjusted trial balance, similar to all trial balances, only proves that the ledger is mathematically accurate. Having a balanced trial balance does not mean there are no mistakes in the ledger. Entries may be omitted, duplicated, or recorded to the wrong accounts.
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20. The balance sheet will not balance. The balance sheet must be prepared using the ending owner`s capital balance that is reported in the statement of owner`s equity. Profit is added to the balance in Owner’s Equity (Capital account) and Drawings are subtracted. The resulting balance then appears on the balance sheet.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 Transaction 1. Collected $550 cash from customers for services provided in May. 2. Billed customers $725 for services provided in May. 3. Received $350 from customers for services to be provided in June. 4. Purchased $250 of supplies on account. All of the supplies were used in May but were paid for in June. Profit
(a) Cash
(b) Accrual
+$550
+$550
0
+725
+350
0
0 $900
–250 $1,025
BRIEF EXERCISE 3-2 Supplies used: $795 + $3,830 – $665 = $3,960 Supplies on hand, May 31, 2017: $985 + $3,070 – x = $2,750 x = $1,305 Green Co. Supplies used: $1,325 + $2,395 - $1,700 = $2,020 Red Co. Blue Co.
BRIEF EXERCISE 3-3 (b) Balance sheet account Overstated or Understated
(a) Type of adjustment 1. 2. 3. 4.
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Prepaid expense Accrued revenue Accrued expense Unearned revenue
3-10
Overstated Understated Understated Overstated
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-4 T accounts not required Supplies Jan. 1 785 May 31 3,255 Dec. 31 3,005 Dec. 31 Bal. 1,035 (a) May 31
Supplies Expense Jan. 1 0 Dec. 31 3,005 Dec. 31 3,005 Bal.
Supplies............................................ 3,255 Cash ...........................................
3,255
(b) Supplies used = $785 + $3,255 − $1,035 = $3,005 (c)
Dec. 31
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Supplies Expense ............................ 3,005 Supplies .....................................
3-11
3,005
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-5 (a)
March 1 Prepaid Insurance .............................. 4,800 Cash .............................................
4,800
(b) Monthly cost: $4,800 ÷ 12 = $400/month; Number of months expired: March to December—10 months Amount expired in 2017: 10 months × $400 = $4,000 Number of months remaining: January to February—2 months Amount unexpired at December 31: 2 months × $400 = $800 Total $4,800 = $4,000 + $800 (c)
Dec. 31 Insurance Expense ............................ 4,000 Prepaid Insurance .......................
4,000
T accounts not required Prepaid Insurance Mar. 1 4,800 Dec. 31 4,000 Dec. 31 Bal.
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Insurance Expense Dec. 31 4,000
800
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-6 (a)
July 1
Prepaid Insurance ............................ 12,750 Cash .............................................
12,750
(b) Monthly cost: $12,750 ÷ 36 = $354.17/month; Number of months expired: July to December—6 months Amount expired in 2017: 6 months × $354.17 = $2,125 Dec. 31 Insurance Expense ............................ 2,125 Prepaid Insurance .......................
2,125
T accounts not required Prepaid Insurance July 1 12,750 Dec. 31 2,125
Insurance Expense Dec. 31 2,125
Dec. 31 Bal. 10,625
BRIEF EXERCISE 3-7 (a) July 1/17
(b)
Equipment .................................... 30,000 Cash .........................................
$30,000 ÷ 10 X 6/12 = $3,000 per year X 6/12 = $1,500
(c) Dec. 31/17 Depreciation Expense ................... 1,500 Accumulated Depreciation —Equipment...........................
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30,000
3-13
1,500
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-8 (a) Jan. 1/17
Equipment .................................... 27,000 Cash .........................................
(b) Dec. 31/17 Depreciation Expense ................... 3,000 Accumulated Depreciation —Equipment........................... ($27,000 ÷ 9 = $3,000 per year) Dec. 31/18 Depreciation Expense ................... 3,000 Accumulated Depreciation —Equipment...........................
27,000
3,000
3,000
(c) ZHANG COMPANY Balance Sheet (partial) December 31 2018
2017
Property, plant, and equipment Equipment .............................................. $27,000 Less: Accumulated depreciation ......... 6,000 Carrying amount .................................... $21,000
$27,000 3,000 $24,000
ZHANG COMPANY Income Statement (partial) Year Ended December 31
Depreciation Expense .............................
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2018
2017
$3,000
$3,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-9 (a)
Mar. 1
Cash .................................................... 4,800 Unearned Revenue ......................
4,800
(b) $4,800 ÷ 12 = $400 per month Number of months earned March to October—8 months Amount earned to October 31: 8 × $400 = $3,200 Number of months remaining November to February—4 months Amount unearned at October 31: 4 × $400 = $1,600 Total $4,800 = $3,200 + $1,600 (c)
Oct. 31 Unearned Revenue............................. 3,200 Service Revenue..........................
3,200
(d) Unearned Revenue Mar. 1 4,800 Oct. 31 3,200 Oct. 31 Bal.
Service Revenue Oct. 31 3,200
1,600
BRIEF EXERCISE 3-10 (a)
July 28 Salaries Expense.............................. 7,080 Cash .............................................
7,080
(b)
July 31 Salaries Expense.............................. 4,720 4,720 Salaries Payable .......................... ($7,080 ÷ 6, number of days worked in week = $1,180 (Monday to Thursday at $1,180 each)
(c)
Aug. 4 Salaries Expense................................ 2,360 Salaries Payable ................................. 4,720 Cash .............................................
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7,080
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-11 (a)
Note 1: $50,000 × 6% × 5/12 = Note 2: $20,000 × 5% × 1/12 = Total accrued interest
$1,250 83 $1,333
(b) May 31/17 Interest Receivable ......................... 1,333 Interest Revenue .....................
1,333
BRIEF EXERCISE 3-12 (a) July 31/16 Equipment ......................................150,000 Cash ......................................... 40,000 Notes Payable ......................... 110,000 (b) Nov. 30/16 Interest Expense ........................... 1,833 Interest Payable ...................... ($110,000 × 5% × 4/12)
1,833
(c) Jan. 31/17 Interest Expense*.......................... 917 Interest Payable .............................. 1,833 Notes Payable ...............................110,000 Cash ........................................ 112,750 *($110,000 × 5% × 6/12) – $1,833
BRIEF EXERCISE 3-13 1.
2.
3.
Solutions Manual .
Interest Expense .............................. Interest Payable ...........................
400 400
Accounts Receivable ....................... 2,300 Service Revenue.......................... Salaries Expense.............................. Salaries Payable ..........................
3-16
2,300
900 900
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-14 WINTERHOLT COMPANY Adjusted Trial Balance September 30, 2017
Debit Credit Cash............................................................. $ 1,100 Accounts receivable ................................... 6,050 Prepaid rent................................................. 780 Equipment ................................................... 29,800 Accumulated depreciation—equipment.... $ 6,400 Accounts payable ....................................... 2,890 Salaries payable.......................................... 875 Unearned service revenue ......................... 840 C. Winterholt, capital .................................. 16,150 C. Winterholt, drawings .............................. 21,000 Service revenue .......................................... 48,450 Depreciation expense ................................. 3,100 Rent expense .............................................. 1,560 Salaries expense......................................... 12,215 $75,605 $75,605
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A A A A A L L L C D R E E E
Chapter 3
BS BS BS BS BS BS BS BS OE OE IS IS IS IS
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 3-15 WILDWOOD COMPANY Income Statement Year Ended December 31, 2017 Revenues Service revenue ............................................................... $39,000 Expenses Depreciation expense ..................................... $ 1,300 Insurance expense ........................................ 2,000 Rent expense ................................................. 4,000 Salaries expense ........................................... 1,500 Supplies expense ............................................. 1,500 Total expenses.......................................... 10,300 Profit .................................................................................... $ 28,700
BRIEF EXERCISE 3-16 WILDWOOD COMPANY Statement of Owner's Equity Year Ended December 31, 2017 D. Wood, capital, Beginning of Year............................... Add: Profit .................................................................... Less: Drawings .............................................................. D. Wood, capital, End of Year .........................................
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$15,600 14,200 29,800 7,000 $ 22,800
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 3-1 (a) CASH BASIS Revenues 1. Cash collected from customers during the year for services provided that year. 3. Cash collected from customers for services provided on account the previous year. 4. Cash collected from customers for services to be provided the following year. Total Revenues Expenses 6. Cash paid for operating expenses incurred during the year. 8. Cash paid to creditors for operating expenses incurred on account during the previous year. Total Expenses Profit (cash basis)
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2017
2018
$50,250
$55,430
–
12,070
4,580
1,760
54,830
69,260
17,380
18,990
17,380
2,199 21,189
$37,450
$48,071
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-1 (Continued) (b) ACCRUAL BASIS Revenues 1. Cash collected from customers during the year for services provided that year. 2. Accounts receivable at year end for services provided on account during the year. 5. Services provided to customers who had paid cash in advance the previous year. Total Revenues Expenses 6. Cash paid for operating expenses incurred during the year. 7. Accounts payable at year end for operating expenses incurred on account during the year. Total Expenses Profit (accrual basis) (c)
2017
2018
$50,250
$55,430
12,070
18,080
– 62,320
4,580 78,090
17,380
18,990
2,199 19,579
3,120 22,110
$42,741
$55,980
The accrual basis provides more useful information for decision-makers as it reflects transactions in the period in which they occur. Compared to the cash basis, the accrual basis gives a more realistic measure of the performance and future earnings potential of the business.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 321 1. When the flight takes place in December. 2. When the home theatre is delivered. 3. As the tickets are used over the season. 4. Over the period of time the loan is outstanding. 5. When the sweater is shipped in September. 6. As each magazine is delivered. 7. When the gift card is redeemed in January.
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EXERCISE 3-3 Adjustment 1: Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
The asset Prepaid Insurance is decreased by $435. The expense Insurance Expense is increased by $435. Debits increase expenses: debit Insurance Expense $435. Credits decrease assets: credit Prepaid Insurance $435. Dec. 31 Insurance Expense 435 Prepaid Insurance 435 To record insurance expired.
Adjustment 2: Basic Analysis Debit-Credit Analysis Adjusting Journal Entry
Solutions Manual .
The asset Supplies is decreased by $425. The expense Supplies Expense is increased by $425. Debits increase expenses: debit Supplies Expense $425. Credits decrease assets: credit Supplies $425. Dec. 31 Supplies Expense 425 Supplies 425 To record supplies used.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-3 (Continued) Adjustment 3: Basic Analysis
Debit-Credit Analysis
Adjusting Journal Entry
One year of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $1,240. The expense Depreciation Expense is increased by $1,240. Debits increase expenses: debit Depreciation Expense $1,240. Credits increase contra assets: credit Accumulated Depreciation—Equipment $1,240. Dec. 31 Depreciation Expense 1,240 Accumulated Depreciation —Equipment 1,240 To record depreciation of equipment.
Adjustment 4: Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability Unearned Revenue is decreased by $320. The revenue account Service Revenue is increased by $320. Debits decrease liabilities: debit Unearned Revenue $320. Credits increase revenues: credit Service Revenue $320. Dec. 31 Unearned Revenue 320 Service Revenue 320 To record revenue for services provided.
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-3 (Continued) Adjustment 5: Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
The liability account Salaries Payable is increased by $835. The expense Salaries Expense is increased by $835. Debits increase expenses: debit Salaries Expense $835. Credits increase liabilities: credit Salaries Payable $835. Dec. 31 Salaries Expense 835 Salaries Payable 835 To record accrued salaries.
Adjustment 6: Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability account Accounts Payable is increased by $230. The expense Utilities Expense is increased by $230. Debits increase expenses: debit Utilities Expense $230. Credits increase liabilities: credit Accounts Payable $230. Dec. 31 Utilities Expense 230 Accounts Payable 230 To record accrued expenses.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-3 (Continued) Adjustment 7: Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
The asset account Accounts Receivable is increased by $935. The revenue account Service Revenue is increased by $935. Debits increase assets: debit Accounts Receivable $935. Credits increase revenues: credit Service Revenue $935. Dec. 31 Accounts Receivable 935 Service Revenue 935 To accrue revenue earned but not collected.
Adjustment 8: Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability account Interest Payable is increased by $85. The expense Interest Expense is increased by $85. Debits increase expenses: debit Interest Expense $85. Credits increase liabilities: credit Interest Payable $85. Dec. 31 Interest Expense 85 Interest Payable 85 To record interest on note payable.
3-25
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-4 1. 2.
3.
4.
5.
6.
7.
Solutions Manual .
Insurance Expense .......................... 2,800 Prepaid Insurance ....................... Unearned Revenue........................... Service Revenue..........................
500
Interest Expense .............................. Interest Payable ........................... ($10,000 x 4% X 6/12)
200
2,800
500
Depreciation expense ...................... 2,150 Accumulated Depreciation —Equipment .............................
200
2,150
Supplies Expense ............................ 1,610 Supplies ....................................... ($950 + $1,395 - $735) = $1,610
1,610
Salaries Expense.............................. 1,464 Salaries Payable .......................... (4 x 3 x 8 x $15.25) = $1,464
1,464
Accounts Receivable ....................... 5,000 Service Revenue..........................
3-26
5,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-5 (a) and (b) Transaction 1: (a) Apr. 1
(b) Dec. 31
Prepaid Insurance ............................ 4,020 Cash ............................................. Insurance Expense .......................... 3,015 Prepaid Insurance ....................... ($4,020 × 9/12 = $3,015)
4,020
3,015
Transaction 2: (a) Aug. 31
(b) Dec. 31
Prepaid Rent ..................................... 6,500 Cash ............................................. Rent Expense ................................... 5,200 Prepaid Rent ................................ ($6,500 × 4/5 = $5,200)
6,500
5,200
Transaction 3: (a) Sept. 27
(b) Dec. 31
Cash .................................................. 3,600 Unearned Revenue ...................... Unearned Revenue........................... 1,080 Fees Earned ................................. ($3,600 × 3/10 = $1,080)
3,600
1,080
Transaction 4: (a) Nov. 30
(b) Dec. 31
Solutions Manual .
Prepaid Expenses ............................ 1,500 Cash ............................................. Office Expense ................................. Prepaid Expenses........................
3-27
1,500
500 500
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-5 (Continued) Transaction 5: (a) Dec. 15
(b) Dec. 31
Cash .................................................. Unearned Revenue ......................
935
Unearned Revenue........................... Admission Revenue .................... ($935 – $545 = $390)
390
935
390
EXERCISE 3-6 (a)
Dec. 31 Depreciation Expense..................... 2,720 Accumulated Depreciation— Building....................................... ($68,000 ÷ 25 = $2,720 per year) 31 Depreciation Expense..................... 4,000 Accumulated Depreciation— Vehicles....................................... ($28,000 ÷ 7 = $4,000 per year) 31 Depreciation Expense..................... 1,575 Accumulated Depreciation —Equipment .............................. ($12,600 ÷ 8 = $1,575 per year)
2,720
4,000
1,575
(b) Building $68,000
Cost Less: Accumulated Depreciation * 21,760 Carrying amount $46,240
Vehicles $28,000
Equipment $12,600
** 16,000 $12,000
***8,663 $ 3,937
* $2,720 × 8 = $21,760 ** $4,000 × 4 = $16,000 **$1,575 × 5.5 = $8,663
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 329 1. 2. 3.
4.
5.
Solutions Manual .
Accounts Receivable ....................... 2,400 Service Revenue.......................... Utilities Expense .............................. Accounts Payable........................
400
Depreciation Expense...................... Accumulated Depreciation —Equipment .............................
500
Interest Expense .............................. Interest Payable ...........................
600
2,400
400
500
600
Insurance Expense .......................... 1,000 Prepaid Insurance ....................... ($12,000 ÷ 12 = $1,000)
1,000
Supplies Expense ............................ 1,700 Supplies ....................................... ($2,600 - $900 = $1,700)
1,700
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 330 1.
2.
3.
4.
5.
Solutions Manual .
Insurance Expense .......................... Prepaid Insurance ....................... ($3,600 ÷ 24 = $150)
150
Depreciation Expense...................... Accumulated Depreciation —Equipment .............................
500
Interest Expense .............................. Interest Payable ........................... ($20,000 x 6% X 1/12) = $100
100
150
500 100
Accounts Receivable ....................... 1,500 Service Revenue.......................... Unearned Revenue........................... Service Revenue..........................
3-30
1,500
600 600
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 331 (a)
May 31 Interest Expense .............................. Interest Payable ........................... ($48,000 × 4% × 1/12 = $160)
160 160
31 Salaries Expense ............................. 1,500 Salaries Payable .......................... ($3,500 × 3/7 = $1,500) 31 Accounts Receivable ....................... Commission Revenue .................
520
31 Utilities Expense .............................. Accounts Payable .......................
425
31 Interest Receivable .......................... Interest Revenue ......................... ($6,000 × 6% × 1/12 = $30)
30
(b) June 1 Interest Payable ............................... Cash .............................................
160
520
425
30
160
5 Salaries Payable............................... 1,500 Salaries Expense ............................. 2,000 Cash .............................................
Aug.
Solutions Manual .
7 Cash .................................................. Accounts Receivable ..................
520
9 Accounts Payable ............................ Cash .............................................
425
3,500
520
1 Cash .................................................. 6,090 Interest Receivable ..................... Interest Revenue ($6,000 × 6% × 2/12) Notes Receivable.........................
3-31
1,500
425 30 60 6,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-32 (a)
July
2 Prepaid Rent..................................... Cash .............................................
750
10 Supplies............................................ Cash .............................................
200
14 Cash .................................................. Accounts Receivable ..................
850
20 Cash .................................................. Unearned Service Revenue ........
700
750
200
850
700
25 Cash .................................................. 1,300 Service Revenue..........................
(b) July 31 Accounts Receivable ....................... Service Revenue..........................
800
31 Rent Expense ................................... Prepaid Rent ................................ ($750 ÷ 3 = $250)
250
31 Supplies Expense ............................ Supplies ....................................... ($1,100 + $200 – $800 = $500)
500
31 Depreciation Expense..................... Accumulated Depreciation —Equipment ............................... ($9,360 ÷ 6 × 1/12)
130
31 Unearned Service Revenue ............. Service Revenue..........................
900
Solutions Manual .
3-32
1,300
800
250
500
130
900
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-33 1.
Mar. 31 Depreciation Expense..................... 2,363 Accumulated Depreciation —Equipment ............................... ($37,800 ÷ 4 × 3/12)
2.
3.
4.
5.
6.
Solutions Manual .
31 Unearned Rent Revenue................. 6,975 Rent Revenue ($9,300 × 3/4) ...... 31 Interest Expense ............................. Interest Payable .......................... ($30,000 × 6% × 3/12)
6,975
450 450
31 Supplies Expense ........................... 13,550 Supplies ($14,400 – $850) .......... 31 Insurance Expense ($3,600 × 3/12) Prepaid Insurance ......................
900
31 Accounts Receivable ...................... Rent Revenue .............................
700
3-33
2,363
13,550
900 700
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-34 (a) July 1/17
Nov. 1/17 (b) Dec. 1/17
Dec. 31/17
Dec. 31/17
Jan. 1/18
Feb. 1/18
Mar. 1/18
Solutions Manual .
Cash................................................ 75,000 Notes Payable .........................
75,000
Cash................................................ 42,000 Notes Payable .........................
42,000
Interest Expense ........................... Cash ......................................... ($42,000 × 5% × 1/12)
175 175
Interest Expense ........................... 1,500 Interest Payable ...................... ($75,000 × 4% × 6/12) Interest Expense ........................... Interest Payable ...................... ($42,000 × 5% × 1/12)
175
Interest Payable ............................ Cash ......................................... ($42,000 × 5% × 1/12)
175
175
Interest Expense*.......................... 175 Notes Payable ............................... 42,000 Cash ........................................ *($42,000 × 5% × 1/12) Interest Expense*.......................... 500 Interest Payable ............................ 1,500 Notes Payable ............................... 75,000 Cash ........................................ *($75,000 × 4% × 8/12) – $1,500
3-34
1,500
175
42,175
77,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-35 (a) July 1/17
Nov. 1/17 (b) Nov. 30/17
Nov. 30/17
Dec. 1/17
Jan. 1/18
Feb. 1/18
Mar. 1/18
Solutions Manual .
Notes Receivable ........................... 75,000 Cash .........................................
75,000
Notes Receivable ........................... 42,000 Cash .........................................
42,000
Interest Receivable ....................... 1,250 Interest Revenue ..................... ($75,000 × 4% × 5/12) Interest Receivable ....................... Interest Revenue ..................... ($42,000 × 5% × 1/12)
175
Cash............................................... Interest Receivable ................. ($42,000 × 5% × 1/12)
175
Cash............................................... Interest Revenue ..................... ($42,000 × 5% × 1/12)
175
1,250
175
175
175
Cash............................................... 42,175 Interest Revenue*.................... Notes Receivable .................... *($42,000 × 5% × 1/12)
175 42,000
Cash .............................................. 77,000 Interest Revenue*.................... Interest Receivable ................. Notes Receivable .................... *($75,000 × 4% × 8/12) – $1,250
750 1,250 75,000
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-36 Answer (a)
Unearned revenue = $1,150
Calculation Service Revenue (01/31/17) $2,000 Unearned Revenue (01/31/17) 750 2,750 Cash received in Jan. 1,600 Unearned Revenue (12/31/16) $1,150
(b) Purchase date On Jan. 31/17, there is $3,660 in = Jan. 1, 2012 Accumulated Depreciation: $3,660 ÷ $60/month = 61 months Purchase date: 61 months or 5 years and one month earlier than Jan. 31/17. (c)
Total premium = $4,800
Total premium = Monthly premium × 12 $400 × 12 = $4,800
Purchase date = June 1, 2016
Purchase date: On Jan. 31, there are 4 months coverage remaining ($400 × 4). Thus, the purchase date was 8 months earlier, on June 1, 2016.
(d)
Supplies purchased = $850
Supplies Expense Add: Supplies (01/31/17) Less: Supplies (01/01/17) Supplies purchased
$950 700 (800) $850
(e)
Salaries paid = $2,200
Salaries Payable (12/31/16) Salaries Payable (01/31/17)
$1,200 (800) 400 1,800 $2,200
Plus: Salaries Expense Salaries paid
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-37 Oct. 31
Oct. 31
Oct. 31
Oct. 31
Oct. 31
Oct. 31
Oct. 31
Solutions Manual .
Accounts Receivable ($9,230 – $8,700) . Service Revenue.................................
530 530
Supplies Expense ($2,450 – $710) ......... 1,740 Supplies ..............................................
1,740
Insurance Expense($3,775 - $2,525) ...... 1,250 Prepaid Insurance ..............................
1,250
Depreciation Expense ............................ 2,275 Accumulated Depreciation —Equipment .......................................
2,275
Salaries Expense .................................... 1,125 Salaries Payable .................................
1,125
Interest Expense ..................................... Interest Payable ................................... Unearned Service Revenue ($1,600 – $900) ........................................ Service Revenue..................................
3-37
500 500
700 700
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-16 LANE COMPANY Income Statement Year Ended October 31, 2017 Revenues Service revenue ............................................................... $46,230 Expenses Depreciation expense ..................................... $ 2,275 Insurance expense ........................................ 1,250 Interest expense ............................................ 2,000 Rent expense .................................................... 15,000 Salaries expense .............................................. 18,125 Supplies expense ............................................. 1,740 Total expenses.......................................... 40,390 Profit ................................................................................. $ 5,840
LANE COMPANY Statement of Owner's Equity Year Ended October 31, 2017 E. Lane, capital, Beginning of Year ................................ Add: Profit .................................................................... Less: Drawings .............................................................. E. Lane, capital, End of Year ...........................................
Solutions Manual .
3-38
$ 5,600 5,840 11,440 10,000 $ 1,440
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 3-16 (Continued)
LANE COMPANY Balance Sheet October 31, 2017 Assets Cash.................................................................................. Accounts receivable ........................................................ Prepaid insurance............................................................ Supplies............................................................................ Equipment ........................................................... $34,100 Less: Accumulated depreciation ....................... 5,800 Total assets .............................................................
$ 9,100 9,230 2,525 710 28,300 $49,865
Liabilities and Owner's Equity Liabilities Notes payable .............................................................. Accounts payable........................................................ Interest payable ........................................................... Salaries payable .......................................................... Unearned service revenue.......................................... Total liabilities.........................................................
$40,000 5,900 500 1,125 900 48,425
Owner's equity E. Lane, capital ............................................................... 1,440 Total liabilities and owner's equity ............................ $49,865
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 3-1A Students may find this to be a fairly challenging problem, so here are a few points that should help: Under the CASH BASIS, revenues are recorded when they are collected (received in cash), even if they were earned (the sale was made) earlier; Under the ACCRUAL BASIS of accounting, revenues are recorded when they are earned (the sale is made) even if the cash is not collected until later, or is received prior to the revenue being earned; Under the CASH BASIS, expenses are recorded when the cash is paid out; and Under the ACCRUAL BASIS of accounting, expenses are recorded when the cost has “expired” or been “used up”, which is not always in the same time period as when the cash is paid out. For example, Under the CASH BASIS, supplies are recorded as expenses as soon as they are purchased and paid for; other items, such as insurance, are recorded as expenses when they are paid for even if a portion of the payment relates to future periods; Under the ACCRUAL BASIS of accounting, supplies are not recorded as expenses until they have been used up. While the supplies are still on hand, they are recorded as assets because they have future benefits; Under the CASH BASIS, amounts such as Salaries Payable at the end of 2016 would not be considered expenses until they are actually paid out in 2017; and Under the ACCRUAL BASIS of accounting, Salaries Payable at the end of 2016 would be considered expenses in 2016, because the cost was incurred or “used up” during 2016, even though the cash will not be paid out until 2017.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-1A (Continued) (a) and (b) $37,100
Cash basis profit ($85,500 – $48,400)
–1,310 Accounts Payable owing at the end 2017 should be accrued; the related expense was incurred in 2017 and thus, reduces income. +2,250 Accounts Payable owing at year end 2016 represent expenses of 2016. Amounts have been deducted from cash and must be added back for accrual basis profit. +4,230 Accounts Receivable arise from sales that have been made in 2017, and thus, revenue must be recognized and recorded in 2017. –2,650 Accounts Receivable collected in 2017 from sales made (and revenue that was earned) in 2016. –640
Depreciation Expense is equal to the increase in accumulated depreciation from 2016 to 2017 ($11,040 – $10,400 = $640)
+1,580 Prepaid Insurance at year end 2017 is an asset rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. –1,250 Prepaid Insurance at year end 2016 has been used up and must be recorded as an expense during 2017 under the accrual basis. +910 Supplies on hand at year end 2017 represent assets rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. –490 Supplies on hand at year end 2016 have been used up and must be recorded as an expense during 2017.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-1A (Continued) (a) and (b) (Continued) –1,260
Unearned Revenue was received in cash in 2017 but has not been earned and thus, must be deducted.
+1,480
Unearned Revenue received in cash in 2016 has now been earned and must be recorded in 2017.
$39,950
Accrual basis income
Taking It Further: Recommend that Southlake Co. use the accrual basis of accounting. The cash basis does not correctly show when the revenue was earned or when the expenses were incurred. The cash basis of accounting is not in accordance with generally accepted accounting principles.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-2A (a)
1. Jan. 10 Supplies ............................................. 3,290 Cash ............................................ 2. Feb. 1 Prepaid Insurance ............................. 3,696 Cash ............................................ 3. Mar. 31 Equipment ....................................... 21,072 Cash ............................................ 4. Sept. 1 Prepaid Rent ...................................... 6,480 Cash ............................................ 5. Oct. 15 Cash ................................................... 1,749 Unearned Revenue ..................... 6. Nov. 1 Cash ................................................... 1,794 Unearned Revenue .....................
3,290
3,696
21,072
6,480
1,749
1,794
(b) 1. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry
Solutions Manual .
The asset Supplies is decreased by $2,340. The expense Supplies Expense is increased by $2,340. Debits increase expenses: debit Supplies Expense $2,340. Credits decrease assets: credit Supplies $2,340. Dec. 31 Supplies Expense 2,340 Supplies ($3,290 – $950) 2,340 To record supplies used.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-2A (Continued) 2. Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
The asset Prepaid Insurance is decreased by $3,388. The expense Insurance Expense is increased by $3,388. Debits increase expenses: debit Insurance Expense $3,388. Credits decrease assets: credit Prepaid Insurance $3,388. Dec. 31 Insurance Expense 3,388 Prepaid Insurance 3,388 To record insurance expired. ($3,696 × 11/12)
3. Basic Analysis
Debit-Credit Analysis
Adjusting Journal Entry
Solutions Manual .
One year of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $1,976. The expense Depreciation Expense is increased by $1,976. Debits increase expenses: debit Depreciation Expense $1,976. Credits increase contra assets: credit Accumulated Depreciation—Equipment $1,976. Dec. 31 Depreciation Expense 1,976 Accumulated Depreciation —Equipment 1,976 To record depreciation of equipment. ($21,072 ÷ 8 × 9/12)
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-2A (Continued) 4. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry
The asset Prepaid Rent is decreased by $2,160. The expense Rent Expense is increased by $2,160. Debits increase expenses: debit Rent Expense $2,160. Credits decrease assets: credit Prepaid Rent $2,160. Dec. 31 Rent Expense ($6,480 × 4/12) 2,160 Prepaid Rent 2,160 To record truck lease expired.
5. Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
The liability Unearned Revenue is decreased by $1,166. The revenue account Service Revenue is increased by $1,166. Debits decrease liabilities: debit Unearned Revenue $1,166. Credits increase revenues: credit Service Revenue $1,166. Dec. 31 Unearned Revenue ($1,749 × 2/3) 1,166 Service Revenue 1,166 To record revenue for services provided.
6. Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability Unearned Revenue is decreased by $1,196. The revenue account Rent Revenue is increased by $1,196. Debits decrease liabilities: debit Unearned Revenue $1,196. Credits increase revenues: credit Rent Revenue $1,196. Dec. 31 Unearned Revenue ($1,794 × 2/3) 1,196 Rent Revenue 1,196 To record revenue for rent earned.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-2A (Continued) Taking It Further: Two generally accepted accounting principles that relate to adjusting entries are: - the revenue recognition principle that indicates revenue should be recorded when it is earned, not when the cash is received and, - the time period assumption, that allows accountants to divide up the economic life of a business into artificial time periods.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-3A (a)
Dec. 31 Interest Receivable ......................... Interest Revenue ........................ ($10,000 × 8% × 1/12 = $67)
67 67
31 Salaries Expense ............................ 3,250 Salaries Payable ......................... ($6,500 ÷ 10 × 5 = $3,250) 31 Accounts Receivable ...................... 3,375 Service Revenue.........................
(b)
31 Utilities Expense ............................. Accounts Payable ......................
485
31 Interest Expense ............................. Interest Payable .......................... ($25,000 × 5% × 2/12 = $208)
208
Jan. 1
Cash ................................................. Interest Receivable.....................
208
67 67
Jan. 18 Cash ................................................... 3,375 Accounts Receivable ................. Jan. 22 Accounts Payable ........................... Cash ............................................
485
Apr. 30 Interest Expense ............................. Interest Payable .............................. Cash ............................................ *($25,000 × 5% × 4/12)
417* 208
3-47
3,375
485
Jan. 10 Salaries Expense ............................ 3,250* Salaries Payable.............................. 3,250 Cash ............................................ *($6,500 ÷ 10 × 5 = $3,250)
Solutions Manual .
3,250
6,500
3,375
485
625
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-3A (Continued) Taking It Further: The following revenue accounts would be understated by: Service Revenue ...................................................... $3,375 Interest Revenue ..................................................... 67 $ 3,442 The following expense accounts would be understated by: Interest Expense ..................................................... 208 Salaries Expense .................................................... 3,250 Utilities Expense ..................................................... 485 3,943 Profit would be overstated by ................................
$ 501
Assets would be understated by: Interest Receivable ................................................. $ 67 Accounts Receivable .............................................. 3,375
$3,442
Liabilities would be understated by: Interest Payable ..................................................... 208 Accounts Payable .................................................. 485 Salaries Payable .................................................... 3,250
3,943
Owner’s equity would be overstated by................
$ 501
Solutions Manual .
Chapter 3
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-4A May 31, 2017 1. Supplies Expense ............................ Supplies ....................................... 2.
3.
4.
5.
6.
7.
8.
900 900
Utilities Expense .............................. Accounts Payable........................
250
Insurance Expense .......................... Prepaid Insurance ....................... ($3,600 ÷ 12 = $300)
300
Depreciation Expense...................... Accumulated Depreciation —Equipment .............................
190
Interest Expense .............................. Interest Payable ........................... ($10,000 x 6% X 1/12) = $50
50
250 300
190 50
Salaries Expense.............................. 1,104 Salaries Payable .......................... ($920 x 2 X 3/5) = $1,104 Unearned Revenue........................... Service Revenue..........................
1,104
500
Accounts Receivable ....................... 1,700 Service Revenue..........................
500
1,700
Taking It Further: Utility companies send invoices to customers after the delivery of services have been performed. The invoice received by Logan Miller is for services received in May 2017. Consequently, an adjusting journal entry should be recorded at May 31, 2017 increasing the Utilities Expense account with a debit and increasing Accounts Payable with a credit. Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-5A 1. (a)
Dec. 31 Interest Expense ............................. Interest Payable ($10,000 × 4% × 4/12)..................
133
(b) Aug. 31 Interest Expense ($10,000 × 4% × 8/12) ...................... 267 Interest Payable ............................. 133 Notes Payable ................................. 10,000 Cash ............................................ 2. (a)
133
10,400
Dec. 31 Supplies Expense ........................... 1,550 Supplies ($2,450- $900) ..............
1,550
3. (a) Dec. 31 Depreciation Expense..................... 1,000 Accumulated Depreciation— Equipment ...............................
1,000
4. (a) Dec. 31 Insurance Expense ........................... 1,225 Prepaid Insurance .................. ($2,100 x 7/12 = $1,225) 5. (a) Dec. 31 Unearned Revenue............................ 8,000 Service Revenue ..................... ($32,000 X 1/4 = $6,400) 6. (a) Dec. 31 Accounts Receivable ........................ 4,200 Service Revenue ..................... (b) Jan. 15
Solutions Manual .
Cash ................................................... 4,200 Accounts Receivable..............
3-50
1,225
8,000
4,200
4,200
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-5A (Continued) 7. (a) Dec.
(b) Jan.
31 Salaries Expense .............................. 9,000 Salaries Payable .....................
9,000
3 Salaries Payable................................ 9,000 Cash ........................................
9,000
Taking It Further: For most businesses, it is impractical to try to keep track of supplies used in the business. This is the case for Devin Wolf Company. Rather than recording supplies expense based on the system of tracking which supplies have been used, it is less time consuming to count what is left in supplies at the end of the accounting period using a physical count. The count amount is then compared to the Supplies account balance, which has been debited with all supplies purchases, and proceed with the adjustment of the asset account to the value of supplies remaining.
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PROBLEM 3-6A 1. (a)
June 10 Supplies ............................................. 1,905 Cash ............................................
1,905
(b) Dec. 31 Supplies Expense ($875 + $1,905 – $870)..................... 1,910 Supplies ......................................
1,910
2. (a) Aug.
1 Equipment ....................................... 43,500 Cash ............................................
43,500
(b) Dec. 31 Depreciation Expense....................... 1,510 Accumulated Depreciation— Equipment ($43,500 ÷ 12 × 5/12)
1,510
3. (a)
July
Cash ($500 × 250) ............................125,000 Unearned Revenue ..................... 125,000
(b) Dec. 31 Unearned Revenue ......................... 62,500 Admission Revenue ($125,000 ÷ 8 × 4) ........................
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62,500
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-6A (Continued)
4. (a)
Salaries Expense ............................ 5,400 Cash ............................................
5,400
(b) Dec. 31 Salaries Expense ............................ 5,400 Salaries Payable .........................
5,400
(c)
5. (a)
Dec. 27
Jan. 3
Cash ................................................. Rent Revenue .............................
550
(b) Dec. 31 Accounts Receivable ($800 – $550) Rent Revenue .............................
250
(c)
6. (a)
Dec. 10
Salaries Payable.............................. 5,400 Cash ............................................
Jan. 10
550
250
Cash ($250 + $800).......................... 1,050 Accounts Receivable ................. Rent Revenue .............................
250 800
June 1 Cash ................................................. 25,000 Notes Payable.............................
25,000
(b) Dec. 31 Interest Expense ............................. Interest Payable ($25,000 × 4.5% × 7/12) ............... (c)
5,400
656
May 31 Interest Expense ($25,000 × 4.5% × 5/12) ................... 469 Interest Payable .............................. 656 Notes Payable ................................. 25,000 Cash ............................................
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656
26,125
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-6A (Continued) 7. (b) Dec. 31 Telephone Expense ........................ Accounts Payable ......................
573
(c)
573
Jan. 12
Accounts Payable ........................... Cash ............................................
573
573
Taking It Further: The three basic reasons that a trial balance may not contain complete or up-to-date data are: 1. Some events are not journalized daily because it is not efficient to do so. 2. Some costs are not journalized during the accounting period because they expire through the passage of time and are not daily transactions. 3. Some items may be unrecorded. The adjustment to record supplies used (Item 1) is an example of the first reason above. It is not practical to record an expense every time supplies are used. The adjustment to record depreciation (Item 2) is an example of the second reason above. The cost of a long-lived asset expires through the passage of time. The adjustment to record the telephone bill (Item 7) is an example of the third reason above. The bill was for the month of December but had not been recorded in the recording of daily transactions.
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PROBLEM 3-7A 1.
Sept. 30 Supplies Expense ($2,080 + $1,700 – $810).................. 2,970 Supplies ......................................
2,970
30 Insurance Expense ($3,200 × 11/12) 2,933 Prepaid Insurance ......................
2,933
30 Unearned Revenue............................ 1,800 Fees Earned ................................
1,800
30 Depreciation Expense....................... 1,333 Accumulated Depreciation— Equipment ($24,000 ÷ 12 × 8/12)
1,333
2.
3.
4.
5.
6.
7.
8.
9.
10.
Solutions Manual .
30 Interest Expense ............................. Interest Payable ($25,000 × 4% × 5/12)..................
417 417
30 Accounts Receivable ........................ 2,000 Fees Earned ................................
2,000
30 Rent Expense ($9,000 ÷ 9) ................ 1,000 Prepaid Rent ...............................
1,000
30 Salaries Expense .............................. 3,500 Salaries Payable .........................
3,500
30 Accounts Receivable ........................ 1,500 Fees Earned ................................
1,500
30 Utilities Expense ............................ Accounts Payable ......................
3-55
895 895
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-7A (Continued) Taking It Further: The timing of the preparation of the adjusting journal entries in the accounting cycle depends completely on the business’ needs to communicate financial information to those who use it. If the business does not need financial statements monthly, and decides that financial statements are only needed on an annual basis, then the preparation of adjusting journal entries on an annual basis is adequate. On the other hand, the practice of recording adjusting journal entries at the end of each month should be adopted if doing so will provide feedback to the business on action that should be taken to rectify a business problem, or initiate changes in the way the business is managed. Companies reporting under IFRS must prepare quarterly financial statements and must therefore prepare adjusting entries on a quarterly basis.
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PROBLEM 3-8A (a) 1.
2.
3.
4.
Dec. 31 Advertising Expense ........................ 4,659 Prepaid Advertising ................... A650 – $5,000 ÷ 12 = $417 per month for 8 months = ............................................ B974 – $10,600 ÷ 24 = $442 per month for 3 months = ............................................
$3,333 1,326 $4,659
Dec. 31 Depreciation Expense ($30,000 ÷ 7) .................................... 4,286 Accumulated Depreciation— Vehicles.......................................
4,286
Dec. 31 Depreciation Expense ($40,000 ÷ 8) .................................... 5,000 Accumulated Depreciation— Vehicles.......................................
5,000
Dec. 31 Interest Expense ............................... 2,302 Interest Payable .......................... ($85,000 × 6.5% × 5/12 mos. = $2,302) Dec. 31 Salaries Expense .............................. 6,300 Salaries Payable ......................... 6 × $750........................................ 3 × $600 ....................................... Total .............................................
5.
4,659
2,302
6,300
$4,500 1,800 $6,300
Dec. 31 Unearned Revenue.......................... 69,000 Rent Revenue .............................
69,000
6 × $4,000 × 2 = ............................. $48,000 3 × $7,000 × 1 =............................... 21,000 Total rent earned ............................ $69,000 Solutions Manual .
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PROBLEM 3-8A (Continued) (b) Truck 1, Accumulated depreciation = $4,286 × 3 = $12,858 Carrying amount = $30,000 – $12,858 = $17,142 Truck 2, Accumulated depreciation = $5,000 + $5,000 × 7/12 = $7,917 Carrying amount = $40,000 – $7,917 = $32,083 Taking It Further: The purpose of depreciation is to allocate the cost of a long-lived asset to expense over the useful life of the asset in a systematic and rational manner. Land is not depreciated because it has an unlimited useful life.
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PROBLEM 3-9A (a) Cobalt Co.: Mar. 31/17
Cash.................................................. 107,900 Notes Payable (Note 1) ........... 107,900
June 1/17
Cash.................................................... 75,000 Notes Payable (Note 2) ...........
June 30/17
Sept. 1/17
Sept. 30/17
Sept. 30/17
Sept. 30/17
Oct. 1/17
Nov. 1/17
Solutions Manual .
Interest Expense ............................ 1,025 Cash ......................................... Note 1: ($107,900 × 3.8% × 3/12) Cash.................................................... 24,400 Notes Payable (Note 3) ........... Interest Expense ............................ 1,025 Cash ......................................... Note 1: ($107,900 × 3.8% × 3/12) Interest Expense ............................ Interest Payable ...................... Note 3: ($24,400 × 5% × 1/12)
102
Interest Expense ............................ Interest Payable ...................... Note 2: ($75,000 × 4.6% × 4/12)
1,150
Interest Payable ............................. Cash ......................................... Note 3: ($24,400 × 5% × 1/12)
102
Interest Expense ............................ Cash ......................................... Note 3: ($24,400 × 5% × 1/12)
102
3-59
75,000
1,025
24,400
1,025
102
1,150
102
102
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-9A (Continued) (a) (Continued) Dec. 1/17
Interest Expense ............................ 102 Notes Payable (Note 3) ...................... 24,400 24,502 Cash .........................................
Dec. 31/17
Interest Expense ............................ 1,025 Cash ......................................... Note 1: ($107,900 × 3.8% × 3/12)
1,025
Mar. 1/18
Interest Expense*........................... 1,438 Interest Payable ............................. 1,150 Notes Payable (Note 2) ...................... 75,000 77,588 Cash ........................................ * Note 2: ($75,000 × 4.6% × 5/12)
Mar. 31/18
Interest Expense*........................... 1,025 Notes Payable (Note 1) .................... 107,900 Cash ........................................ 108,925 * Note 1: ($107,500 × 3.8% × 3/12)
(b) Azores Enterprises: Mar. 31/17
Notes Receivable (Note 1) ............. 107,900 Cash ......................................... 107,900
June 1/17
Notes Receivable (Note 2) ............. Cash .........................................
June 30/17
Sept. 1/17
Solutions Manual .
75,000
Cash................................................ 1,025 Interest Revenue ..................... Note 1: ($107,900 × 3.8% × 3/12)
75,000
1,025
Notes Receivable (Note 3) .................24,400 Cash ......................................... 24,400
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PROBLEM 3-9A (Continued) (b) (Continued) Sept. 30/17
Oct. 1/17
Oct. 31/17
Oct. 31/17
Oct. 31/17
Nov. 1/17
Dec. 1/17
Dec. 31/17
Solutions Manual .
Cash................................................ 1,025 Interest Revenue ..................... Note 1: ($107,900 × 3.8% × 3/12) Cash................................................ Interest Revenue ..................... Note 3: ($24,400× 5% × 1/12)
102
Interest Receivable ........................ Interest Revenue ..................... Note 1: ($107,900 × 3.8% × 1/12)
342
Interest Receivable ........................ Interest Revenue ..................... Note 2: ($75,000 × 4.6% × 5/12)
1,438
Interest Receivable ........................ Interest Revenue ..................... Note 3: ($24,400× 5% × 1/12)
102
Cash................................................ Interest Receivable ................. Note 3: ($24,400 × 5% × 1/12)
102
Cash................................................ Interest Revenue ..................... Notes Receivable (Note 3) ......
24,502
102
342
1,438
102
102
Cash................................................ 1,025 Interest Receivable ................. Interest Revenue ..................... Note 1: *($107,900 × 3.8% × 2/12)
3-61
1,025
102 24,400
342 683*
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-9A (Continued) (b) (Continued) Mar. 1/18
Cash ....................................................77,588 Interest Receivable ................. 1,438 Interest Revenue*.................... 1,150 Notes Receivable (Note 2) ...... 75,000 * Note 2: ($75,000 × 4.6% × 4/12)
Mar. 31/18
Cash ..................................................108,925 Interest Revenue*.................... 1,025 Notes Receivable (Note 1) ...... 107,900 * Note 1: ($107,900 × 3.8% × 3/12)
Taking It Further: It is appropriate because the accrued interest payable records the obligation that exists at the balance sheet date and the offsetting expense that applies to the current accounting period. If it is not recorded, both liabilities and expenses are understated and profit and owner’s equity are overstated.
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PROBLEM 3-10A (b) 1. Aug. 31 Supplies Expense ................................ 3,605 Supplies ($4,455 – $850) .......... 2.
3.
4.
5.
6.
7.
8.
Solutions Manual .
3,605
31 Insurance Expense ($12,660 × 10/12)10,550 Prepaid Insurance ....................
10,550
31 Depreciation Expense ($40,320 ÷ 10). 4,032 Accumulated Depreciation— Equipment.................................
4,032
31 Depreciation Expense ($421,200 ÷ 12)............................... 35,100 Accumulated Depreciation—Vehicles
35,100
31 Unearned Revenue ($25,000 – $4,500).......................... 20,500 Service Revenue.......................
20,500
31 Interest Expense ($162,000 × 4.5% × 1/12) ............... Interest Payable ........................
608 608
31 Salaries Expense ................................. 2,725 Salaries Payable ($545 × 5) ......
2,725
31 Accounts Receivable .......................... 1,350 Service Revenue.......................
1,350
31 Fuel Expense ................................... Accounts Payable ....................
3-63
620 620
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-10A (Continued) (a) and (c)
Aug. 31
Aug. 31 Aug. 31 Bal.
Aug. 31 Bal.
Aug. 31
Cash 9,000
Accounts Receivable 7,080 1,350 8,430
Prepaid Insurance 12,660 Aug. 31 2,110
Supplies 4,455 Aug. 31
Bal.
Aug. 31
10,550
3,605
850
Vehicles 421,200
Accumulated Depreciation-Vehicles Aug. 31 175,500 Aug. 31 35,100 Bal. 210,600
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PROBLEM 3-10A (Continued) (a) and (c)
Aug. 31
Equipment 40,320
Accumulated Depreciation-Equipment Aug. 31 25,200 Aug. 31 4,032 Bal. 29,232
Aug. 31
Accounts Payable Aug. 31 Aug. 31 Bal.
5,700 620 6,320
Notes Payable Aug. 31
162,000
Unearned Revenue Aug. 31 20,500 Bal.
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25,000
4,500
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 3-10A (Continued) (a) and (c)
Aug. 31
Interest Payable Aug. 31
608
Salaries Payable Aug. 31
2,725
J. Reyes, Capital Aug. 31
105,075
J. Reyes, Drawings 141,000
Service Revenue Aug. 31 Aug. 31 Aug. 31 Bal.
Aug. 31 Aug. 31 Bal.
Solutions Manual .
334,300 20,500 1,350 356,150
Salaries Expense 140,625 2,725 143,350
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PROBLEM 3-10A (Continued) (a) and (c)
Aug. 31 Aug. 31 Bal.
Interest Expense 9,653 608 10,261
Aug. 31
Rent Expense 22,810
Aug. 31 Aug. 31 Bal.
Fuel Expense 23,972 620 24,592
Aug. 31
Insurance Expense 10,550
Aug. 31 Aug. 31 Bal.
Depreciation Expense 4,032 35,100 39,132
Aug. 31
Supplies Expense 3,605
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PROBLEM 3-10A (Continued) (d) REYES RIDES Adjusted Trial Balance August 31, 2017 Debit $ 9,000 8,430 2,110 850 40,320
Credit
Cash.................................................................. Accounts receivable ........................................ Prepaid insurance............................................ Supplies............................................................ Equipment ........................................................ Accumulated depreciation—equipment......... $ 29,232 Vehicles ............................................................ 421,200 Accumulated depreciation—vehicles............. 210,600 Accounts payable ............................................ 6,320 Notes payable .................................................. 162,000 Interest payable ............................................... 608 Salaries payable............................................... 2,725 Unearned revenue ........................................... 4,500 J. Reyes, capital ............................................... 105,075 J. Reyes, drawings .......................................... 141,000 Service revenue ............................................... 356,150 Depreciation expense ...................................... 39,132 Fuel expense .................................................... 24,592 Insurance expense .......................................... 10,550 Interest expense .............................................. 10,261 Rent expense ................................................... 22,810 Salaries expense.............................................. 143,350 Supplies expense ............................................ 3,605 $877,210 $877,210
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PROBLEM 3-10A (Continued) Taking It Further: The carrying amount of the vehicles at Aug. 31, 2017 is $421,200 − $210,600 = $210,600 or half of the purchase price. Since the carrying amount is half of the purchase price, the vehicles are half depreciated through their useful life estimated at 12 years. Consequently the vehicles are 6 years old. The accumulated depreciation of the equipment at Aug. 31, 2017 is $29,232. Annual depreciation expense is $4,032. Consequently the equipment is 7.25 years old ($29,232 ÷ $4,032).
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PROBLEM 3-11A (b) 1.
May 31 Insurance Expense ($6,360 × 1/12) Prepaid Insurance ......................
530
31 Supplies Expense ($995 – $560) .... Supplies ......................................
435
2.
3.
4.
5.
6.
7.
8.
Solutions Manual .
530
435
31 Depreciation Expense [($150,000 ÷ 50) × 1/12] ................... 250 Accumulated Depreciation—Buildings
250
31 Depreciation Expense [($33,000 ÷ 10) × 1/12] ..................... 275 Accumulated Depreciation—Furniture
275
31 Unearned Revenue ......................... 10,000 Rent Revenue ............................. ($15,000 X 2/3)
10,000
31 Interest Expense ($96,000 × 6.5% × 2/12) ................... 1,040 Interest Payable ..........................
1,040
31 Salaries Expense .............................. 1,450 Salaries Payable .........................
1,450
31 Utilities Expense ............................... 3,420 Accounts Payable ......................
3,420
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PROBLEM 3-11A (Continued) (a) and (c)
May 31
May 31 Bal.
May 31
Cash 17,520
Prepaid Insurance 1,590 May 31 1,060
Supplies 995 May 31
Bal.
May 31
May 31
Buildings 150,000
Accumulated Depreciation-Buildings May 31 May 31 Bal.
Solutions Manual .
435
560
Land 35,000
May 31
530
47,750 250 48,000
Furniture 33,000
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PROBLEM 3-11A (Continued) (a) and (c) Accumulated Depreciation-Furniture May 31
May 31
Solutions Manual .
12,925
May 31 Bal.
275 13,200
Accounts Payable May 31 May 31 Bal.
8,500 3,420 11,920
Mortgage Payable May 31
96,000
Unearned Revenue May 31 10,000 Bal.
15,000 5,000
Interest Payable May 31
1,040
Salaries Payable May 31
1,450
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PROBLEM 3-11A (Continued) (a) and (c) K. MacPhail, Capital May 31
May 31
K. MacPhail, Drawings 42,735
Rent Revenue May 31 May 31 Bal.
May 31 May 31 Bal.
Salaries Expense 156,710 1,450 158,160
May 31 May 31 Bal.
Interest Expense 5,720 1,040 6,760
May 31
Repairs Expense 14,400
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246,150 10,000 256,150
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PROBLEM 3-11A (Continued) (a) and (c)
May 31 May 31 Bal.
Utilities Expense 37,600 3,420 41,020
May 31 May 31 Bal.
Insurance Expense 5,830 530 6,360
May 31 May 31 May 31 Bal.
Depreciation Expense 5,775 250 275 6,300
May 31 May 31 Bal.
Supplies Expense 4,450 435 4,885
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PROBLEM 3-11A (Continued) (c) HIGHLAND COVE RESORT Adjusted Trial Balance May 31, 2017 Debit Credit Cash................................................................... $ 17,520 Prepaid insurance............................................. 1,060 Supplies............................................................. 560 Land ................................................................... 35,000 Buildings ........................................................... 150,000 Accumulated depreciation—buildings ............ $ 48,000 Furniture ............................................................ 33,000 13,200 Accumulated depreciation—furniture ............. Accounts payable ............................................. 11,920 Unearned revenue ............................................ 5,000 Salaries payable................................................ 1,450 Interest payable ................................................ 1,040 Mortgage payable ............................................. 96,000 K. MacPhail, capital .......................................... 85,000 K. MacPhail, drawings ...................................... 42,735 Rent revenue ..................................................... 256,150 Depreciation expense ....................................... 6,300 Insurance expense ........................................... 6,360 Interest expense ............................................... 6,760 Repairs expense ............................................... 14,400 Salaries expense............................................... 158,160 Supplies expense ............................................. 4,885 Utilities expense ............................................... 41,020 $517,760 $517,760
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PROBLEM 3-11A (Continued) (d) HIGHLAND COVE RESORT Income Statement Year Ended May 31, 2017 Revenues Rent revenue ............................................... $256,150 Expenses Depreciation expense ................................ $ 6,300 Insurance expense ...................................... 6,360 Interest expense .......................................... 6,760 Repairs expense.......................................... 14,400 Salaries expense ......................................... 158,160 Supplies expense ........................................ 4,885 Utilities expense .......................................... 41,020 Total expenses........................................ 237,885 Profit ................................................................. $ 18,265
HIGHLAND COVE RESORT Statement of Owner's Equity Year Ended May 31, 2017 K. MacPhail, capital, June 1, 2016 .................................. $ 85,000 Add: Profit ........................................................................ 18,265 103,265 Less: Drawings ................................................................ 42,735 K. MacPhail, capital, May 31, 2017.................................. $ 60,530
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PROBLEM 3-11A (Continued) (d) (Continued) HIGHLAND COVE RESORT Balance Sheet May 31, 2017 Assets Cash.................................................................... $ 17,520 Prepaid insurance.............................................. 1,060 Supplies.............................................................. 560 Land .................................................................... 35,000 Buildings ........................................................... $150,000 Less: Accumulated depreciation ...................... 48,000 102,000 Furniture .................................................. 33,000 Less: Accumulated depreciation ...................... 13,200 19,800 Total Assets................................................... $175,940 Liabilities and Owner's Equity Liabilities Accounts payable........................................................ $ 11,920 Unearned revenue ....................................................... 5,000 Salaries payable .......................................................... 1,450 Interest payable .......................................................... 1,040 Mortgage payable........................................................ 96,000 Total liabilities......................................................... 115,410 Owner's equity K. MacPhail, capital ........................................................ 60,530 Total liabilities and owner's equity .......................... $175,940
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PROBLEM 3-11A (Continued) Taking It Further: The balance of the owner’s capital account that appears on the adjusted trial balance on May 31, 2017 does not correspond to the amount of the owner’s capital that appears on the balance sheet at that date. The reason for the difference is that the owner’s capital account in the trial balance does not include the amount of the profit and the drawings taken by the owner for the year ended May 31, 2017.
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PROBLEM 3-12A (b) Nov.
8 Salaries Payable.............................. 700 Salaries Expense ............................ 1,000 Cash ............................................
1,700
10 Cash ................................................. 3,620 Accounts Receivable .................
3,620
12 Cash ................................................. 3,100 Service Revenue.........................
3,100
15 Equipment ....................................... 2,000 Accounts Payable ......................
2,000
17 Supplies........................................... Accounts Payable ......................
700 700
20 Accounts Payable ........................... 2,700 Cash ............................................ 22 Rent Expense .................................. Cash ............................................
400 400
25 Salaries Expense ............................ 1,700 Cash ............................................
1,700
27 Accounts Receivable ...................... 2,200 Service Revenue.........................
2,200
29 Cash ................................................. Unearned Revenue .....................
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2,700
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600 600
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PROBLEM 3-12A (Continued) (c) HAMM EQUIPMENT REPAIR Trial Balance November 30, 2017
Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Unearned revenue ............................................ J. Hamm, capital ............................................... Service revenue ................................................ Salaries expense............................................... Rent expense ....................................................
Debit $ 3,220 2,830 2,500 14,000
Credit
$2,000 2,600 1,800 13,950 5,300 2,700 400 $25,650
$25,650
(d) Nov.
Solutions Manual .
30 Supplies Expense ............................. 1,100 Supplies ...................................... ($2,500 - $1,400 = $1,100) 30 Salaries Expense ............................ Salaries Payable .........................
350
30 Depreciation Expense..................... Accumulated Depreciation— Equipment...................................
200
1,100
350
200
30 Unearned Revenue ......................... 1,220 Service Revenue.........................
1,220
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PROBLEM 3-12A (Continued) (a), (b), and (d)
Nov. 1 Nov. 10 Nov. 12 Nov. 29 Bal.
Cash 2,400 3,620 3,100 600 3,220
Nov. 1 Nov. 27 Bal.
Accounts Receivable 4,250 Nov. 10 3,620 2,200 2,830
Nov. 1 Nov. 17 Bal.
Nov. 8 Nov. 20 Nov. 22 Nov. 25
Supplies 1,800 700 2,500 Nov. 30
Bal.
Nov. 1 Nov. 15 Bal.
1,100
1,400 Equipment 12,000 2,000 14,000
Accumulated Depreciation-Equipment Nov. 1 Nov. 30 Bal.
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1,700 2,700 400 1,700
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2,000 2,000 200 2,200
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PROBLEM 3-12A (Continued) (a), (b), and (d)
Nov. 20
Nov. 30
Nov. 8
Solutions Manual .
Accounts Payable Nov. 1 2,700 Nov. 15 Nov. 17 Bal.
Unearned Revenue Nov. 1 Nov. 29 Bal. 1,220 Bal. Salaries Payable Nov. 1 700 Nov. 30 Bal.
2,600 2,000 700 2,600
1,200 600 1,800 580
700 350 350
J. Hamm, Capital Nov. 1
13,950
Service Revenue Nov. 12 Nov. 27 Bal. Nov. 30 Bal.
3,100 2,200 5,300 1,220 6,520
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PROBLEM 3-12A (Continued) (a), (b), and (d)
Nov. 22
Salaries Expense 1,000 1,700 2,700 350 3,050 Rent Expense 400
Nov. 30
Depreciation Expense 200
Nov. 30
Supplies Expense 1,100
Nov. 8 Nov. 25 Bal. Nov. 30 Bal.
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PROBLEM 3-12A (Continued) (e) HAMM EQUIPMENT REPAIR Adjusted Trial Balance November 30, 2017
Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Salaries payable................................................ Unearned revenue ............................................ J. Hamm, capital ............................................... Service revenue ................................................ Salaries expense............................................... Depreciation expense ....................................... Supplies expense ............................................. Rent expense ....................................................
Debit $ 3,220 2,830 1,400 14,000
Credit
$2,200 2,600 350 580 13,950 6,520 3,050 200 1,100 400 $26,200
$26,200
(f) HAMM EQUIPMENT REPAIR Income Statement Month Ended November 30, 2017 Revenues Service revenue........................................... Expenses Depreciation expense ................................. Rent expense ............................................... Salaries expense ......................................... Supplies expense ........................................ Total expenses........................................ Profit Solutions Manual .
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$6,520 $ 200 400 3,050 1,100 4,750 $1,770 Chapter 3
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PROBLEM 3-12A (Continued) (f) HAMM EQUIPMENT REPAIR Statement of Owner's Equity Month Ended November 30, 2017
J. Hamm, capital, November 1, 2017 .............................. Add: Profit ........................................................................ J. Hamm, capital, November 30, 2017 ............................
$13,950 1,770 $15,720
HAMM EQUIPMENT REPAIR Balance Sheet November 30, 2017 Assets Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment ........................................................... $14,000 Less: Accumulated depreciation ......................... 2,200 Total Assets ..............................................
$ 3,220 2,830 1,400 11,800 $19,250
Liabilities and Owner’s Equity Liabilities Accounts payable........................................................ Unearned revenue ....................................................... Salaries payable .......................................................... Total liabilities.........................................................
$2,600 580 350 3,530
Owner’s Equity J. Hamm, capital .............................................................. 15,720 Total liabilities and owner’s equity ................................$19,250
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PROBLEM 3-12A (Continued)
Taking It Further: Although the balance in the accounts payable account remains unchanged after recording the adjusting entries, its balance must appear on the adjusted trial balance along with all accounts that have any balance. Failing to include this account will result in the adjusted trial balance being out of balance.
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PROBLEM 3-13A (b) 1.
Jan. 31 Insurance Expense ($3,960 × 7/12) ................................. 2,310 Prepaid Insurance ......................
2,310
31 Supplies Expense ........................... 5,660 Supplies ($6,580 − $920) ............
5,660
31 Depreciation Expense ($32,350 ÷ 5) 6,470 Accumulated Depreciation— Equipment...................................
6,470
31 Unearned Revenue ......................... 5,230 Service Revenue.........................
5,230
2.
3.
4.
5.
6.
7.
8.
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31 Interest Expense ($11,000 × 6% × 3/12) ...................... Interest Payable ..........................
165 165
31 Salaries Expense ............................ 1,315 Salaries Payable .........................
1,315
31 Accounts Receivable ...................... 2,675 Service Revenue.........................
2,675
31 Telephone Expense ........................ Accounts Payable ......................
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PROBLEM 3-13A (Continued) (a) and (b)
Jan. 31
Jan. 31 Jan. 31 Bal.
Cash 4,970
Accounts Receivable 14,540 2,675 17,215
Bal.
Prepaid Insurance 3,960 Jan. 31 1,650
Jan. 31
Supplies 6,580
Jan. 31
Jan. 31 Bal.
Jan. 31
2,310
5,660
920
Equipment 32,350
Accumulated Depreciation-Equipment Jan. 31 12,940 Jan. 31 6,470 Bal.
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19,410
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PROBLEM 3-13A (Continued) (a) and (b) Accounts Payable Jan. 31 Jan. 31 Bal.
7,760 170 7,930
Notes Payable Jan. 31
Jan. 31
Jan. 31
Solutions Manual .
Unearned Revenue Jan. 31 5,230 Bal.
11,000
7,480 2,250
Interest Payable Jan. 31
165
Salaries Payable Jan. 31
1,315
E. Fox, Capital Jan. 31
18,320
E. Fox, Drawings 119,000
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PROBLEM 3-13A (Continued) (a) and (b) Service Revenue Jan. 31 Jan. 31 Jan. 31 Bal.
Jan. 31 Jan. 31 Bal.
Salaries Expense 66,950 1,315 68,265
Jan. 31
Interest Expense 165
Jan. 31
Rent Expense 20,750
Jan. 31 Jan. 31 Bal.
Telephone Expense 2,900 170 3,070
Jan. 31
Insurance Expense 2,310
Jan. 31
Depreciation Expense 6,470
Jan. 31
Supplies Expense 5,660
214,500 5,230 2,675 222,405
Fill in white space
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PROBLEM 3-13A (Continued) (c) FOX ENTERPRISES Adjusted Trial Balance January 31, 2017 Debit $ 4,970 17,215 920 1,650 32,350
Credit
Cash................................................................... Accounts receivable ......................................... Supplies ............................................................ Prepaid insurance ............................................ Equipment ......................................................... Accumulated depreciation—equipment ......... $ 19,410 Notes payable ................................................... 11,000 Accounts payable ............................................ 7,930 Interest payable ................................................ 165 Salaries payable................................................ 1,315 Unearned revenue ............................................ 2,250 E. Fox, capital.................................................... 18,320 E. Fox, drawings ............................................... 119,000 Service revenue ............................................... 222,405 Depreciation expense ....................................... 6,470 Insurance expense ........................................... 2,310 Interest expense ............................................... 165 Rent expense .................................................... 20,750 Salaries expense............................................... 68,265 Supplies expense ............................................. 5,660 Telephone expense........................................... 3,070 $282,795 $282,795
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PROBLEM 3-13A (Continued) (d) FOX ENTERPRISES Income Statement Year Ended January 31, 2017 Revenues Service revenue............................................ $222,405 Expenses Depreciation expense .................................. $ 6,470 Insurance expense ....................................... 2,310 Interest expense ........................................... 165 Rent expense ................................................ 20,750 Salaries expense .......................................... 68,265 Supplies expense ......................................... 5,660 Telephone expense ...................................... 3,070 Total expenses......................................... 106,690 Profit .................................................................. $115,715
FOX ENTERPRISES Statement of Owner's Equity Year Ended January 31, 2017 E. Fox, capital, February 1, 2016..................................... Add: Profit ........................................................................
$ 18,320 115,715 134,035 Less: Drawings ................................................................ 119,000 E. Fox, capital, January 31, 2017 .................................... $ 15,035
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PROBLEM 3-13A (Continued) (d) (Continued) FOX ENTERPRISES Balance Sheet January 31, 2017 Assets Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Prepaid insurance............................................. Equipment ......................................................... $32,350 Less: Accumulated depreciation ..................... 19,410 Total Assets .............................................
$ 4,970 17,215 920 1,650 12,940 $37,695
Liabilities and Owner's Equity Liabilities Notes payable .............................................................. Accounts payable........................................................ Interest payable ........................................................... Salaries payable .......................................................... Unearned revenue ....................................................... Total liabilities.........................................................
$11,000 7,930 165 1,315 2,250 22,660
Owner's equity E. Fox, capital .................................................................. 15,035 Total liabilities and owner's equity ............................ $37,695
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PROBLEM 3-13A (Continued) Taking It Further: Fox Enterprises is performing very well. Profit is positive and expenses represent only 48% of total revenues. A negative indicator in these financial statements is the amount of drawings the owner has taken. This amount exceeds the profit for the year. The financial position of Fox Enterprises is also positive, total cash and accounts receivable ($22,185) exceeds liabilities (excluding unearned revenues) of $20,410. As long as all accounts receivable are collected there should be adequate cash to pay all outstanding liabilities. If Fox Enterprises wishes to purchase additional assets, the company may require additional cash. This will have to be obtained from Edmund Fox by additional investment of cash or by bank financing.
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PROBLEM 3-1B Students may find this to be a fairly challenging problem, so here are a few points that should help: Under the CASH BASIS of accounting, revenues are recorded when they are collected (received in cash), even if they were earned (the sale was made) in an earlier accounting period; Under the ACCRUAL BASIS of accounting, revenues are recorded when they are earned (the sale is made) even if the cash is not collected until later, or is received prior to the revenue being earned; Under the CASH BASIS of accounting, expenses are recorded when the cash is paid out; and Under the ACCRUAL BASIS of accounting, expenses are recorded when the cost has “expired” or been “used up”, which is not always in the same time period as when the cash is paid out. For example: Under the CASH BASIS of accounting, Supplies are recorded as expenses as soon as they are purchased and paid for. Expenses, such as insurance, are recorded when items are paid for even if a portion relates to future periods; Under the ACCRUAL BASIS of accounting, Supplies are not recorded as expenses until they have been used up. While the supplies are still on hand, they are recorded as assets because they have future benefits; Under the CASH BASIS of accounting, amounts such as Salaries Payable at the end of 2016 would not be considered expenses until they are actually paid out in 2017; and Under the ACCRUAL BASIS of accounting, Salaries Payable at the end of 2016 would be considered expenses in 2017, because the cost was incurred or “used up” during 2016, even though the cash will not be paid out until 2017.
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PROBLEM 3-1B (Continued) (a) and (b) $27,500
Cash basis income ($136,200 − $108,700)
−3,990 Accounts Payable owing at the end 2017 should be accrued; the related expense was incurred in 2017 and thus, reduces income. +1,460 Accounts Payable owing at year end 2016 represents expenses of 2016. Amount has been deducted from cash and must be added back for accrual basis profit. +6,100 Accounts Receivable arise from sales that have been made in 2017, and thus, revenue must be recognized and recorded in 2017. −13,200 Accounts Receivable collected in 2017 from sales made (and revenue that was earned) in 2016. −3,250
Depreciation Expense is equal to the increase in accumulated depreciation from 2016 to 2017 ($18,250 − $15,000 = $3,250)
+620 Prepaid Insurance at year end 2017 is an asset rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. −1,530 Prepaid Insurance at year end 2016 has been used up and must be recorded as an expense during 2017. +550 Supplies on hand at year end 2017 represent assets rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. −2,350 Supplies on hand at year end 2016 have been used up and must be recorded as an expense during 2017.
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PROBLEM 3-1B (Continued) (a) and (b) (Continued) −7,400
Unearned Revenue was received in cash in 2017 but has not been earned and thus, must be taken away.
+1,560
Unearned Revenue received in cash in 2016 has now been earned and must be recorded in 2017.
$6,070
Accrual basis income
Taking It Further: Recommend that Northland Co. use the accrual basis of accounting. The cash basis does not correctly show when the revenue was earned or the expenses were incurred. The cash basis of accounting is not in accordance with generally accepted accounting principles.
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PROBLEM 3-2B (a)
1. Jan. 2. Mar.
9 Supplies ............................................. 2,950 Cash ............................................
2,950
1 Prepaid Insurance ............................. 4,920 Cash ............................................
4,920
Equipment ....................................... 31,200 Cash ............................................
31,200
3. June 1
4. Sept. 1 Prepaid Rent ...................................... 1,650 Cash ............................................ 5. Oct. 1 Cash ................................................... 2,600 Unearned Revenue ..................... 6. Nov. 15 Cash ................................................... 2,500 Unearned Revenue .....................
1,650
2,600
2,500
(b) 1. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry
Solutions Manual .
The asset Supplies is decreased by $2,235. The expense Supplies Expense is increased by $2,235. Debits increase expenses: debit Supplies Expense $2,235. Credits decrease assets: credit Supplies $2,235. Dec. 31 Supplies Expense 2,235 Supplies ($2,950 – $715) 2,235 To record supplies used.
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PROBLEM 3-2B (Continued) 2. Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
The asset Prepaid Insurance is decreased by $4,100. The expense Insurance Expense is increased by $4,100. Debits increase expenses: debit Insurance Expense $4,100. Credits decrease assets: credit Prepaid Insurance $4,100. Dec. 31 Insurance Expense 4,100 Prepaid Insurance 4,100 To record insurance expired. ($4,920 × 10/12)
3. Basic Analysis
Debit-Credit Analysis
Adjusting Journal Entry
Solutions Manual .
Seven months of depreciation increases the contra asset Accumulated Depreciation—Equipment (which decreases the carrying value of the asset Equipment) by $2,275. The expense Depreciation Expense is increased by $2,275. Debits increase expenses: debit Depreciation Expense $2,275. Credits increase contra assets: credit Accumulated Depreciation—Equipment $2,275. Dec. 31 Depreciation Expense 2,275 Accumulated Depreciation —Equipment 2,275 To record depreciation of equipment. ($31,200 ÷ 8 × 7/12)
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PROBLEM 3-2B (Continued) 4. Basic Analysis Debit-Credit Analysis Adjusting Journal Entry
The asset Prepaid Rent is decreased by $1,100. The expense Rent Expense is increased by $1,100. Debits increase expenses: debit Rent Expense $1,100. Credits decrease assets: credit Prepaid Rent $1,100. Dec. 31 Rent Expense ($275 × 4) 1,100 Prepaid Rent 1,100 To record equipment lease expired.
5. Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
The liability Unearned Revenue is decreased by $975. The revenue account Rent Revenue is increased by $975. Debits decrease liabilities: debit Unearned Revenue $975. Credits increase revenues: credit Rent Revenue $975. Dec. 31 Unearned Revenue ($325 × 3) 975 Rent Revenue 975 To record revenue for rent earned.
6. Basic Analysis Debit-Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability Unearned Revenue is decreased by $1,500. The revenue account Service Revenue is increased by $1,500. Debits decrease liabilities: debit Unearned Revenue $1,500. Credits increase revenues: credit Service Revenue $1,500. Dec. 31 Unearned Revenue ($500 × 3) 1,500 Service Revenue 1,500 To record revenue for services provided.
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PROBLEM 3-2B (Continued) (c)
1.
Jan. 9
Supplies 2,950 Dec. 31 2,235
Dec. 31 Bal.
Supplies Expense Dec. 31 2,235
715
2. Prepaid Insurance Mar. 1 4,920 Dec. 31 4,100 Dec. 31 Bal. 820
Insurance Expense Dec. 31 4,100
3.
Mar. 31
Accumulated Depreciation—Equipment Dec. 31 2,275
Equipment 31,200
Depreciation Expense Dec. 31 2,275 4. Prepaid Rent Sept. 1 1,650 Dec. 31 1,100 Dec. 31 Bal. 550
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Rent Expense Dec. 31 1,100
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PROBLEM 3-2B (Continued) 5. Unearned Revenue Oct. 1 2,600 Dec. 31 975
Rent Revenue Dec. 31
975
Dec. 31 Bal. 1,625 6. Unearned Revenue Nov. 15 2,500 Dec. 31 1,500 Dec. 31 Bal. 1,000
Service Revenue Dec. 31 1,500
Taking It Further: Burke Bros. cannot avoid recording adjusting journal entries at the end of the fiscal year. Had Burke originally recorded items 1 through 4 as expenses and items 5 and 6 as revenues, there would still have been a need to adjust asset and liability accounts at the end of the fiscal year in order to arrive at accurate balances.
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PROBLEM 3-3B (a)
(b)
Dec. 31 Interest Expense ............................. Interest Payable .......................... ($40,000 × 5.5% × 1/12 = $183)
183 183
31 Salaries Expense .............................. 7,500 Salaries Payable .........................
7,500
31 Accounts Receivable ...................... 12,000 Rental Revenue ..........................
12,000
31 Telephone Expense ........................ Accounts Payable ......................
290
31 Interest Receivable ......................... Interest Revenue ........................ ($10,000 × 7% × 2/12 = $117)
117
Jan. 1 Interest Payable .............................. Cash ............................................
183
290
117
183
Jan. 2 Salaries Payable.............................. 7,500 Cash ............................................
7,500
Jan. 5 Cash ................................................. 18,000 Accounts Receivable ................. Rental Revenue ..........................
12,000 6,000
Jan. 9 Accounts Payable ........................... Cash ............................................
290
Apr. 30 Cash ($10,000 × 7% × 6/12)............. Interest Receivable..................... Interest Revenue ($10,000 × 7% × 4/12)..................
350
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290
117 233
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PROBLEM 3-3B (Continued) Taking It Further: The following revenue accounts would be understated by: Rental Revenue ..................................................... $12,000 Interest Revenue .................................................. 117 $12,117 The following expense accounts would be understated by: Interest Expense ..................................................... $ 183 Salaries Expense ...................................................... 7,500 Utilities Expense .................................................... 290 7,973 Profit would be understated by .............................
$ 4,144
Assets would be understated by: Interest Receivable ................................................. $ 117 Accounts Receivable .............................................. 12,000 $12,117 Liabilities would be understated by: Interest Payable ..................................................... $ 183 Accounts Payable .................................................. 290 Salaries Payable ....................................................... 7,500 Owner’s equity would be understated by .............
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PROBLEM 3105B Sept. 30, 2017 1. Supplies Expense ............................ 1,100 Supplies ....................................... 2.
3.
4.
5.
6.
7.
Utilities Expense .............................. Accounts Payable........................
775
Insurance Expense .......................... Prepaid Insurance ....................... ($2,360 ÷ 12 = $197)
197
Depreciation Expense...................... Accumulated Depreciation —Equipment ............................. ($9,600 ÷ 48 = $200)
200
Interest Expense .............................. Interest Payable ........................... ($15,000 x 4.5% X 1/12) = $56
56
775 197
200
56
Salaries Expense.............................. 3,000 Salaries Payable .......................... ($1,000 x 3) = $3,000 Accounts Receivable ....................... Service Revenue..........................
1,100
3,000
950 950
Taking It Further: Sam is incorrect in stating that it is never appropriate to make adjusting entries to accrue for revenue. Service revenue is susceptible to the need for adjusting entries at the end of accounting periods. This is particularly true if the amount of time working on an assignment or service takes several days, even weeks to perform. It would be unfair to postpone the recognition of revenue just because a task was in process. Solutions Manual .
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PROBLEM 3-5B 1. (a) 2. (a)
June 30 Rent Expense .................................. Prepaid Rent ...............................
900
June 30 Supplies Expense ........................... Supplies ($1,415- $900) ..............
515
900
515
3. (a) June 30 Depreciation Expense....................... 2,000 Accumulated Depreciation— Equipment ............................... ($12,000 ÷ 36 x 6) ................... 4. (a)
June 30 Interest Expense ............................. Interest Payable ($5,000 × 4.5% × 5/12).................
94
(b) Jan. 31 Interest Expense ($5,000 × 4.5% × 7/12) ..................... 131 Interest Payable .............................. 94 Notes Payable ................................... 5,000 Cash ............................................ 5. (a) June 30 Accounts Receivable ........................ 3,650 Service Revenue ..................... 6. (a) June 30 Salaries Expense .............................. 3,000 Salaries Payable ..................... (b) July
Salaries Payable................................ 3,000 Cash ........................................
7. (a) June 30 Unearned Revenue............................ 2,190 Service Revenue ..................... ($2,590 - $400 = $2,190)
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2,000
94
5,225
3,650
3,000
3,000
2,190
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PROBLEM 3-5B (Continued) Taking It Further: The statement: “The amount included in an adjusted trial balance for a specific account will always be more than the amount that was included in the trial balance for the same account” is true when accruals are recorded as adjustments to revenue and expense accounts and their respective asset and liability accounts. For prepayments adjustments, the unadjusted account balances will be reduced by the adjustments. The exception to this relationship is the adjusting entry for depreciation. When depreciation is recorded, it does increase an expense and it does increase a contra-asset account Accumulated Depreciation.
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PROBLEM 3-6B 1. (a)
Supplies............................................. 2,880 Cash ............................................
2,880
(b) Nov. 30 Supplies Expense ($950 + $2,880 − $670) .................... 3,160 Supplies ......................................
3,160
2. (a)
Jan. 31
Cash ($200 × 310)............................ 62,000 Unearned Revenue .....................
62,000
(b) Nov. 30 Unearned Revenue ......................... 18,600 Admission Revenue ($62,000 ÷ 10 × 3) ........................
18,600
3. (a)
Aug.
Nov. 29 Salaries Expense .............................. 4,500 Cash ............................................
(b) Nov. 30 Salaries Expense .............................. 1,800 Salaries Payable ......................... ($4,500 x 2/5) = $1,800 (c)
Dec.
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6 Salaries Payable ............................... 1,800 Salaries Expense .............................. 2,700 Cash ............................................
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4,500
1,800
4,500
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PROBLEM 3-6B (Continued) 4. (a)
1 Cash ................................................. Rent Revenue .............................
245
(b) Nov. 30 Accounts Receivable ($425 − $245) Rent Revenue .............................
180
(c)
605
5. (a)
Nov.
Dec.
4 Cash ($180 + $425) ......................... Accounts Receivable ................. Rent Revenue .............................
180 180 425
June 1 Cash ................................................. 11,000 Notes Payable.............................
(b) Nov. 30 Interest Expense ............................. Interest Payable ($11,000 × 4.5% × 6/12) ............... (c)
245
248 248
1 Interest Expense ($11,000 × 4.5% × 2/12) ................... 82 Interest Payable .............................. 248 Notes Payable ................................. 11,000 Cash ............................................
11,330
6. (b) Nov. 30 Utilities Expense ............................... 1,420 Accounts Payable ......................
1,420
(c)
Feb.
11,000
Dec. 10 Accounts Payable ............................. 1,420 Cash ............................................
1,420
7. (b) Nov. 30 Depreciation Expense ($37,975 ÷ 8) 4,747 Accumulated Depreciation—Vehicles..............
4,747
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PROBLEM 3-6B (Continued) Taking It Further: The three basic reasons that a trial balance may not contain complete or up-to-date data are: 1. Some events are not journalized daily because it is not efficient to do so; 2. Some costs are not journalized during the accounting period because they expire through the passage of time so are not daily transactions; 3. Some items may be unrecorded. The adjustment to record supplies used (Item 1) is an example of the first reason above. It is not practical to record an expense every time supplies are used. The adjustment to record depreciation (Item 7) is an example of the second reason above. The cost of a long-lived asset expires through the passage of time. The adjustment to record the utility bill (Item 6) is an example of the third reason above. The bill was for the month of November but had not been recorded in the recording of daily transactions.
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PROBLEM 3-7B 1.
Oct. 31 Depreciation Expense....................... 1,500 Accumulated Depreciation— Equipment ($9,000 ÷ 6)...............
1,500
31 Supplies Expense ($1,000 + $2,500 – $980).................. 2,520 Supplies ......................................
2,520
2.
3.
4.
5.
6.
7. 8.
Solutions Manual .
31 Interest Expense ............................. Interest Payable ($28,000 × 6% × 4/12)..................
560
31 Rent Expense .................................. Prepaid Rent ...............................
800
560
800
31 Unearned Revenue ......................... 2,000 Fees Earned [$200 × (15 − 5)] ....
2,000
31 Accounts Receivable ...................... 1,550 Fees Earned ................................
1,550
31 Wages Expense ($125 × 2 × 3) ....... Wages Payable ...........................
750
31 Telephone Expense ....................... Accounts Payable ......................
360
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750 360
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PROBLEM 3-7B (Continued) Taking It Further: The timing of the preparation of the adjusting journal entries in the accounting cycle depends completely on the business’ needs to communicate financial information to those who use it. If the business does not need financial statements monthly, and decides that financial statements are only needed on an annual basis, then the preparation of adjusting journal entries on an annual basis is adequate. On the other hand, the practice of recording adjusting journal entries at the end of each month should be adopted if doing so will provide feedback to the business on action that should be taken to rectify a business problem, or initiate changes in the way the business is managed. Companies reporting under IFRS must prepare quarterly financial statements and must therefore prepare adjusting entries on a quarterly basis.
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PROBLEM 3-8B (a) 1.
July 31 Insurance Expense ........................... 7,035 Prepaid Insurance ...................... Expired insurance: B4564 $10,440 × 11/24 A2958 $ 5,400 × 5/12
2.
3.
4.
$4,785 2,250 $7,035
July 31 Rent Expense .................................... 4,675 Prepaid Rent ............................... Expired rent: Agreement 1: Agreement 2:
7,035
$335 × 5 months $375 × 8 month
4,675
$1,675 3,000 $4,675
July 31 Depreciation Expense ($127,800 ÷ 30)................................. 4,260 Accumulated Depreciation— Building.......................................
4,260
31 Depreciation Expense ($164,160 ÷ 40)................................. 4,104 Accumulated Depreciation— Building.......................................
4,104
July 31 Unearned Revenue.......................... 34,242 Service Revenue.........................
34,242
Earned Revenue at July 31, 2017: October 325 × $35 × 10/12 = $ 9,479 November 450 × $35 × 9/12 = 11,813 December 555 × $35 × 8/12 = 12,950 $34,242
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PROBLEM 3-8B (Continued) (a) (Continued) 5.
July 31 Salaries Expense .............................. 1,290 Salaries Payable .........................
1,290
6 × $650 × 1/5 = $ 780 3 × $850 × 1/5 = 510 Total $ 1,290
(b)
First building, Accumulated Depreciation = ($4,260 × 15 ) + $4,260 × 11/12 = $63,900 + $3,905 (11 months for first year) = $67,805 Carrying amount = $127,800 − $67,805 = $59,995 Second building, Accumulated Depreciation = $4,104 × 14 + $4,104 × 3/12 = $57,456 + $1,026 (3 months for 2003) = $58,482 Carrying amount = $164,160 − $58,482 = $105,678
Taking It Further: The purpose of depreciation is to allocate the cost of a long-lived asset to expense over the useful life of the asset in a systematic and rational manner. Land is not depreciated because it has an unlimited useful life.
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PROBLEM 3-9B (a) Alabaster Co.: June 1/17
Sept. 30/17
Oct. 1/17
Oct. 31/17
Oct. 31/17
Oct. 31/17
Nov. 1/17
Dec. 1/17
Dec. 31/17
Solutions Manual .
Cash................................................ Notes Payable (Note 1) ...........
50,000
Cash................................................ Notes Payable (Note 2) ...........
80,000
Cash................................................ Notes Payable (Note 3) ...........
45,000
Interest Expense ............................ Interest Payable ...................... Note 1: ($50,000 × 4% × 5/12)
833
Interest Expense ............................ Interest Payable ...................... Note 2: ($80,000 × 3.5% × 1/12)
233
Interest Expense ............................ Interest Payable ...................... Note 3: ($45,000 × 5.5% × 1/12)
206
Interest Payable ............................. Cash .........................................
206
Interest Expense ............................ Cash ......................................... Note 3: ($45,000 × 5.5% × 1/12)
206
Interest Expense*........................... Interest Payable ............................. Cash ........................................ * Note 2: ($80,000 × 3.5% × 2/12)
467 233
3-115
50,000
80,000
45,000
833
233
206
206
206
700
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PROBLEM 3-9B (Continued) (a) (Continued) Jan. 1/18
Jan. 1/18
Mar. 31/18
June 30/18
Sept. 30/18
Interest Expense ............................ Notes Payable (Note 3) .................. Cash .........................................
206 45,000
Interest Expense*........................... Interest Payable ............................. Notes Payable (Note 1) .................. Cash ........................................ * Note 1: ($50,000 × 4% × 2/12)
334 833 50,000
Interest Expense ............................ Cash ......................................... Note 2: ($80,000 × 3.5% × 3/12)
700
Interest Expense ............................ Cash ......................................... Note 2: ($80,000 × 3.5% × 3/12)
700
45,206
51,167
700
700
Interest Expense*........................... 700 Notes Payable (Note 2) .................. 80,000 Cash ........................................ 80,700 * Note 2: ($80,000 × 3.5% × 3/12)
(b) Fuchsia Enterprises: June 1/17
Sept. 30/17
Oct. 1/17
Solutions Manual .
Notes Receivable (Note 1) ............. Cash .........................................
50,000
Notes Receivable (Note 2) ............. Cash .........................................
80,000
Notes Receivable (Note 3) ............. Cash .........................................
45,000
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50,000
80,000 45,000
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PROBLEM 3-9B (Continued) (b) (Continued) Nov. 1/17
Nov. 30/17
Nov. 30/17
Nov. 30/17
Dec. 1/17
Dec. 31/17
Jan. 1/18
Jan. 1/18
Solutions Manual .
Cash................................................ Interest Revenue ..................... Note 3: ($45,000 × 5.5% × 1/12)
206
Interest Receivable ........................ Interest Revenue ..................... Note 1: ($50,000 × 4% × 6/12)
1,000
Interest Receivable ........................ Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 2/12)
467
Interest Receivable ........................ Interest Revenue ..................... Note 3: ($45,000 × 5.5% × 1/12)
206
Cash................................................ Interest Receivable ................. Note 3: ($45,000 × 5.5% × 1/12)
206
Cash................................................ Interest Receivable ................. Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 1/12)
700
Cash................................................ Interest Revenue ..................... Notes Receivable (Note 3) ......
45,206
Cash................................................ Interest Receivable ................. Interest Revenue*.................... Notes Receivable (Note 1) ...... * Note 1: ($50,000 × 4% × 1/12)
51,167
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206
1,000
467
206
206
467 233
206 45,000 1,000 167 50,000
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PROBLEM 3-9B (Continued) (b) (Continued) Mar. 31/18
June 30/18
Sept. 30/18
Cash................................................ Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 3/12)
700
Cash................................................ Interest Revenue ..................... Note 2: ($80,000 × 3.5% × 3/12)
700
700
700
Cash................................................ 80,700 700 Interest Revenue*.................... Notes Receivable (Note 2) ...... 80,000 * Note 2: ($80,000 × 3.5% × 3/12)
Taking It Further: It is appropriate because the accrued interest receivable records the asset that exists at the balance sheet date and the offsetting revenue that applies to the current accounting period. If it is not recorded, both assets and revenues are understated and profit and owner’s equity are understated.
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PROBLEM 3-10B (b) 1.
June 30 Supplies Expense ........................... 3,755 Supplies ($4,470 − $715) ............
3,755
30 Insurance Expense ($9,480 × 9/12) 7,110 Prepaid Insurance ......................
7,110
30 Depreciation Expense..................... 5,040 Accumulated Depreciation— Equipment ($30,240 ÷ 6).............
5,040
30 Depreciation Expense .................... 26,325 Accumulated Depreciation— Vehicles ($210,600 ÷ 8)...............
26,325
30 Unearned Revenue ......................... 16,500 Service Revenue ($18,750 – $2,250)
16,500
2.
3.
4.
5.
6.
7.
Solutions Manual .
30 Interest Expense ($120,000 × 4.5% × 1/12) ................. Interest Payable ..........................
450 450
30 Salaries Expense .............................. 2,340 Salaries Payable ($390 × 6) ........
2,340
30 Accounts Receivable ........................ 1,100 Service Revenue.........................
1,100
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PROBLEM 3-10B (Continued) (a) and (c) Cash 9,810
June 30
June 30 June 30
1,100
Bal.
6,410
June 30
Prepaid Insurance 9,480 June 30
7,110
June 30
3,755
2,370
Bal.
June 30
Supplies 4,470
715
Bal.
June 30
Solutions Manual .
Accounts Receivable 5,310
Vehicles 210,600
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PROBLEM 3-10B (Continued) (a) and (c) (Continued) Accumulated Depreciation-Vehicles June 30
26,325
June 30
26,325
Bal.
52,650
Equipment June 30
30,240
Accumulated Depreciation-Equipment June 30 June 30 Bal.
June 30
10,080
Accounts Payable June 30
5,075
Notes Payable June 30
120,000
Unearned Revenue June 30
18,750
16,500 Bal.
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5,040 5,040
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2,250
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Interest Payable June 30
450
Salaries Payable June 30
2,340
K. Cordial, Capital June 30
75,000
K. Cordial, Drawings June 30
91,650
Service Revenue June 30
252,795
June 30
16,500
June 30
1,100
Bal.
270,395
Salaries Expense Jun e 30
101,400
Jun e 30
2,340
Bal.
103,740
PROBLEM 3-10B (Continued) Solutions Manual .
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(a) and (c) (Continued) Interest Expense June 30
4,950
June 30
450 Bal.
5,400 Rent Expense
June 30
17,095 Fuel Expense
June 30
17,980 Insurance Expense
June 30
7,110
Depreciation Expense June 30
26,325
June 30
5,040 Bal.
31,365 Supplies Expense
June 30 3,755 PROBLEM 3-10B (Continued)
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(d) RED BRIDGES TOWING Adjusted Trial Balance June 30, 2017 Debit Credit Cash................................................................... $ 9,810 Accounts receivable ......................................... 6,410 Prepaid insurance............................................. 2,370 Supplies............................................................. 715 Vehicles ............................................................. 210,600 Accumulated depreciation—vehicles.............. $ 52,650 Equipment ......................................................... 30,240 Accumulated depreciation—equipment.......... 10,080 Accounts payable ............................................. 5,075 Notes payable ................................................... 120,000 Unearned revenue ............................................ 2,250 Interest payable ................................................ 450 Salaries payable................................................ 2,340 K. Cordial, capital ............................................. 75,000 K. Cordial, drawings ......................................... 91,650 Service revenue ................................................ 270,395 Salaries expense............................................... 103,740 Interest expense ............................................... 5,400 Rent expense .................................................... 17,095 Fuel expense ..................................................... 17,980 Insurance expense ........................................... 7,110 Depreciation expense ....................................... 31,365 Supplies expense ............................................. 3,755 $538,240 $538,240
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PROBLEM 3-10B (Continued) Taking It Further: The carrying amount of the vehicles at June 30, 2017 is $210,600 − $52,650 = $157,950 or 75% of the purchase price. The automobiles are 25% depreciated. Since the useful life is estimated at 8 years, the automobiles are 2 years old (25% of 8 years). The carrying amount of the equipment at June 30, 2017 is $30,240 − $10,080 = $20,160 or 67% of the purchase price. Since the carrying amount is 67% of the purchase price, the equipment is 33% depreciated through its useful life estimated at 6 years. Consequently the equipment is also 2 years old (33% × 6 years).
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PROBLEM 3-11B (b) 1.
May 31 Insurance Expense ($5,280 × 1/12) Prepaid Insurance ......................
440
31 Supplies Expense ($1,050 − $760) . Supplies ......................................
290
2.
3.
4.
5.
6.
7.
8.
9.
Solutions Manual .
440
290
31 Depreciation Expense ($180,000 ÷ 40) × 1/12 ..................... 375 Accumulated Depreciation—Buildings
375
31 Depreciation Expense ($21,000 ÷ 5) × 1/12.......................... Accumulated Depreciation— Furniture .....................................
350
350
31 Unearned Revenue ........................... 2,000 Rent Revenue (40 × $50) ............ 31 Interest Expense ............................. Interest Payable .......................... ($146,400 × 5.5% × 1/12)
2,000
671 671
31 Salaries Expense .............................. 1,025 Salaries Payable .........................
1,025
31 Utilities Expense ............................... 1,250 Accounts Payable ......................
1,250
31 Accounts Receivable ...................... Rent Revenue .............................
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950 950
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PROBLEM 3-11B (Continued) (a) and (c)
May 31
Cash 12,365
May 31
Accounts Receivable 950
May 31
Prepaid Insurance 3,080
Bal.
May 31
Bal.
May 31
440
May 31
290
2,640
Supplies 1,050
760
May 31
Land 80,000
May 31
Buildings 180,000
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PROBLEM 3-11B (Continued) (a) and (c) Accumulated Depreciation-Buildings May 31 May 31 Bal.
May 31
May 31
Solutions Manual .
76,125 375 76,500
Furniture 21,000
Accumulated Depreciation-Furniture May 31 May 31 Bal.
12,250 350 12,600
Accounts Payable May 31 May 31 Bal.
4,780 1,250 6,030
Mortgage Payable May 31
146,400
Unearned Revenue May 31 2,000 Bal.
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8,500 6,500
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PROBLEM 3-11B (Continued) (a) and (c)
May 31
Interest Payable May 31
671
Salaries Payable May 31
1,025
M. Rundle, Capital May 31
54,800
M. Rundle, Drawings 18,750
Rent Revenue May 31 May 31 May 31 Bal.
May 31 May 31 Bal.
Salaries Expense 49,304 1,025 50,329
May 31 May 31 Bal.
Interest Expense 7,381 671 8,052
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102,100 2,000 950 105,050
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PROBLEM 3-11B (Continued) (a) and (c)
May 31
Advertising Expense 500
May 31 May 31 Bal.
Utilities Expense 13,300 1,250 14,550
May 31 May 31 Bal.
Insurance Expense 4,840 440 5,280
May 31 May 31 May 31 Bal.
Depreciation Expense 7,975 375 350 8,700
May 31 May 31 Bal.
Supplies Expense 5,410 290 5,700
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PROBLEM 3-11B (Continued) (c) MOUNTAIN BEST LODGE Adjusted Trial Balance May 31, 2017 Debit Credit Cash................................................................... $ 12,365 Accounts receivable ......................................... 950 Prepaid insurance............................................. 2,640 Supplies............................................................. 760 Land ................................................................... 80,000 Buildings ........................................................... 180,000 Accumulated depreciation—buildings ............ $ 76,500 Furniture ............................................................ 21,000 Accumulated depreciation—furniture ............. 12,600 Accounts payable ............................................. 6,030 Unearned revenue ............................................ 6,500 Salaries payable................................................ 1,025 Interest payable ................................................ 671 Mortgage payable ............................................. 146,400 M. Rundle, capital ............................................. 54,800 M. Rundle, drawings ......................................... 18,750 Rent revenue ..................................................... 105,050 Advertising expense ......................................... 500 Depreciation expense ....................................... 8,700 Salaries expense............................................... 50,329 Supplies expense ............................................. 5,700 Interest expense ............................................... 8,052 Insurance expense ........................................... 5,280 Utilities expense ............................................... 14,550 $409,576 $409,576
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PROBLEM 3-11B (Continued) (d) MOUNTAIN BEST LODGE Income Statement Year Ended May 31, 2017 Revenues Rent revenue ................................................ $105,050 Expenses Advertising expense .................................... $ 500 Depreciation expense .................................. 8,700 Salaries expense .......................................... 50,329 Supplies expense ......................................... 5,700 Interest expense ........................................... 8,052 Insurance expense ....................................... 5,280 Utilities expense ........................................... 14,550 Total expenses......................................... 93,111 Profit .................................................................. $ 11,939
MOUNTAIN BEST LODGE Statement of Owner's Equity Year Ended May 31, 2017 M. Rundle, capital, June 1, 2016 ..................................... Add: Profit...................................................................... Less: Drawings ............................................................... M. Rundle, capital, May 31, 2017.....................................
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$54,800 11,939 66,739 18,750 $47,989
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PROBLEM 3-11B (Continued) (d) (Continued) MOUNTAIN BEST LODGE Balance Sheet May 31, 2017 Assets Cash................................................................... $ 12,365 Accounts receivable ......................................... 950 Prepaid insurance............................................. 2,640 Supplies............................................................. 760 Land ................................................................... 80,000 Buildings ........................................................... $180,000 Less: Accumulated depreciation ...................... 76,500 103,500 Furniture ................................................................ 21,000 Less: Accumulated depreciation ...................... 12,600 8,400 Total assets .............................................. $208,615 Liabilities and Owner's Equity Liabilities Accounts payable........................................................ $ 6,030 Unearned revenue ....................................................... 6,500 Salaries payable .......................................................... 1,025 Interest payable ........................................................... 671 Mortgage payable........................................................ 146,400 Total liabilities......................................................... 160,626 Owner's equity M. Rundle, capital ......................................................... 47,989 Total liabilities and owner's equity .......................... $208,615
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PROBLEM 3-11B (Continued) Taking It Further: The balance of the owner’s capital account that appears on the adjusted trial balance on May 31, 2017 does not correspond to the amount of the owner’s capital that appears on the balance sheet at that date. The reason for the difference is that the owner’s capital account in the trial balance is the opening balance and does not include the amount of the profit and the drawings taken by the owner for the year ended May 31, 2017.
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PROBLEM 3-12B (b) Nov.
8 Salaries Payable.............................. Salaries Expense ............................ Cash ............................................
500 600 1,100
10 Cash ................................................. 1,200 Accounts Receivable .................
1,200
12 Cash ................................................. 1,400 Service Revenue.........................
1,400
15 Equipment ....................................... 3,000 Accounts Payable ......................
3,000
17 Supplies........................................... Accounts Payable ......................
500 500
20 Accounts Payable ........................... 2,500 Cash ............................................ 22 Rent Expense .................................. Cash ............................................
300 300
25 Salaries Expense ............................ 1,300 Cash ............................................
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27 Accounts Receivable ...................... Service Revenue.........................
900
29 Cash ................................................. Unearned Revenue .....................
550
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2,500
1,300
900 550
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PROBLEM 3-12B (Continued) (d) PINE EQUIPMENT REPAIR Trial Balance November 30, 2017
Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Unearned revenue ............................................ S. Seed, capital ................................................. Service revenue ................................................ Salaries expense............................................... Rent expense ....................................................
Debit $ 740 2,210 2,500 13,000
Credit
$ 500 3,100 1,950 12,800 2,300 1,900 300 $20,650
$20,650
(e) Nov.
Solutions Manual .
30 Supplies Expense ............................. 1,500 Supplies ...................................... ($2,500 - $1,000 = $1,500) 30 Salaries Expense ............................ Salaries Payable .........................
500
30 Depreciation Expense..................... Accumulated Depreciation— Equipment...................................
100
1,500
500
100
30 Unearned Revenue ......................... 1,150 Service Revenue.........................
1,150
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PROBLEM 3-12B (Continued) (a), (c) and (e) 101 Nov. 1 Nov. 10 Nov. 12 Nov. 29 Bal.
Cash 2,790 1,200 1,400 550 740
Nov. 8 Nov. 20 Nov. 22 Nov. 25
112 Nov. 1 Nov. 27 Bal.
Accounts Receivable 2,510 Nov. 10 900 2,210
126 Nov. 1 Nov. 17 Bal.
Supplies 2,000 500 2,500 Nov. 30
Bal.
1,000
153 Nov. 1 Nov. 15 Bal.
Equipment 10,000 3,000 13,000
154
Solutions Manual .
1,100 2,500 300 1,300
1,200
1,500
Accumulated Depreciation-Equipment Nov. 1 500 Nov. 30 100 Bal. 600
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PROBLEM 3-12B (Continued) (a), (c) and (e) 201 Nov. 20
209
Nov. 30
212 Nov. 8
301
Solutions Manual .
Accounts Payable Nov. 1 2,500 Nov. 15 Nov. 17 Bal.
Unearned Revenue Nov. 1 Nov. 29 Bal. 1,150 Bal. Salaries Payable Nov. 1 500 Nov. 30 Bal.
2,100 3,000 500 3,100
1,400 550 1,950 800
500 500 500
S. Seed, Capital Nov. 1
12,800
Service Revenue Nov. 12 Nov. 27 Bal. Nov. 30 Bal.
1,400 900 2,300 1,150 3,450
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PROBLEM 3-12B (Continued) (a), (c) and (e)
Nov. 30 Bal.
Salaries Expense 600 1,300 1,900 500 2,400 Rent Expense 300 300 Depreciation Expense 100 100
Nov. 30 Bal.
Supplies Expense 1,500 1,500
Nov. 8 Nov. 25 Bal. Nov. 30 Bal. Nov. 22 Bal.
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PROBLEM 3-12B (Continued) (f) PINE EQUIPMENT REPAIR Adjusted Trial Balance November 30, 2017
Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Equipment ......................................................... Accumulated depreciation—equipment.......... Accounts payable ............................................. Salaries payable................................................ Unearned revenue ............................................ S. Seed, capital ................................................. Service revenue ................................................ Salaries expense............................................... Depreciation expense ....................................... Supplies expense ............................................. Rent expense ....................................................
Debit $ 740 2,210 1,000 13,000
Credit
$ 600 3,100 500 800 12,800 3,450 2,400 100 1,500 300 $21,250
$21,250
(g) PINE EQUIPMENT REPAIR Income Statement Month Ended November 30, 2017 Revenues Service revenue........................................... Expenses Depreciation expense ................................. Rent expense ............................................... Salaries expense ......................................... Supplies expense ........................................ Total expenses........................................ Loss ................................................................. Solutions Manual .
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$3,450 $ 100 300 2,400 1,500 4,300 $(850) Chapter 3
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PROBLEM 3-12B (Continued) (g) PINE EQUIPMENT REPAIR Statement of Owner's Equity Month Ended November 30, 2017
S. Seed, capital, November 1, 2017 ................................ Less: Loss ........................................................................ S. Seed, capital, November 30, 2017 ..............................
$12,800 850 $11,950
PINE EQUIPMENT REPAIR Balance Sheet November 30, 2017 Assets Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment ........................................................... $13,000 Less: Accumulated depreciation ........................ 600 Total Assets ..............................................
$ 740 2,210 1,000 12,400 $16,350
Liabilities and Owner’s Equity Liabilities Accounts payable........................................................ Unearned revenue ....................................................... Salaries payable .......................................................... Total liabilities.........................................................
$3,100 800 500 4,400
Owner’s Equity S. Seed, capital ................................................................ 11,950 Total liabilities and owner’s equity ................................$16,350
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PROBLEM 3-12B (Continued)
Taking It Further: The results from operations for the month of November, 2017 are negative with a loss of $850 experienced as shown on the income statement. Salaries expense is very high when compared to service revenue. As well, the supplies expense is very high. There is very little cash left to pay off the accounts payable. Even if the accounts receivable are collected immediately, there would not be enough cash. As a result, S. Seed was unable to withdraw any cash from the business in November.
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PROBLEM 3-13B (a) 1.
Dec. 31 Insurance Expense ($5,940 × 8/12) 3,960 Prepaid Insurance ......................
3,960
31 Supplies Expense ........................... 7,390 Supplies ($8,680 – $1,290) .........
7,390
31 Depreciation Expense ($24,240 ÷ 6) 4,040 Accumulated Depreciation— Equipment...................................
4,040
31 Unearned Revenue ......................... 4,000 Service Revenue.........................
4,000
2.
3.
4. 5.
6.
7.
8.
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31 Interest Expense ($14,000 × 5% × 3/12) ...................... Interest Payable .......................... 31 Salaries Expense ............................ Salaries Payable .........................
175 175 915 915
31 Accounts Receivable ...................... 2,000 Service Revenue......................... 31 Telephone Expense ........................ Accounts Payable ......................
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2,000
210 210
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PROBLEM 3-13B (Continued) (b) SHEK ENTERPRISES Adjusted Trial Balance December 31, 2017 Debit Credit Cash................................................................... $ 6,725 Accounts receivable ($10,915 + $2,000) .......... 12,915 Supplies ($8,680 − $7,390)................................ 1,290 Prepaid insurance ($5,940 − $3,960)................ 1,980 Equipment ......................................................... 24,240 Accumulated depreciation— equipment ($10,100 + $4,040)......................... $ 14,140 Note payable ..................................................... 14,000 Accounts payable ($5,765 + $210) ................... 5,975 Interest payable ................................................ 175 Salaries payable................................................ 915 Unearned revenue ($5,550 − $4,000) ............... 1,550 M. Shek, capital ................................................. 13,750 M. Shek, drawings ............................................ 85,000 Service revenue ($160,875 + $2,000 + $4,000)........................... 166,875 Depreciation expense ....................................... 4,040 Insurance expense ........................................... 3,960 Interest expense ($350 + $175) ........................ 525 Rent expense .................................................... 15,600 Salaries expense ($50,225 + $915)................... 51,140 Supplies expense ............................................. 7,390 Telephone expense ($2,365 + $210) ................ 2,575 $217,380 $217,380
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PROBLEM 3-13B (Continued) (c) SHEK ENTERPRISES Income Statement Year Ended December 31, 2017 Revenues Service revenue............................................ $166,875 Expenses Depreciation expense .................................. $ 4,040 Insurance expense ....................................... 3,960 Interest expense ........................................... 525 Rent expense ................................................ 15,600 Salaries expense .......................................... 51,140 Supplies expense ......................................... 7,390 Telephone expense ...................................... 2,575 Total expenses......................................... 85,230 Profit .................................................................. $ 81,645
SHEK ENTERPRISES Statement of Owner's Equity Year Ended December 31, 2017 M. Shek, capital, January 1, 2017.................................... Add: Profit ...................................................................... Less: Drawings .............................................................. M. Shek, capital, December 31, 2017 ..............................
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$13,750 81,645 95,395 85,000 $10,395
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PROBLEM 3-13B (Continued) (c) (Continued) SHEK ENTERPRISES Balance Sheet December 31, 2017 Assets Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Prepaid insurance............................................. Equipment ......................................................... $24,240 Less: Accumulated depreciation .................... 14,140 Total assets ..................................................
$ 6,725 12,915 1,290 1,980 10,100 $33,010
Liabilities and Owner's Equity Liabilities Notes payable .............................................................. $14,000 Accounts payable........................................................ 5,975 Interest payable ........................................................... 175 Salaries payable .......................................................... 915 Unearned revenue ....................................................... 1,550 Total liabilities......................................................... 22,615 Owner's equity M. Shek, capital ............................................................... 10,395 Total liabilities and owner's equity ............................ $33,010
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PROBLEM 3-13B (Continued) Taking It Further: Shek Enterprises is performing very well. Profit is positive and expenses represent only 51% of total revenues. On the other hand, Memphis Shek has withdrawn a large amount of cash from the company and consequently the cash and the owner’s equity are low. As a result, the ability of the business to pay its liabilities may be in jeopardy. Total cash and accounts receivable ($19,640) fall below the amount of the total liabilities ($22,615). This may not be a problem since the note payable is due more than 2 years in the future. Cash and receivables exceed liabilities that are payable within the coming year of $7,065 (total liabilities of $22,615 – note payable of $14,000 – unearned revenue of $1,550 = $7,065).
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (a), (c), and (e) Cash Date
Explanation
Ref. J102 J102 J102 J102 J102 J102 J102 J102
Aug. 31 Balance Sept. 1 8 10 12 20 22 25 29
Debit
Credit
10,000 1,100 1,200 3,400 4,500 1,000 1,200 700
Balance 1,880 11,880 10,780 11,980 15,380 10,880 9,880 8,680 9,380
Accounts Receivable Date
Explanation
Aug. 31 Balance Sept. 10 27
Ref. J102 J102
Debit
Credit
Balance
1,200
3,720 2,520 3,420
Credit
Balance
900
Prepaid Rent Date Sep. 22
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Explanation
Ref.
Debit
J102
500
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500
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Supplies Date
Explanation
Aug. 31 Balance Sept. 17 30 Adj. entry
Ref. J102 J103
Debit
Credit
Balance
1,020
800 2,300 1,280
Credit
Balance
1,500
Equipment Date
Explanation
Aug. 31 Balance Sept. 30
Ref. J102
Debit
15,000 18,000
3,000
Accumulated Depreciation—Equipment Date
Explanation
Aug. 31 Balance Sept. 30 Adj. entry
Ref.
Debit
J103
Credit
Balance
250
1,500 1,750
Credit
Balance
Accounts Payable Date
Explanation
Aug. 31 Balance Sept. 17 20 30
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Ref. J102 J102 J102
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Debit
1,500 4,500 3,000
3,100 4,600 100 3,100
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Unearned Revenue Explanation
Date
Aug. 31 Balance Sept. 29 30 Adj. entry
Ref.
Debit
J102 J103
Credit
Balance
700
400 1,100 450
Credit
Balance
775
700 0 775
Credit
Balance
42
42
Credit
Balance
10,000
10,000
Credit
Balance
650
Salaries Payable Explanation
Date
Aug. 31 Balance Sept. 8 30 Adj. entry
Ref.
Debit
J102 J103
700
Interest Payable Explanation
Date
Sep. 30 Adj. entry
Ref.
Debit
J103 Notes Payable
Explanation
Date Sep.
1
Ref.
Debit
J102
R. Pitre, Capital Date
Explanation
Aug. 31 Balance
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Ref.
3-150
Debit
15,700
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Service Revenue Date
Explanation
Sep. 12 27 30 Adj. entry
Ref.
Debit
J102 J102 J103
Credit
Balance
3,400 900 650
3,400 4,300 4,950
Credit
Balance
Depreciation Expense Date
Explanation
Sep. 30 Adj. entry
Ref.
Debit
J103
250
250
Interest Expense Date
Explanation
Sep. 30 Adj. entry
Ref.
Debit
J103
42
Credit
Balance 42
Rent Expense Date Sep. 22
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Explanation
Ref.
Debit
J102
500
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Credit
Balance 500
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued)
Salaries Expense Explanation
Date Sep.
8 25 30 Adj. entry
Ref.
Debit
J102 J102 J103
400 1,200 775
Credit
Balance 400 1,600 2,375
Supplies Expense Date
Explanation
Sep. 30 Adj. entry
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Ref.
Debit
J103
1,020
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Credit
Balance 1,020
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (b) GENERAL JOURNAL Date Sep.
Account Titles and Explanation
J102 Debit
Credit
1 Cash ........................................................... 10,000 Notes Payable....................................... 10,000 8 Salaries Payable .......................................... 700 Salaries Expense ......................................... 400 Cash ......................................................
1,100
10 Cash ........................................................... 1,200 Accounts Receivable ...........................
1,200
12 Cash ........................................................... 3,400 Service Revenue...................................
3,400
17 Supplies ..................................................... 1,500 Accounts Payable ................................
1,500
20 Accounts Payable ..................................... 4,500 Cash ......................................................
4,500
22 Rent Expense ............................................... 500 Prepaid Rent................................................. 500 Cash ......................................................
1,000
25 Salaries Expense ...................................... 1,200 Cash ......................................................
1,200
27 Accounts Receivable ................................... 900 Service Revenue...................................
900
29 Cash .............................................................. 700 Unearned Revenue ...............................
700
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a) (Continued) GENERAL JOURNAL Date
J102
Account Titles and Explanation
Debit
30 Equipment ................................................. 3,000 Accounts Payable ................................
Credit
3,000
(d) and (f) PITRE EQUIPMENT REPAIR Unadjusted and Adjusted Trial Balances September 30, 2017
Cash Accounts receivable Prepaid rent Supplies Equipment Accumulated depreciation —equipment Accounts payable Unearned revenue Salaries payable Interest payable Notes payable R. Pitre, capital Service revenue Depreciation expense Interest expense Rent expense Salaries expense Supplies expense
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Unadjusted Dr. Cr. $ 9,380 3,420 500 2,300 18,000
Adjusted Dr. Cr. $ 9,380 3,420 500 1,280 18,000
$ 1,500 3,100 1,100 0 0 10,000 15,700 4,300
$ 1,750 3,100 450 775 42 10,000 15,700 4,950
0 250 0 42 500 500 1,600 2,375 0 1,020 _ $35,700 $35,700 $36,767 $36,767 3-154
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (e) GENERAL JOURNAL Date 1.
Account Titles and Explanation
J103 Debit
Credit
Sep. 30 Supplies Expense .............................. 1,020 Supplies ($2,300 – $1,280) ............
1,020
30 Salaries Expense................................ Salaries Payable ............................
775 775
30 Depreciation Expense........................ Accumulated Depreciation —Equipment .................................. [($15,000 ÷ 5 years) × 1/12]
250
2.
3.
4.
5.
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250
30 Unearned Revenue............................. 650 Service Revenue ($400 + $700 – $450)
650
30 Interest Expense ($10,000 × 5% × 1/12) 42 Interest Payable .............................
42
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (g) PITRE EQUIPMENT REPAIR Income Statement Month Ended September 30, 2017 Revenues Service revenue........................................... Expenses Depreciation expense ................................. Interest expense.......................................... Rent expense............................................... Salaries expense ......................................... Supplies expense........................................ Total expenses......................................... Profit ..................................................................
$4,950 $ 250 42 500 2,375 1,020 4,187 $ 763
PITRE EQUIPMENT REPAIR Statement of Owner's Equity Month Ended September 30, 2017 R. Pitre, capital, September 1, 2017.................................. $15,700 Add: Profit ........................................................................ 763 R. Pitre, capital, September 30, 2017 ................................ $16,463
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (g) (Continued) PITRE EQUIPMENT REPAIR Balance Sheet September 30, 2017 Assets Cash.................................................................... Accounts receivable .......................................... Prepaid rent........................................................ Supplies.............................................................. Equipment ........................................................... $18,000 Less: Accumulated depreciation ..................... 1,750 Total assets ...................................................
$ 9,380 3,420 500 1,280 16,250 $30,830
Liabilities and Owner's Equity Liabilities Accounts payable........................................................ Salaries payable .......................................................... Interest payable ........................................................... Unearned revenue ....................................................... Notes payable .............................................................. Total liabilities.........................................................
$ 3,100 775 42 450 10,000 14,367
Owner's equity R. Pitre, capital ................................................................ 16,463 Total liabilities and owner's equity ............................ $30,830
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BYP3-1 FINANCIAL REPORTING PROBLEM (a) The title used by Corus Entertainment for its income statement is “Consolidated Statements of Income and Comprehensive Income.” For its balance sheet Corus uses “Consolidated Statements of Financial Position”. (b)Depreciation and amortization expense was $24,068,000 in 2014 and $26,812,000 in 2013. (c) Instead of using the term profit, Corus uses the term Net Income. This is a more common term for public companies. (d)Corus shows prepaid expenses on its balance sheet. These prepaid expenses may include prepaid insurance and prepaid rent.
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BYP3-2 INTERPRETING FINANCIAL STATEMENTS (a)
Revenue from monthly subscriber fees are recognized on a prorata basis as the service is provided.
(b) Rogers should record unearned revenue from its subscription services when customers prepay their account, before the service is provided. It should record unearned revenue for its Blue Jays home game admission revenue when tickets are purchased in advance of the games. (c)
If unearned revenue were recorded as revenue, profit and therefore owner’s equity would be overstated. Liabilities would be omitted and therefore, would be understated.
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BYP3-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP3-4 COMMUNICATION ACTIVITY Memorandum To: From: Student Date: Re: Cash versus accrual basis of accounting for profit
The accrual basis of calculating profit recognizes revenues as they are earned and expenses when they are incurred. The cash basis of calculating profit recognizes revenues when cash is received and expenses when cash is paid. The accrual basis of calculating profit is a better measure of performance than the cash method because earnings reflect economic events in the period that they occur. Using the revenue and expense recognition principles ensures that the effect of events are recorded in the same period and provides a better measure of a company’s economic performance. It is possible for management to manipulate profit using both the cash basis and accrual basis of accounting. Using the cash basis, profit can be manipulated by changing the timing of payments, for example deferring payment of expenses. Using the accrual basis, profits can be manipulated by changing estimates in calculating expenses, for example management can increase profit by increasing the useful life of long-lived assets.
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BYP3-5 “ALL ABOUT YOU” ACTIVITY (a)
Chapter 1 introduced the concept and definition of an asset as a resource owned and controlled by the entity that is capable of producing future services or benefits. The benefits are generally focussed around the production of revenue to make profits and increase the equity (wealth) of the owner(s). While education costs resemble payments made by a business as an investment toward the production of future earning of revenue, there is too much uncertainty to record these costs as assets. Education is generally acquired by a person in the hopes of obtaining knowledge that will be useful in earning employment or other income. This advantage is nontransferable and the likelihood of realizing the future production of revenue is uncertain and cannot be reasonably measured. Consequently it should be treated as an expense. When a business spends money training its employees, that cost is also expensed.
(b) The program of study chosen by a student might enhance the likelihood of earning income if the program of study will help the student in obtaining a profession or a job that is in high demand. However, the risk that education will not lead to better earning potential for the student remains too strong to warrant treating these costs as an asset. Consequently, we would still conclude that education costs should be expensed. (c)
Cost-benefit analysis is unconsciously applied to purchases or expenditures made by individuals. But the benefit received may be consumed in the present. An example would be the rest and relaxation obtained from a vacation to Hawaii. It is only when the expenditure will result in a future benefit that it can be recorded as an asset.
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BYP3-5 (Continued) (c) (Continued) As an education may result in a future benefit, it is more reasonable to consider recording the cost of your education as an asset than the cost of a vacation that doesn’t have a future benefit. But as already discussed, the benefit is still too uncertain to record your education costs as an asset. (d) When applying for a loan, an applicant will present to the financial institution, a list of assets, a list of debts, and an employment history to demonstrate an ability to repay the loan. If the assets listed are understated, the loan application might be unsuccessful. If the assets presented to the bank are overstated and the expenses understated, the bank might be more receptive to the loan application. However, if it is later determined that you falsified your application then this could result in the bank calling your loan or in damage to your credit rating.
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BYP3-6 Santé Smoothie Saga
(a) Apr. 30 Supplies Expense ..................................... Supplies ................................................ ($198 − $105)
93 93
30 Accounts Receivable ................................ Revenue ................................................
175
30 Salaries Expense ...................................... Salaries Payable ................................... (4 hours x $12)
48
175
48
30 Depreciation Expense .............................. 23 Accumulated Depreciation—Equipment ($825 ÷ 36 months)
23
30 Interest Expense ....................................... Interest Payable.................................... ($3,000 × 3% × 1/12 × 1/2)
4
Apr. 13 Apr. 15 Apr.28
Cash 900 3,000 Apr. 18 125 Apr. 20
Bal.
3,502
Apr. 23 Apr. 30 Bal.
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325 198
Accounts Receivable 300 175 475
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BYP3-6 (Continued) (a) (Continued)
Apr. 20 Bal.
Supplies 198 Apr. 30 105
Apr. 22
Equipment 825
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93
Accumulated Depreciation-Equipment Apr. 30
23
Accounts Payable Apr. 24
98
Salaries Payable Apr. 30
48
Interest Payable Apr. 30
4
Unearned Revenue Apr. 28
125
Notes Payable Apr. 15
3,000
N. Koebel, Capital Apr. 13 Apr. 22 Bal.
900 825 1,725
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BYP3-6 (Continued) (a) (Continued) Revenue Apr. 23 Apr. 30 Bal.
Apr. 18
Advertising Expense 325
Apr. 30
Salaries Expense 48
Apr. 30
Depreciation Expense 23
Apr. 24
Telephone Expense 98
Apr. 30
Supplies Expense 93
Apr. 30
Interest Expense 4
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300 175 475
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BYP3-6 (Continued) (b) SANTÉ SMOOTHIES Adjusted Trial Balance April 30, 2017 Debit $3,502 475 105 825
Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment .......................................................... Accumulated depreciation—equipment........... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Unearned revenue ............................................. Notes payable .................................................... N. Koebel, capital ............................................... Revenue.............................................................. Salaries expense................................................ 48 Advertising expense .......................................... 325 Telephone expense............................................ 98 Supplies expense .............................................. 93 Depreciation expense ........................................ 23 Interest expense ................................................ 4 Totals ............................................................. $5,498
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Credit
$
23 98 48 4 125 3,000 1,725 475
$5,498
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BYP3-6 (Continued) (c) SANTÉ SMOOTHIES Income Statement For the month ended April 30, 2017 Revenues Revenue .................................................................. $475 Expenses Advertising expense .............................................. $325 Telephone expense ................................................ 98 Supplies expense ................................................... 93 Depreciation expense ............................................ 23 Salaries expense .................................................... 48 Interest expense ..................................................... 4 591 Loss ............................................................................ $(116)
(d)
No, Santé Smoothies was not profitable in the first month of operations. It has a loss of $116. The main reason for the loss was the high cost of initial advertising. It is better to measure profitability after preparing and posting the adjusting journal entries instead of before. By implementing accrual accounting, a better measure of the amount of revenue and expenses for the accounting period is achieved, and consequently, a fairer report of profit performance.
(e)
Natalie has $3,502 in cash available to her to operate the business going forward. The amount is different because cash includes transactions that do not affect profit directly such as the $3,000 loan from her mother and the unearned revenue. Profit also includes items for which cash has not yet been received or paid such as accounts receivable and telephone expense. The cash balance of $3,502 plus $475 in outstanding accounts receivable total $3,977. If we ignore the note payable to Natalie’s mother and the unearned revenue, there remain very few liabilities that will need cash payments in the very near future.
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BYP3-6 (Continued) (e) (Continued) Even though the company has more cash and receivables than liabilities, Natalie may have to borrow additional money from her mother in order to purchase additional supplies and equipment to grow her business. She also has not taken any money out of the business as withdrawals to pay her living expenses.
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Accounting Principles, Seventh Canadian Edition
CHAPTER 4 Completion of the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Questions
Brief Exercises
Problems Set A
Problems Set B
1. Prepare closing entries and a postclosing trial balance. 2. Explain the steps in the accounting cycle including optional steps and the preparation of correcting entries. 3. Prepare a classified balance sheet. 4. Illustrate measures used to evaluate liquidity. *5. Prepare a work sheet (Appendix 4A).
1, 2 ,3, 4, 5, 6
1, 2, 3, 4, 6, 7
1, 2, 3, 4, 5, 6, 7, 8, 9, *19 8, 9, 10, 11
1, 2, 3, 4, 5, 6, 7, 9, *13 5, 6, 7, 8
1, 2, 3, 4, 5, 6, 7, 9, *13 5, 6, 7, 8
6, 7, 8, 9, 10, 11,
7
12, 13, 14, 15, 16, 17 18, 19, 20
8, 9, 10, 11, 12 13, 14, 15
12, 13, 14, 15 15, 16
2, 3, 4, 6, 7, 9 9, 10
9, 10
*21, *22, *23
*16, *17
*17, *18
*11, *12
*13, *14
*6. Prepare reversing entries (Appendix 4B).
*24, *25
*18, *19
*19, *20
*13, *14
1, 2, 3, 4, 5, 6, 7, 9, *13
Exercises
*11, *12
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendix to each chapter.
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Difficulty Level
Time Allotted (min.)
Prepare closing entries, and a post-closing trial balance. Prepare financial statements, closing entries and post-closing trial balance.
Simple
30-40
Simple
40-50
3A
Prepare financial statements, closing entries and post-closing trial balance.
Simple
70-80
4A
Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.
Simple
60-70
5A
Complete all steps in the accounting cycle.
Moderate
80-100
6A
Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.
Simple
60-70
7A
Analyze errors and prepare corrections.
Moderate
60-70
8A
Determine impact of errors on financial statements, and correct.
Moderate
60-70
9A
Calculate capital account balance; prepare classified balance sheet and liquidity ratios.
Moderate
30-40
10A
Calculate current assets and liabilities, working capital, current ratio, and acid-test ratio; comment on liquidity.
Moderate
30-35
*11A
Prepare work sheet.
Moderate
50-60
*12A
Prepare work sheet.
Moderate
50-60
*13A
Prepare and post adjusting, closing, reversing, and cash transaction entries.
Moderate
40-50
*14A
Prepare adjusting, reversing and subsequent cash entries.
Simple
40-50
Problem Number 1A 2A
Description
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Difficulty Level
Time Allotted (min.)
Prepare closing entries, and a post-closing trial balance. Prepare financial statements, closing entries and post-closing trial balance.
Simple
30-40
Simple
40-50
3B
Prepare financial statements, closing entries and post-closing trial balance.
Simple
70-80
4B
Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.
Simple
60-70
5B
Complete all steps in accounting cycle.
Moderate
90-120
6B
Prepare adjusting entries, adjusted trial balance, financial statements, and closing entries.
Simple
60-70
7B
Analyze errors and prepare corrections.
Moderate
60-70
8B
Determine impact of errors on financial statements, and correct.
Moderate
60-70
9B
Calculate capital account balance; prepare classified balance sheet and liquidity ratios.
Moderate
30-40
10B
Calculate current assets and liabilities, working capital, current ratio, and acid-test ratio; comment on liquidity.
Moderate
30-35
11B
Prepare work sheet.
Moderate
50-60
12B
Prepare work sheet.
Moderate
50-60
*13B
Prepare and post adjusting, closing, reversing, and cash transaction entries.
Moderate
40-50
*14B
Prepare adjusting, reversing and subsequent cash entries.
Simple
40-50
Problem Number 1B 2B
Description
Solutions Manual .
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material
1. Prepare closing Q4-4 entries and a post- BE4-1 closing trial balance.
Comprehension Q4-1 Q4-2 Q4-3 Q4-5
2. Explain the steps BE4-6 in the accounting Q4-8 cycle including optional steps and the preparation of correcting entries.
Q4-5 Q4-6 Q4-7 Q4-9 Q4-10 Q4-11
3.
Prepare a Q4-14 classified balance Q4-17 sheet. BE4-8
Q4-12 Q4-13 Q4-15 Q4-16
4.
Illustrate BE4-13 measures used to evaluate liquidity.
Q4-18 Q4-19 Q4-20
Learning Objective
Knowledge
*5. Prepare a work sheet (Appendix 4A).
*Q4-21 *Q4-22 *Q4-23
*6. Prepare reversing entries (Appendix 4B).
*Q4-24 *Q4-25
Broadening Your Perspective
Solutions Manual .
BYP4-3 BYP4-4
Application BE4-2 BE4-3 BE4-4 BE4-5 BE4-7 E4-1 E4-2 E4-3 E4-4 E4-5 E4-6 BE4-7 E4-8 E4-9 E4-10 E4-11 P4-5A P4-6A BE4-9 BE4-10 BE4-11 BE4-12 E4-12 E4-13 P4-1A
E4-7 E4-8 E4-9 *E4-19 P4-1A P4-2A P4-3A P4-4A P4-5A P4-6A P4-7A
Synthesis
Evaluation
P4-9A *P4-13A P4-1B P4-2B P4-3B P4-4B P4-5B P4-6B P4-7B P4-9B *P4-13B P4-7A P4-8A P4-5B P4-6B P4-7B P4-8B
P4-2A P4-3A P4-2A P4-3A P4-4A P4-6A P4-7A
P4-9A P4-2B P4-3B P4-4B P4-6B P4-7B P4-9B
BE4-14 BE4-15 P4-9A P4-9B *BE4-16 *BE4-17 *E4-17 *E4-18
*P4-11A *P4-12A *P4-11B *P4-12B
*BE4-18 *BE4-19 *E4-19 *E4-20
*P4-13A *P4-14A *P4-13B *P4-14B
E4-14 E4-15 P4-10A P4-10B
E4-15 E4-16 P4-8A P4-8B
Santé Smoothie Cumulative Coverage BYP4-1
4-4
Analysis
BYP4-2 BYP4-6
BYP4-5
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Permanent accounts appear on the balance sheet and are never closed at the end of the annual accounting year. Temporary accounts do not appear on the balance sheet and are closed at the end of the year. The net result of the closing entries updates the owner’s equity capital account, a permanent account on the balance sheet.
2.
Closing entries are made at the end of an accounting period after preparation of the financial statements to: a. transfer revenue, expense, and drawings account balances to the owner’s capital account, and b. reset these temporary account balances to zero.
3.
The Income Summary account is used to avoid having a lot of detailed entries on the permanent owner’s capital account. The summary data posted to the Income Summary account are the totals of revenue and expense accounts. After posting the closing entries of the revenue and expense accounts, the balance in the Income Summary account should equal the profit or loss for the period. If the amounts are equal, it indicates the closing entries prepared so far have been journalized and posted correctly.
4.
Preparing and posting closing entries should only be done at the end of the fiscal year, not at the end of each accounting period (such as the end of each month). If the accounting period in question is the fiscal year end, then Kathleen is correct. If the period in question is not the fiscal year end, it is necessary to carry forward balances from one accounting period to the next to ensure that all transactions for the fiscal year to date are reported on the financial statements.
5.
The post-closing trial balance lists only permanent accounts after the closing entries have been journalized and posted. Its purpose is to prove the equality of the permanent accounts that are carried forward to the next accounting period. This indicates that all closing entries have been journalized and posted correctly. The account balance appearing in the owner’s capital account must correspond to the ending balance appearing in the statement of owner’s equity. This trial balance also verifies that the temporary accounts have been properly reset to zero, ready for the posting of transactions of the next fiscal year.
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 6.
Analyzing business transactions is a critical and necessary step in the accounting cycle because at this step, we determine whether or not the business’s financial position has changed. Through this analysis, we determine which accounts have been changed and whether the accounts involved have increased or decreased by an amount that can be measured.
7.
(1) The purpose of the unadjusted trial balance is to prove that the ledger is mathematically accurate. It is used primarily when scrutinizing account balances to decide which accounts need adjustments at the end of the accounting cycle. (2) The purpose of the adjusted trial balance is also to prove that the ledger is mathematically accurate following the posting of adjusting journal entries. The adjusted trial balance is then used to prepare all of the financial statements at the end of the accounting cycle. (3) Finally, the purpose of the post-closing trial balance is to prove the equality of the permanent account balances that are carried forward to the next accounting period. The post-closing trial balance provides evidence that the closing entries have been prepared and posted properly to the accounts and it also shows that the accounting equation is in balance at the end of the accounting period and the beginning of the next accounting period.
8.
a) Daily: Analyze transactions and journalize transactions. b) Periodic: Post to ledger, prepare a trial balance, journalize and post adjusting entries, prepare an adjusted trial balance, prepare financial statements. c) Fiscal year end: Journalize and post closing entries, prepare a postclosing trial balance.
9.
Correcting entries differ from adjusting entries because they (1) are not a required part of the accounting cycle if no errors have been made, (2) may be made at any time, and (3) may affect any combination of accounts. Adjusting entries are an important step in the accounting cycle, required to implement accrual accounting. Adjusting entries will always affect an income statement and a balance sheet account and they are prepared at the end of an accounting cycle.
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Chapter 4
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 10.
Correcting entries are necessary. Without correcting entries, the accounts in the ledger would be incorrect. The information reported on the financial statements would also be incorrect. Cristobal’s suggestion of erasing or removing previously recorded incorrect entries and replacing them with correct entries is not acceptable. The preparers and users of the accounting information could not rely on the completeness and accuracy of the entries to reflect the transactions of the business. Correcting entries leave behind a proper trail of the original incorrect journal entry and the entry recorded for the correction of the error. Once an incorrect journal entry has been posted to the ledger, a correcting entry is required to fix the error.
11.
In order to properly correct for entry errors, it is important to identify which accounts should have been involved in the transaction and which accounts were used to record the transaction. As well, it is important to determine if the amounts that have been recorded are correct. By comparing what should have been recorded to what was actually recorded, the correcting entry may be determined. The accounts that are not in error can be omitted from the correcting entry. An alternative is to reverse the incorrect entry and to then record the correct entry.
12.
Current assets are normally cash and other assets that are expected to be converted to cash, sold, or used up within one year from the balance sheet date or within its operating cycle. Current liabilities are obligations that are expected to be settled within one year from the balance sheet date or in the company’s operating cycle. On the other hand, non-current assets are assets that are not expected to be converted to cash, sold, or used by the business within one year of the balance sheet date or within its operating cycle. Basically that means that non-current assets are everything not classified as a current asset. Non-current liabilities are obligations that are expected to be paid after one year or longer.
13.
A company’s operating cycle is the average time it takes to go from starting with cash and ending with cash in producing revenues.
14.
The standard classifications that are used in the preparation of a classified balance sheet include: Assets Liabilities and Owner’s Equity Current assets Current liabilities Long-term investments Non-current liabilities Property, plant, and equipment Owner’s (shareholders’) equity Intangible assets Goodwill
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 15.
Current assets for a Canadian company are listed in liquidity order on the balance sheet. The accounts listed will appear in the following order: cash, short-term investments, accounts receivable, inventory, supplies, and lastly, prepaid insurance.
16.
Long-term investments are assets that can be realized in cash. However, the conversion is not expected within one year. They include shares (equity) and bonds (debt) of other companies. Property, plant, and equipment assets are resources that have a physical substance, are used in the business, and are not intended for resale.
17.
Intangible asset are long-lived assets that do not have physical substance and are rights and privileges that result from ownership. They include patents, copyrights, trademarks, trade names, and licences. They are similar to property, plant, and equipment, but lack physical substance. Goodwill is separate from intangibles because it does not exist on its own and can only exist along with the business to which it relates. Goodwill is only recorded when purchased. Intangibles are listed below property, plant and equipment, followed by goodwill on the balance sheet.
18.
Liquidity is the ability of a company to pay its obligations that become due within the next year. One measure of liquidity is working capital. Other measures include the current and acid-test ratios.
19.
Ratios should never be interpreted without considering certain factors: (1) general economic and industry conditions, (2) other specific financial information about the company over time, and (3) the ratios should be compared to the ratios for other companies in the same or related industries.
20.
The acid-test ratio is a measure of the company’s immediate short-term liquidity. The acid-test ratio is calculated by dividing the sum of cash, short-term investments, and accounts receivable by current liabilities. The current ratio is a measure of the short-term debt-paying ability that is determined by dividing all current assets by current liabilities.
*21. To calculate the income on a work sheet, each of the financial statement columns must be totalled. The profit or loss for the period is then found by calculating the difference between the totals of the two income statement columns. If a company has profit, the amount is entered in the income statement debit column and the balance sheet credit column of the work sheet. If the company has a loss, the amount is entered in the income statement credit column and in the balance sheet debit column of the work sheet.
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Chapter 4
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) *22. No. The preparation of the work sheet is not a required step in the accounting cycle and consequently it is not part of the company’s permanent accounting records. The work sheet is simply an optional tool for completing steps 4-6 (trial balance, adjusting entries, adjusted trial balance) and for assisting with step 7 (prepare financial statements) in the accounting cycle. *23. Using a work sheet, accountants can prepare financial statements before adjusting entries have been journalized and posted. However, the completed work sheet is not a substitute for formal financial statements. Data in the financial statement columns of the work sheet are not properly arranged for statement purposes. Also, the financial statement presentation for some accounts differs from their statement columns on the work sheet. A work sheet is basically an accountant’s working tool. It is not given to management or other parties. *24. A reversing entry is an optional entry that is the exact opposite, both in amount and in account titles, of an adjusting entry for an accrual. Reversing entries are prepared at the beginning of the accounting period and are used to simplify the recording of subsequent transactions related to the accrual adjustments. *25. It is helpful to use reversing entries for accruals because then the payment can be processed in the normal manner without having to check whether there has been an accrual, i.e., all cash payments can be debited to the appropriate expense account. The use of reversing entries does not change the amounts reported in the financial statements. It simply makes it easier to record transactions in the next accounting period.
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1 1. (NC) 2. (NC) 3. (C) 4. (C) 5. (NC) 6. (C) 7. (NC) 8. (NC) 9. (C) 10. (NC) 11. (NC) 12. (C) 13. (NC) 14. (NC)
Accounts payable Accounts receivable Depreciation expense Operating expenses Unearned revenue Interest expense S. Young, capital Notes payable Rent revenue Prepaid expenses Equipment S. Young, drawings Accumulated depreciation Supplies
BRIEF EXERCISE 4-2 July 31 Service Revenue................................. 16,400 Income Summary ...........................
16,400
31 Income Summary ............................... 10,900 Salaries Expense ........................... Rent Expense .................................
8,400 2,500
31 Income Summary ............................... T. Arid, Capital ...............................
5,500
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-3 (a) Nov. 30 Service Revenue................................. 38,500 Income Summary ...........................
38,500
30 Income Summary ............................... 12,250 Insurance Expense ........................ Rent Expense ................................. Supplies Expense ..........................
2,750 8,000 1,500
30 Income Summary ............................... 26,250 L. Wilfrid, Capital ...........................
26,250
30 L. Wilfrid, Capital ................................ 29,000 L. Wilfrid, Drawings .......................
29,000
(b)
The closing balance of the L. Wilfrid, Capital account at November 30, 2017 is $39,250, calculated as follows: L. Wilfrid, Capital 42,000 26,250 29,000 Bal.
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-4 Oct
31 Service Revenue................................. 130,000 Income Summary ...........................
130,000
31 Income Summary ............................... 105,000 Maintenance Expense ................... Rent Expense ................................. Salaries Expense ...........................
23,000 10,000 72,000
31 Income Summary ................................. 25,000 N. Mosquera, Capital .....................
25,000
31 N. Mosquera, Capital ............................ 45,000 N. Mosquera, Drawings .................
45,000
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Chapter 4
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-5 MOSQUERA GOLF CLUB Post-Closing Trial Balance October 31, 2017 Debit Cash .................................................................... $ 7,500 Prepaid expenses............................................... 3,000 Equipment........................................................... 65,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Unearned revenue .............................................. N. Mosquera, capital ......................................... $75,500
Credit
$15,000 14,000 1,500 45,000* $75,500
* N. Mosquera, Capital 65,000 25,000 45,000 45,000
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Chapter 4
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-6 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 the ledger accounts Prepare a trial balance Journalize and post the adjusting entries Prepare an adjusted trial balance Prepare the financial statements Journalize and post the closing entries Prepare a post-closing trial balance
Filling in the blanks, the answers are 9, 6, 1, 4, 2, 8, 7, 5, 3.
BRIEF EXERCISE 4-7 1.
2.
3.
Solutions Manual .
Service Revenue ................................... Accounts Receivable .....................
750
Unearned Revenue................................ Service Revenue.............................
600
Roch Hébert, Drawings ......................... Salaries Expense ............................
500
4-14
750
600
500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-8 Accounts payable........................................... CL Accounts receivable ...................................... CA Cash ................................................................ CA L. Dawn, capital .............................................. OE Patents ............................................................ IA Salaries payable ............................................. CL Merchandise inventory .................................. CA Short-term investments ................................. CA Accumulated depreciation – equipment .......... PPE Buildings ............................................................ PPE Land ................................................................... PPE Notes payable ..................................................... LTL Supplies .......................................................... CA Equipment.......................................................... PPE Prepaid expenses........................................... CA
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-9 DARIUS COMPANY Balance Sheet December 31, 2017 (a) Current assets Cash............................................................................... $ 16,400 Short-term investments................................................ 8,200 Accounts receivable ..................................................... 14,500 Merchandise inventory................................................. 9,000 Supplies......................................................................... 4,200 Prepaid insurance......................................................... 1,600 Total current assets ................................................. $53,900 (b) Long-term investments Notes receivable (due February 1, 2019).........$ 5,500 Property, plant, and equipment Vehicles ............................................................... 22,500 Intangible assets Patents ..................................................................3,900 Goodwill .....................................................................9,250 Current liabilities Unearned revenue ................................................2,900
BRIEF EXERCISE 4-10 Current assets Cash............................................................................... $ 4,100 Short-term investments................................................ 6,700 Accounts receivable ..................................................... 12,500 Supplies......................................................................... 5,200 Prepaid insurance......................................................... 3,600 Total current assets ................................................. $32,100
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-11 Current liabilities Accounts payable ......................................................... Interest payable ............................................................ Unearned revenue ........................................................ Current portion of mortgage payable .......................... Notes payable ...............................................................
$ 8,500 750 2,500 5,000 6,700
Total current liabilities ............................................. $23,450
BRIEF EXERCISE 4-12 ODOM COMPANY Balance Sheet December 31, 2017 Non-current assets Property, plant, and equipment Land .................................................. $85,000 Buildings ........................................ $125,000 Less: Accumulated depreciation ... 37,400 87,600 Equipment .......................................... 43,000 Less: Accumulated depreciation .. 25,800 17,200 $189,800 Intangible assets Patents .............................................................................. 12,300 Goodwill ............................................................................ 5,520
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-13 Working capital = Current assets − Current liabilities Big River: Working capital = $1,000,000 − $900,000 = $100,000 Small Fry: Working capital = $200,000 − $100,000 = $100,000 Current ratio = Current assets ÷ Current liabilities Big River: Current ratio = $1,000,000 ÷ $900,000 = 1.11:1 Small Fry: Current ratio = $200,000 ÷ $100,000 = 2.00:1 The working capital is the same for both companies but Small Fry Company’s current ratio is much stronger. The current ratio is more relevant.
BRIEF EXERCISE 4-14 = Current assets − Current liabilities Year 1: $95,000 - $65,000 = $30,000 Year 2: $150,000 - $100,000 = $50,000 Year 3: $200,000 - $95,000 = $105,000
(a) Working capital
Current ratio = Current assets ÷ Current liabilities Year 1 = $95,000 ÷ $65,000 = 1.46:1 Year 2 = $150,000 ÷ $100,000 = 1.5:1 Year 3 = $200,000 ÷ $95,000 = 2.11:1 The calculations for Jones Co. show a trend of improvement in the current ratio, demonstrating increasing liquidity.
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 4-15 (a) (1) Working capital = Current assets − Current liabilities Working capital 2016 = $33,510 − $24,800 = $8,710 Working capital 2017 = $35,100 − $24,460 = $10,640 (2) Current ratio = Current assets ÷ Current liabilities Current ratio 2016 = $33,510 ÷ $24,800 = 1.35:1 Current ratio 2017 = $35,100 ÷ $24,460 = 1.43:1 (3) Acid-test ratio
= (Cash + Accounts Receivable + Short-term Investments) ÷ Current liabilities
Acid-test ratio 2016
= $20,430 ÷ $24,800 = 0.82:1
Acid-test ratio 2017
= $22,680 ÷ $24,460 = 0.93:1
(b) All three measures of Drew Co.’s improvement in 2017 compared to 2016.
liquidity
show
*BRIEF EXERCISE 4-16
Totals Profit Totals
Income Statement Dr. Cr. 75,000 95,500 20,500 95,500 95,500
Balance Sheet Dr. Cr. 191,000 170,500 20,500 191,000 191,000
Coulombe Company had a profit for 2017. Revenue exceeded expenses by $20,500, which increased retained earnings.
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Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 4-17
Totals Loss Totals
Income Statement Dr. Cr. 53,875 43,425 10,450 53,875 53,875
Balance Sheet Dr. Cr. 55,550 66,000 10,450 66,000 66,000
Orange Line Company had a loss for 2017. Expenses exceeded revenue by $10,450, which decreased retained earnings.
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Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 4-18 (a) Dec. 31 Salaries Expense .................................. Salaries Payable............................... To accrue salaries at year-end. (b) Dec. 31 Income Summary.................................. Salaries Expense.............................. Closing entry
1,700 1,700
1,700 1,700
(c)
Jan. 1
Salaries Payable ....................................... 1,700 Salaries Expense.............................. To reverse Dec. 31 accrual.
1,700
4 Salaries Expense ..................................... 3,000 Cash .................................................. To record Jan. 4 payment of salary.
3,000
(d)
Date
Salaries Expense Explanation Ref. Debit
Credit Balance
Dec. 31 31 Jan. 1 4
Accrual Closing entry Reversing entry Payment of salary
3,000
1,700 Dr. 1,700 0 1,700 1,700 Cr. 1,300 Dr.
Date
Salaries Payable Explanation Ref. Debit
Credit Balance
1,700
Dec. 31 Accrual Jan. 1 Reversing entry
1,700 1,700
1,700 0
The balances after posting the entries are a debit of $1,300 in Salaries Expense and $0 in Salaries Payable.
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Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 4-19 (a) Dec. 31 Interest Receivable ............................... 1,125 Interest Revenue .............................. To accrue interest at year-end. ($90,000 × 5% × 3/12 = $1,125) (b) Jan.1 Interest Revenue................................... 1,125 Interest Receivable .......................... To record reversing entry. (c) Mar. 1 Cash ...................................................... 91,875 Notes Receivable ............................. Interest Revenue .............................. To record collection of note and interest. ($90,000 × 5% × 5/12 = $1,875)
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1,125
1,125
90,000 1,875
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 4-1 (a) Dec. 31 Revenues .............................................. 50,000 Income Summary ...........................
50,000
31 Income Summary ................................. 34,000 Salaries Expense ........................... Rent Expense ................................. Supplies Expense ..........................
21,000 6,000 7,000
31 Income Summary ................................. 16,000 L. Lee, Capital ................................
16,000
31 L. Lee, Capital ......................................... 2,000 L. Lee, Drawings ............................
2,000
(b) Clos. Clos.
Clos.
Clos.
Income Summary 34,000 Clos. 50,000 Bal. 16,000 16,000 Bal. 0 L. Lee, Capital Bal. 2,000 Clos. Bal. Revenues 50,000 Bal. Bal.
Bal. Bal.
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Rent Expense 6,000 Clos. 0
30,000 16,000 44,000
50,000 0
6,000
4-23
Bal. Bal.
L. Lee, Drawings 2,000 Clos. 2,000 0
Salaries Expense Bal. 21,000 Clos. 21,000 Bal. 0 Supplies Expense Bal. 7,000 Clos. 7,000 Bal. 0
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-2 (a) VICTOIRE ESTHETICS Statement of Owner's Equity Month Ended August 31, 2017 B. Victoire, capital, August 1, 2017 ................................ Add: Investment .............................................................. Profit ....................................................................... Less: Drawings............................................................... B. Victoire, capital, August 31, 2017 ..............................
$ 9,000 2,000 7,000 18,000 4,700 $13,300
(b) Aug. 31 Income Summary ................... B. Victoire, Capital .............
7,000
31 B. Victoire, Capital.................. B. Victoire, Drawings .........
4,700
7,000
4,700
Income Summary Aug. 31 8,000 Aug. 31 15,000 Bal. 7,000 Clos. 7,000 Bal. 0 V. Victoire, Capital Aug. 31 11,000 Clos. 31 4,700 Clos. 31 7,000 Bal. 13,300
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V. Victoire, Drawings Aug. 31 4,700 Clos. 4,700 Bal. 0
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-3 GENERAL JOURNAL Date
Account Titles
J15 Debit
Credit
July 31 Service Revenue................................. 75,000 Interest Revenue ................................ 320 Income Summary ...........................
75,320
31 Income Summary ............................... 81,300 Depreciation Expense ................... Interest Expense ............................ Rent Expense ................................. Salaries Expense ........................... Supplies Expense ..........................
2,850 3,000 18,550 36,050 20,850
31 B. Donatello, Capital........................... Income Summary ...........................
5,980
5,980
31 B. Donatello, Capital........................... 16,500 B. Donatello, Drawings ..................
Solutions Manual .
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16,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-4 Aug. 31 Service Revenue .................... Income Summary ...............
35,900
31 Income Summary ................... Depreciation Expense ....... Insurance Expense ............ Interest Expense ................ Supplies Expense ..............
22,745
31 Income Summary ................... T. Williams, Capital ............
13,155
31 T. Williams, Capital................. T. Williams, Drawings ........
18,500
Solutions Manual .
4-26
35,900 9,300 4,100 1,500 7,845
13,155 18,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-5 (a) Aug. 31 Service Revenue ................................ 42,400 Rent Revenue ..................................... 6,100 Income Summary ..........................
48,500
31 Income Summary .............................. 49,900 Depreciation expense .................... Salaries expense............................ Utilities expense ............................
2,700 37,100 10,100
31 S. Strong, Capital ............................... Income Summary ...........................
1,400
1,400
31 S. Strong, Capital .............................. 12,000 S. Strong, Drawings ......................
Solutions Manual .
4-27
12,000
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-5 (Continued) (b) Clos. Bal.
Income Summary 49,900 Clos. 48,500 1,400 Clos. 1,400 Bal.
0
Clos. Clos.
S. Strong, Capital 1,400 Bal. 31,700 12,000 Bal. 18,300
S. Strong, Drawings Bal. 12,000 Clos. 12,000 Bal. 0
Clos.
Service Revenue 42,400 Bal. 42,400 Bal. 0
Rent Revenue 6,100 Bal. Bal.
Depreciation Expense Bal. 2,700 Clos. 2,700 Bal. 0
Bal. Bal.
Clos.
6,100 0
Salaries Expense Bal. 37,100 Clos. 37,100 Bal. 0
Utilities Expense 10,100 Clos. 10,100 0
Solutions Manual .
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-5 (Continued) (c) HERCULES COMPANY Post-Closing Trial Balance August 31, 2017 Debit Cash ................................................................. $ 10,900 Accounts receivable ....................................... 6,200 Equipment........................................................ 10,600 Accumulated depreciation—equipment ........ Accounts payable............................................ Unearned revenue ........................................... S. Strong, capital ............................................. $27,700
Solutions Manual .
4-29
Credit
$ 5,400 2,800 1,200 18,300 $27,700
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-6 (a) June 30 Service Revenue ................................ Income Summary ..........................
4,300 4,300
30 Income Summary .............................. Supplies expense .......................... Salaries expense............................ Miscellaneous expense .................
3,416
30 Income Summary ............................... V. Lee, Capital ................................
884
30 V. Lee, Capital..................................... V. Lee, Drawings ...........................
550
1,900 1,260 256
884
550
(b) VICTORIA LEE COMPANY Post-Closing Trial Balance June 30, 2017
Cash ................................................................. Accounts receivable ....................................... Supplies ........................................................... Accounts payable............................................ Salaries payable .............................................. Unearned revenue ........................................... V. Lee, capital ..................................................
Debit $ 3,712 3,904 480
$8,096
Solutions Manual .
4-30
Credit
$1,382 460 160 6,094 $8,096
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-7 (a)
Apr.
30 Unearned Revenue ................. Service Revenue ................
500
30 Depreciation Expense ............ Accumulated Depreciation —Equipment ...................... [($24,000 ÷ 8) ÷ 12 = $250]
250
30 Interest Expense .................... Interest Payable ................. [($12,000 × 6%) ÷ 12 = $60]
60
500
250
60
(b) Unearned Revenue Apr. 30 500 Bal. 1,500 Bal.
1,000
Accumulated Depreciation Equipment Bal. 6,000 Apr. 30 250 Bal. 6,250
Service Revenue Bal. 15,400 Apr. 30 500 Bal. 15,900
Interest Payable Apr. 30 Bal.
Depreciation Expense Bal. 2,750 Apr. 30 250
Interest Expense Bal. 660 Apr. 30 60
Bal.
Bal.
Solutions Manual .
3,000
4-31
60 60
720
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-7 (Continued) (c)
Apr.
Solutions Manual .
30 Service Revenue .................... Income Summary ...............
15,900
30 Income Summary ................... Salaries Expense ............... Depreciation Expense ....... Interest Expense ................
13,585
30 Income Summary ................... T. Muzyka, Capital.............. 30 T. Muzyka, Capital .................. T. Muzyka, Drawings .........
2,315 2,315 4,150
4-32
15,900 9,865 3,000 720
4,150
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-8 (a)
Apr.
2 Cash ...................................................4,000 Tim Sasse, Capital .....................
4,000
6 Supplies .............................................1,500 Cash............................................
1,500
15 Cash ................................................ Service Revenue ........................
600
25 Cash ...................................................2,200 Unearned Revenue ....................
600
2,200
(b) (c), and (e) Cash Apr. 2 4,000 Apr. 6 Apr. 15 600 Apr. 25 2,200 Bal.
1,500
Apr. 6 Bal.
Supplies 1,500 Apr. 30 800
700
5,300
Unearned Revenue Apr.30 800 Apr. 25 2,200 Bal. 1,400
Service Revenue Apr. 15 600 Apr. 30 600 Apr. 30 800 Clos. 2,000 Bal. 2,000 Bal. 0
Accounts Receivable Apr. 30 600
Supplies Expense Apr. 30 700 Clos. 700 Bal. 0
Income Summary Clos. 700 Clos. 2,000 Clos. 1,300 Bal. 0
Solutions Manual .
Tim Sasse, Capital Apr. 2 4,000 Clos. 1,300 Bal. 5,300
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-8 (Continued) (c)
(Continued) Apr. 30 Accounts Receivable ..................... Service Revenue ........................
600
30 Supplies Expense........................... Supplies...................................... ($1,500 – $800 = $700)
700
30 Unearned Revenue ......................... Service Revenue .......................
800
600
700
800
(d) SASSE ROOF REPAIRS Adjusted Trial Balance April 30, 2017
Cash ................................................................. Accounts receivable ....................................... Supplies ........................................................... Unearned revenue ........................................... Tim Sasse, capital ........................................... Service revenue............................................... Supplies expense ............................................
(e)
Apr.
Solutions Manual .
Debit $ 5,300 600 800
700 $7,400
30 Service Revenue .................... Income Summary ...............
2,000
30 Income Summary ................... Supplies Expense ..............
700
30 Income Summary ................... Tim Sasse, Capital .............
1,300
4-34
Credit
$ 1,400 4,000 2,000 _ $7,400
2,000
700 1,300
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-9 (a)
Dec. 31 Accounts Receivable ............. Service Revenue ................
10,440
31 Insurance Expense................. Prepaid Insurance.............. ($7,440 ÷ 12 × 7 = $4,340)
4,340
31 Depreciation Expense ............ Accumulated Depreciation —Equipment ......................
2,780
31 Supplies Expense................... Supplies.............................. ($5,260 – $1,750 = $3,510)
3,510
10,440
4,340
2,780
3,510
31 Interest Receivable................. 120 Interest Revenue................ [($12,000 × 4%) ÷ 12 × 3 = $120]
120
(b) Bal. Dec. 31 Bal.
Accounts Receivable 6,250 10,440 16,690
Dec. 31
Interest Receivable 120
Bal. Bal.
Prepaid Insurance 7,440 Dec. 31 3,100
Solutions Manual .
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4,340
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-9 (Continued) (b) (Continued) Supplies 5,260
Bal.
Dec. 31 Bal.
3,510
1,750
Accumulated Depreciation-Equipment Bal. 8,340 Dec. 31 2,780 Bal. 11,120 Service Revenue Bal. Dec. 31 Bal.
112,300 10,440 122,740
Interest Revenue Dec. 31
120
Dec. 31
Supplies Expense 3,510
Dec. 31
Depreciation Expense 2,780
Dec. 31
Insurance Expense 4,340
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-9 (Continued) (c)
Dec. 31 Service Revenue .................... Interest Revenue .................... Income Summary ...............
122,740 120
31 Income Summary ................... Insurance Expense ............ Salaries Expense ............... Depreciation Expense ....... Supplies Expense ..............
50,030
31 Income Summary ................... H. Duguay, Capital .............
72,830
31 H. Duguay, Capital.................. H. Duguay, Drawings .........
53,500
Solutions Manual .
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122,860 4,340 39,400 2,780 3,510
72,830 53,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-10 1.
2.
3.
4.
5.
Accounts Payable ($750 − $570) ................ Cash.........................................................
180
Supplies ....................................................... Accounts Payable ...................................
560
L. Choi, Drawings ........................................ Salaries Expense ....................................
500
Service Revenue.......................................... Accounts Receivable..............................
700
Unearned Revenue ...................................... Service Revenue .....................................
350
Solutions Manual .
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180
560
500
700 350
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-11 (a) 1.
2.
Cash ................................................... Equipment...................................
700
Salaries Expense............................... Cash ............................................
700
Cash ................................................... Short-Term Investments ............
2,000
Cash ................................................... T. D’Addario, Capital ..................
2,000
700
700
2,000
2,000
3.
No correction needed
4.
Cash ................................................... Supplies ......................................
440
Accounts Payable ............................. Cash ............................................
440
Accounts Payable ............................. Equipment Expense ...................
3,500
Equipment ......................................... Accounts Payable ......................
3,500
5.
Solutions Manual .
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440
440
3,500 3,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-11 (Continued) (b) 1.
2.
Salaries Expense............................... Equipment...................................
700
Cash ................................................... Short-Term Investments ............ T. D’Addario, Capital ..................
4,000
700 2,000 2,000
3.
No correction needed
4.
Accounts Payable ............................. Supplies ......................................
440
Equipment ......................................... Equipment Expense ...................
3,500
5.
Solutions Manual .
4-40
440 3,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-41 J. PARRA COMPANY Balance Sheet December 31, 2017 (in thousands) Assets Current assets Cash............................................................................. $ 2,668 Short-term investments.............................................. 3,690 Accounts receivable ................................................... 1,696 Merchandise inventory............................................... 1,256 Prepaid insurance....................................................... 880 Total current assets ............................................... 10,190 Long-term investments Long-term investments .............................................. 264 Property, plant, and equipment Equipment ...................................................... $11,500 Less: Accumulated depreciation .................. 5,655 ... 5,845 Total assets ................................................................ $16,299 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 1,444 Notes payable ............................................................. 500 Total current liabilities ........................................... 1,944 Long-term liability Long-term debt ................................................ $1,000 Notes payable ................................................ 400 1,400 Total liabilities ........................................................ 3,344 Owner's equity J. Parra, capital ........................................................... 12,955 Total liabilities and owner's equity ........................... $16,299
Solutions Manual .
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-13 (a) DONATELLO COMPANY Income Statement Year Ended July 31, 2017 Revenues Service revenue ............................................. $75,000 Interest revenue ............................................. 320 Total revenues........................................... 75,320 Expenses Depreciation expense .....................................$ 2,850 Interest expense ............................................ 3,000 Rent expense ................................................. 18,550 Salaries expense............................................ 36,050 Supplies expense .......................................... 20,850 Total expenses .......................................... 81,300 Loss .................................................................... $ 5,980 DONATELLO COMPANY Statement of Owner's Equity Year Ended July 31, 2017 B. Donatello, capital, August 1, 2016*............................ Add: Investment ........................................................... Less: Loss ......................................................... $ 5,980 Drawings ...................................................16,500 B. Donatello, capital, July 31, 2017 ................................
$23,285 5,000 28,285 22,480 $ 5,805
* ($28,285 – $5,000)
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-13 (Continued) (b) DONATELLO COMPANY Balance Sheet July 31, 2017 Assets Current assets Cash............................................................................. $ 4,650 Accounts receivable ................................................... 11,400 Prepaid rent................................................................. 500 Supplies....................................................................... 750 Total current assets ............................................... 17,300 Long-term investments Debt investments ................................................... 8,000 Property, plant, and equipment Equipment ...................................................... $19,950 Less: Accumulated depreciation .................. 5,700 14,250 Intangible assets Patents ........................................................... 18,300 Total assets ................................................................ $57,850 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 4,245 Interest payable .......................................................... 750 Unearned revenue ...................................................... 2,050 Total current liabilities ........................................... 7,045 Long-term liabilities Notes payable ............................................................. 45,000 Owner's equity B. Donatello, capital ................................................... 5,805 Total liabilities and owner's equity ........................... $57,850
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-14 (a) BASTEN COMPANY Income Statement Year Ended July 31, 2017 Revenues Service revenue ............................................. $63,000 Rent revenue .................................................... 8,500 Total revenues........................................... Expenses Depreciation expense.................................... 4,000 Utilities expense ............................................ 22,600 Salaries expense............................................ 48,700 Total expenses .......................................... Loss ....................................................................
$71,500
75,300 $ 3,800
BASTEN COMPANY Statement of Owner's Equity Year Ended July 31, 2017 D. Basten, capital, August 1, 2016 ................................. Less: Loss ............................................................ $3,800 Drawings ...............................................................3,000 D. Basten, capital, July 31, 2017.....................................
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$51,200 6,800 $44,400
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-14 (Continued) (b) BASTEN COMPANY Balance Sheet July 31, 2017 Assets Current assets Cash................................................................................. $14,200 Accounts receivable ................................................... 9,780 Total current assets ............................................... 23,980 Property, plant, and equipment Equipment ...................................................... $34,400 Less: Accumulated depreciation .................. 6,000 28,400 Total assets ................................................................ $52,380 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... Salaries payable.......................................................... Total current liabilities ........................................... Long-term liabilities Notes payable ............................................................. Total liabilities ........................................................
$ 4,100 2,080 6,180 1,800 7,980
Owner's equity D. Basten, capital ............................................................ 44,400 Total liabilities and owner's equity ........................... $52,380
Solutions Manual .
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-15 (a) JPC ENTERPRISES Balance Sheet December 31, 2017 Assets Current assets Cash............................................................................. $ 16,500 Accounts receivable ................................................... 197,000 Supplies....................................................................... 10,100 Prepaid expenses ....................................................... 6,900 Total current assets ............................................... 230,500 Long-term investments Equity investments ..................................................... 45,800 Property, plant, and equipment Land ................................................. $105,600 Building ........................................... $306,300 Less: Accumulated depreciation ... 79,900 226,400 332,000 Intangible assets Licences ...................................................................... 98,300 Goodwill ........................................................................... 36,000 Total assets ................................................................. $742,600
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-15 (Continued) (a) (Continued) Liabilities and Owner's Equity Current liabilities Accounts payable ...................................................... $105,600 Salaries payable......................................................... 28,700 Interest payable ......................................................... 16,500 Unearned revenue ..................................................... 27,400 Notes payable ............................................................ 55,000 Current portion of mortgage payable ....................... 17,250 Total current liabilities .......................................... 250,450 Long-term liabilities Mortgage payable ($230,000 – $17,250) ...................... 212,750 Total liabilities ............................................................ 463,200 Owner's equity J. Chrowder, capital ...................................................... 279,400 Total liabilities and owner's equity ......................... $742,600 (b) Working capital = Current Assets – Current Liabilities $230,500 − $250,450 = $(19,950) Current Ratio = Current Assets ÷ Current Liabilities $230,500 ÷ $250,450 = .92:1 Acid-test ratio
= (Cash + Accounts receivable + Shortterm investments) ÷ Current liabilities = ($16,500 + $197,000) ÷ $250,450 = $213,500 ÷ $250,450 = 0.85:1
(c)
The company's liquidity is very poor. There is insufficient cash to pay for accounts payable and salaries payable that are likely due within days. Some of the investments might have to be sold to meet these obligations on time.
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 4-16 (a) Working Capital Current Ratio
=
Acid-test ratio
=
March 28, 2015 $421,955 – $223,239 $421,955 $223,239 $203,162 + $4,896 $223,239
=
$198,716
=
1.89
=
0.93
=
$189,696
=
1.96
=
0.83
=
$ 224,343
=
2.05
=
1.02
March 29, 2014 Working Capital Current Ratio
=
Acid-test ratio
=
$387,323
–
$197,627
$387,323 $197,627 $157,578 + $5,582 $197,627 March 30, 2013
Working Capital Current Ratio
=
Acid-test ratio
=
$438,374
–
$214,031
$438,374 $214,031 $210,562 + $7,126 $214,031
(b) Indigo’s liquidity at March 28, 2015 is very similar to that of the two previous fiscal years. Ratios are strong, due in part to very few sales on account.
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*EXERCISE 4-17 GARDENS DESIGNS Work Sheet Month Ended April 30, 2017 Unadjusted Trial Balance Account Titles
Dr.
Cash Accounts receivable Prepaid rent Equipment Accum.deprec.–equip. Accounts payable Notes payable Unearned revenue Interest payable T. Muzyka, capital T. Muzyka, drawings Service revenue Salaries expense Depreciation expense Interest expense
Cr.
Adjustments
Adjusted Trial Balance
Dr.
Dr.
Cr.
11,430 8,780 4,875 24,000
4,150 9,865 2,750 660
Solutions Manual
66,510
810
810
Dr.
6,250 5,650 12,000 1,000 60 25,960 4,150
15,900
66,820
Cr.
11,430 8,780 4,875 24,000
9,865 3,000 720
2)250 3) 60
Balance Sheet
6,250 5,650 12,000 1,000 60 25,960
(1) 500
4-49 .
Cr.
4,150 15,400
66,510
Dr.
11,430 8,780 4,875 24,000 6,000 (2)250 5,650 12,000 1,500 (1) 500 (3) 60 25,960
Totals Profit Totals
Cr.
Income Statement
15,900 9,865 3,000 720
66,820
13,585 2,315 15,900
15,900
53,235
15,900
53,235
Chapter 4
50,920 2,315 53,235
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*EXERCISE 4-18 SWIFT CREEK ENGINEERING Work Sheet Year Ended December 31, 2017 Unadjusted Trial Balance Account Titles Cash Accounts receivable Interest receivable Supplies Prepaid insurance Notes receivable Equipment Acc. depr.—equip. Accounts payable H. Duguay, capital H. Duguay, draw. Service revenue Interest revenue Depr. expense Insurance exp. Salaries expense Supplies expense Totals Profit Totals
Dr.
Cr.
8,450 6,250
Adjustments
Dr.
Cr.
10,440 120
5,260 7,440 12,000 27,800
3,510 4,340
8,340 4,560 34,900
2,780
112,300
10,440 120
53,500
39,400
Solutions Manual
Dr.
Dr.
Cr.
Balance Sheet
Dr.
160,100
3,510 21,190
Cr.
8,450 16,690
8,450 16,690
120 1,750 3,100 12,000 27,800
120 1,750 3,100 12,000 27,800 11,120 4,560 34,900
11,120 4,560 34,900 53,500
122,740 120
2,780 4,340 39,400 3,510 21,190 173,440
4-50 .
Cr.
Income Statement
53,500
2,780 4,340
160,100
Adjusted Trial Balance
173,440
122,740 120 2,780 4,340 39,400 3,510 50,030 72,830 122,860
122,860 123,410
50,580 72,830 122,860 123,410 123,410
Chapter 4
*EXERCISE 4-19 (a) (1) Dec.31 Accounts Receivable ..................... Service Revenue .......................
6,900
31 Interest Expense ............................ Interest Payable.........................
1,250
6,900
1,250
(2) Dec.31 Service Revenue ............................ 98,900 Income Summary ....................
98,900
31 Income Summary ........................... Interest Expense .......................
9,050
9,050
31 Income Summary ........................... 89,850 I. Masterson, Capital ................. (b) Jan. 1 Service Revenue ............................ Accounts Receivable ................
6,900
1 Interest Payable ............................. Interest Expense .......................
1,250
(c) Jan. 10 Cash................................................ Service Revenue .......................
8,200
31 Interest Expense ............................ Cash ...........................................
2,235
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89,850
6,900
1,250
8,200 2,235
Chapter 4
*EXERCISE 4-19 (Continued) (a), (b), and (c)
Date
Explanation
Cash Ref.
Dec. 31 Unadjusted balance Jan. 10 31
Date
8,200
7,600 15,800 13,565
Accounts Receivable Explanation Ref. Debit
6,900
Interest Payable Explanation Ref. Debit
Credit Balance
1,250
I. Masterson, Capital Explanation Ref. Debit
Credit Balance
1,250
89,850
Income Summary Explanation Ref. Debit
Dec. 31 Closing entry 31 Closing entry 31 Closing entry
Solutions Manual .
24,000 30,900 24,000
0 1,250 0
Dec. 31 Unadjusted balance 31 Closing entry
Date
Credit Balance
6,900
Dec. 31 Unadjusted balance 31 Adjusting entry Jan. 1 Reversing entry
Date
Credit Balance
2,235
Dec. 31 Unadjusted balance 31 Adjusting entry Jan. 1 Reversing entry
Date
Debit
Credit Balance 98,900
9,050 89,850
4-52
48,000 137,850
98,900 89,850 0
Chapter 4
*EXERCISE 4-19 (Continued) (a), (b), and (c) (Continued)
Date Dec. 31 31 31 Jan. 1 10
Date Dec. 31 31 31 Jan. 1 31
Solutions Manual .
Service Revenue Explanation Ref. Debit Unadjusted balance Adjusting entry Closing entry Reversing entry
Credit Balance
6,900 98,900 6,900 8,200
Interest Expense Explanation Ref. Debit Unadjusted balance Adjusting entry Closing entry Reversing entry
Credit Balance
1,250 9,050 1,250 2,235
4-53
92,000 98,900 0 6,900 Dr. 1,300
7,800 9,050 0 1,250 Cr. 985
Chapter 4
*EXERCISE 4-20 (a)
It would be useful to prepare reversing entries for adjustments 1, 4, and 6.
(b) (1) May
(4)
(6)
(c)
May
May
1 Service Revenue........................... Accounts Receivable ...............
600
1 Interest Payable ............................ Interest Expense ......................
545
600
1 Property Tax Payable ................... 1,304 Property Tax Expense ............. ($3,912 ÷ 12 × 4)
545
1,304
Reversing entries are useful for these adjustments because it simplifies the recording of future transactions. Without reversing entries, transactions 1, 4, and 6 would require compound journal entries. If reversing entries are prepared, the future transactions can be recorded with simple journal entries. You will not have to remember what has gone before. The use of reversing entries does not change the amounts reported in the financial statements. It simply makes it easier to record future transactions. Since there are no future transactions related to items 2, 3, and 5, there is nothing to be gained by reversing these entries.
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Chapter 4
SOLUTIONS TO PROBLEMS PROBLEM 4-1A (a) General Journal Date Dec. 31
Account Titles Service Revenue ................................. Income Summary.......................
Ref. 400 350
Debit 61,000
31 Income Summary................................ Advertising Expense ................. Supplies Expense...................... Depreciation Expense ............... Insurance Expense .................... Salaries Expense ....................... Interest Expense........................
350 610 631 711 722 726 905
50,100
31 Income Summary................................ D. Thao, Capital .........................
350 301
10,900
31 D. Thao, Capital .................................. D. Thao, Drawings .....................
301 306
7,000
J14 Credit 61,000 8,400 4,000 5,600 3,500 28,000 600 10,900 7,000
(b) Income Summary No.350 Clos. 50,100 Clos. 61,000 Bal. 10,900 Clos. 10,900 Bal. 0
D. Thao, Capital Bal. Clos. 7,000 Clos. Bal.
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No. 301 13,000 10,900 16,900
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D. Thao, Drawings No.306 Bal. 7,000 Clos. 7,000 Bal. 0
Chapter 4
PROBLEM 4-1A (Continued) (b) (Continued) Service Revenue No. 400 Clos. 61,000 Bal. 61,000 Bal. 0 Advertising Expense No. 610 Bal. . 8,400 Clos. . 8,400 Bal. 0
Supplies Expense No. 631 Bal. 4,000 Clos. 4,000 Bal. 0
Depreciation Expense No. 711 Bal. 5,600 Clos. 5,600 Bal. 0
Insurance Expense No. 722 Bal. 3,500 Clos. 3,500 Bal. 0
Interest Expense No. 905 600 Clos. 600 0
Salaries Expense No. 726 Bal. 28,000 Clos. 28,000 Bal. 0
Bal. Bal. (c)
THAO COMPANY Post-Closing Trial Balance December 31, 2017 Cash.............................................................. Accounts receivable .................................... Supplies ....................................................... Prepaid insurance........................................ Equipment .................................................... Accumulated depreciation—equipment..... Notes payable .............................................. Accounts payable ........................................ Salaries payable .......................................... Interest payable ........................................... D. Thao, capital ............................................ Totals .................................................... Solutions Manual .
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Debit $ 5,300 10,800 1,500 2,000 27,000
$46,600
Credit
$ 5,600 15,000 6,100 2,400 600 16,900 $46,600 Chapter 4
PROBLEM 4-1A (Continued) Taking It Further: The drawings account is not closed with the expense accounts because it is not part of profit. Drawings represent the distribution of profit to the owner and are not used to calculate profit. Drawings are reported on the statement of owner’s equity, not the income statement. The drawings account is closed in a separate entry and not with expenses because it is closed to the capital account, not the Income Summary account.
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PROBLEM 4-2A (a) BRAY COMPANY Income Statement For the Year Ended December 31, 2017 Revenues Service revenue ........................................... Expenses Maintenance expense.................................. Depreciation expense.................................. Insurance expense ...................................... Salaries expense.......................................... Utilities expense .......................................... Total expenses ..................................... Profit ...................................................................
$60,000 1,700 2,800 1,800 $30,000 1,400 37,700 $22,300
BRAY COMPANY Statement of Owner’s Equity For the Year Ended December 31, 2017 L. Bray, Capital, January 1............................................. Add: Profit..................................................................... Less: Drawings.............................................................. L. Bray, Capital, December 31 .......................................
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$19,500 22,300 41,800 11,000 $30,800
Chapter 4
PROBLEM 4-2A (Continued) (a) (Continued) BRAY COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash.............................................................. $8,800 Accounts receivable .................................... 10,800 Prepaid insurance........................................ 2,800 Total current assets ............................. 22,400 Property, plant, and equipment Equipment .................................................... $24,000 Less: Accumulated depreciation— equipment 4,200 19,800 Total assets .......................................... $42,200 Liabilities and Owner’s Equity Current liabilities Accounts payable ........................................ Salaries payable .......................................... Total current liabilities ......................... Owner’s equity L. Bray, capital ............................................. Total liabilities and owner’s equity .....
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$9,000 2,400 11,400 30,800 $42,200
Chapter 4
PROBLEM 4-2A (Continued) (b) General Journal Date Dec. 31 31
31 31
Account Titles Service Revenue ................................. Income Summary .......................
Ref. 400 350
Debit 60,000
Income Summary ................................ Maintenance Expense ................ Depreciation Expense ................ Insurance Expense..................... Salaries Expense........................ Utilities Expense ........................
350 622 711 722 726 732
37,700
Income Summary ................................ L. Bray, Capital ..........................
350 301
22,300
L. Bray, Capital ................................... L. Bray, Drawings ......................
301 306
11,000
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Credit 60,000 1,700 2,800 1,800 30,000 1,400 22,300 11,000
Chapter 4
PROBLEM 4-2A (Continued) (c) L. Bray, Capital Clos.
11,000 1/1 Bal. Clos. Bal.
L. Bray, Drawings 12/31 Bal. Bal.
Clos. Clos.
Clos.
11,000 Clos. 0
Income Summary 37,700 Clos. Bal. 22,300 Bal.
No. 301 19,500 22,300 30,800
Depreciation Expense No. 711 12/31Bal. 2,800 Clos. 2,800 Bal. 0
No. 306 11,000
12/31 Bal. Bal.
No. 350 60,000 22,300
Insurance Expense 1,800 Clos.
No. 722 1,800
0
12/31 Bal. Bal.
Salaries Expense 30,000 Clos. 0
No. 726 30,000
12/31 Bal. Bal.
Utilities Expense 1,400 Clos. 0
No. 732 1,400
0
Service Revenue No. 400 60,000 12/31 Bal. 60,000 Bal. 0
Maintenance Expense No. 622 12/31 Bal. 1,700 Clos. 1,700 Bal. 0 Bal. 0
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-2A (Continued) (d)
BRAY COMPANY Post-Closing Trial Balance December 31, 2017
Cash ............................................................... Accounts receivable ...................................... Prepaid insurance.......................................... Equipment ...................................................... Accumulated depreciation—equipment....... Accounts payable .......................................... Salaries payable............................................. L. Bray, capital ............................................... Totals ......................................................
Debit $ 8,800 10,800 2,800 24,000
$46,400
Credit
$ 4,200 9,000 2,400 _30,800 $46,400
Taking It Further: After posting the closing entries for the revenue and expense accounts, the balance of the Income Summary account is compared to the profit or loss appearing on the income statement to ensure that the closing entries prepared so far have been journalized and posted correctly. In addition, following the posting of the last closing entries, the account balance appearing in the owner’s capital account must correspond to the ending balance appearing in the statement of owner’s equity. Finally, L. Bray should prepare a post-closing trial balance, which lists only permanent accounts after the closing entries have been journalized and posted. Its purpose is to determine that all closing entries have been journalized and posted correctly. This trial balance also verifies that the temporary accounts have been properly reset to zero, ready for the posting of the transactions of the next fiscal year.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-3A (a) MARINE FISHING CENTRE Income Statement Year Ended March 31, 2017 Revenues Service revenue ............................................ $124,300 Interest revenue .......................................... 1,500 $125,800 Expenses Depreciation expense ................................. 9,850 Interest expense .......................................... 3,960 Insurance expense ...................................... 4,500 Salaries expense ......................................... 30,000 Supplies expense ........................................ 5,700 Utilities expense .......................................... 5,400 59,410 Profit .................................................................................... $ 66,390
(b) MARINE FISHING CENTRE Statement of Owner's Equity Year Ended March 31, 2017
R. Falkner, capital, April 1, 2016* ................................... $ 163,000 Add: Investment ............................................... $ 2,300 Profit..................................................... 66,390 68,690 231,690 Less: Drawings .............................................................. 46,200 R. Falkner, capital, March 31, 2017 ................................. $ 185,490 * $165,300 - $2,300
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-3A (Continued) (c) MARINE FISHING CENTRE Balance Sheet March 31, 2017 Assets Current assets Cash ............................................................................... $ 7,720 Interest receivable......................................................... 750 Supplies ......................................................................... 1,425 Total current assets.................................................. 9,895 Long-term debt investment............................................... 30,000 Property, plant, and equipment Land ................................................. $46,800 Building.......................................... $186,900 Less: Accumulated depreciation .. 31,150 155,750 Equipment ......................................... 36,200 Less: Accumulated depreciation . 18,100 18,100 220,650 Total assets ...................................................................... $260,545 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $5,875 Interest payable ........................................................... 990 Unearned revenue ....................................................... 2,190 Current portion of notes payable ............................... 6,000 Total current liabilities............................................ 15,055 Long-term liabilities Notes payable .................................................................. 60,000 Total liabilities......................................................... 75,055 Owner's equity R. Falkner, capital.......................................................... 185,490 Total liabilities and owner's equity .......................... $260,545
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-3A (Continued) (d) GENERAL JOURNAL Date
Account Titles
Debit
Credit
Mar. 31 Service Revenue ............................... 124,300 Interest Revenue ................................ 1,500 Income Summary .........................
125,800
31 Income Summary .............................. 59,410 Depreciation expense ................... Interest expense ............................ Insurance expense ........................ Salaries expense ........................... Supplies expense .......................... Utilities expense ............................
9,850 3,960 4,500 30,000 5,700 5,400
31 Income Summary .............................. 66,390 R. Falkner, Capital ........................
66,390
31 R. Falkner, Capital ............................. 46,200 R. Falkner, Drawings ....................
46,200
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-3A (Continued) (e) Clos. Clos.
Income Summary 59,410 Clos. 125,800 Bal. 66,390 66,390 Bal. 0
R. Falkner, Capital Bal. 165,300 Clos. 46,200 Clos. 66,390 Bal. 185,490
R. Falkner, Drawings Bal. 46,200 Clos. 46,200 Bal. 0
Service Revenue 124,300 Bal. 124,300 Bal. 0
Interest Revenue Clos. 1,500 Bal. 1,500 Bal. 0
Depreciation Expense Bal. 9,850 Clos. 9,850 Bal. 0
Insurance Expense Bal. 4,500 Clos. 4,500 Bal. 0
Interest Expense 3,960 Bal. Bal.
3,960 0
Salaries Expense Bal. 30,000 Clos. 30,000 Bal. 0
Supplies Expense 5,700 Clos. 5,700 0
Utilities Expense Bal. 5,400 Clos. 5,400 Bal. 0
Clos.
Clos.
Bal. Bal.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-3A (Continued) (f) MARINE FISHING CENTRE Post-Closing Trial Balance March 31, 2017 Debit Credit Cash.................................................................... $ 7,720 Interest receivable ............................................. 750 Supplies.............................................................. 1,425 Debt investments ............................................... 30,000 Land .................................................................... 46,800 Building .............................................................. 186,900 Accumulated depreciation—building .............. $ 31,150 Equipment ......................................................... 36,200 Accumulated depreciation—equipment .......... 18,100 Accounts payable ............................................. 5,875 Interest payable ................................................. 990 Unearned revenue ............................................. 2,190 Notes payable .................................................... 66,000 R. Falkner, capital ............................................. 185,490 $309,795 $309,795 The balance in the R. Falkner, capital account after the closing entries have been posted will be $185,490 as shown in the above post-closing trial balance. This balance corresponds to the ending balance on the statement of owner’s equity in part (b) above.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-3A (Continued) Taking It Further: When deciding how to present financial information in the classified balance sheet, Marine Fishing Centre could show the presentation as was followed in part (c) above but it also had the alternative to prepare the classified balance sheet following the International Financial Reporting Standards (IFRS). If it followed IFRS, the statement would have been titled Statement of Financial Position. The balance sheet would have the same amounts and key sub-totals, but the sequence of the major categories of the elements in the balance sheet may have changed.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-4A (a) GENERAL JOURNAL Date
Account Titles
Debit
Jan. 31 Insurance Expense ($6,420 × 8/12) ... Prepaid Insurance ........................
4,280
31 Supplies Expense ($5,240 − $1,310) . Supplies ........................................
3,930
31 Depreciation Expense ....................... Accumulated Depreciation— Building ($190,000 ÷ 50) ................ Accumulated Depreciation— Equipment ($27,000 ÷ 9)................
6,800
31 Interest Expense ($182,000 × 5% × 1/12) Interest Payable ............................
758
31 Unearned Revenue ........................... Service Revenue ...........................
1,300
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Credit
4,280
3,930
3,800 3,000
758 1,300
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 4-4A (Continued) (b) ELBOW CYCLE REPAIR SHOP Adjusted Trial Balance January 31, 2017
Debit Credit Cash ................................................................... $ 3,200 Accounts receivable .......................................... 6,630 Prepaid insurance ($6,420 − $4,280)................. 2,140 Supplies ($5,240 − $3,930)................................. 1,310 Land .................................................................... 50,000 Building .............................................................. 190,000 Accumulated depreciation—building ($11,000 + $3,800) ........................................... $ 14,800 Equipment ......................................................... 27,000 Accumulated depreciation—equipment ($4,500 + $3,000) ............................................. 7,500 Accounts payable ............................................. 6,400 Interest payable ................................................. 758 Unearned revenue ($21,950 − $1,300)............... 20,650 Mortgage payable .............................................. 182,000 H. Dude, capital ................................................. 61,000 H. Dude, drawings ............................................. 101,100 Service revenue ($235,550 + $1,300) ................ 236,850 Depreciation expense ........................................ 6,800 Insurance expense ............................................ 4,280 Interest expense ($5,610 + $758) ...................... 6,368 Salaries expense................................................ 115,200 Supplies expense .............................................. 3,930 Utilities expense ................................................ 12,000 $529,958 $529,958
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-4A (Continued) (c) ELBOW CYCLE REPAIR SHOP Income Statement Year Ended January 31, 2017 Service revenue ................................................................. $236,850 Expenses Salaries expense .......................................... $115,200 Utilities expense .......................................... 12,000 Interest expense .......................................... 6,368 Insurance expense ...................................... 4,280 Supplies expense ........................................ 3,930 Depreciation expense .................................. 6,800 Total expenses........................................................ 148,578 Profit ................................................................................. $ 88,272
ELBOW CYCLE REPAIR SHOP Statement of Owner's Equity Year Ended January 31, 2017
H. Dude, capital, February 1, 2016 * ................................... $ 56,000 Add: Investment ................................................ $ 5,000 Profit..................................................... 88,272 93,272 149,272 Less: Drawings ................................................................. 101,100 H. Dude, capital, January 31, 2017 ..................................... $ 48,172 *($61,000 − $5,000)
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PROBLEM 4-4A (Continued) (c) (Continued) ELBOW CYCLE REPAIR SHOP Balance Sheet January 31, 2017 Assets Current assets Cash .................................................................................. $ 3,200 Accounts receivable ..................................................... 6,630 Prepaid insurance ......................................................... 2,140 Supplies ......................................................................... 1,310 Total current assets ...................................................... 13,280 Property, plant, and equipment Land ................................................ $50,000 Building ........................................... $190,000 Less: Accumulated depreciation ..... 14,800 175,200 Equipment........................................... 27,000 Less: Accumulated depreciation . 7,500 19,500 244,700 Total assets ........................................................................ $257,980 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 6,400 Interest payable ........................................................... 758 Unearned revenue ....................................................... 20,650 Current portion of mortgage payable ........................ 4,500 Total current liabilities............................................ 32,308 Long-term liabilities Mortgage payable .......................................................... 177,500 Total liabilities ............................................................. 209,808 Owner's equity H. Dude, capital ............................................................ 48,172 Total liabilities and owner's equity .......................... $257,980
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-4A (Continued) (d) GENERAL JOURNAL Date Jan
Account Titles
Debit
Credit
31 Service Revenue ................................. 236,850 Income Summary ..........................
236,850
31 Income Summary ................................ 148,578 Salaries Expense ........................... Utilities Expense............................ Interest Expense............................ Insurance Expense........................ Supplies Expense.......................... Depreciation Expense ...................
115,200 12,000 6,368 4,280 3,930 6,800
31 Income Summary .................................. 88,272 H. Dude, Capital .............................
88,272
31 H. Dude, Capital .................................. 101,100 H. Dude, Drawings.........................
101,100
Taking It Further: Likely the reason that Henry had to invest $5,000 cash into the business in November of 2016 is because during the year he withdrew $101,100 cash when the business’ profit was only $88,272. Henry should be concerned that his capital balance is diminishing and he should try to reduce his drawings in the coming year.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (a) GENERAL JOURNAL Date July
Account Titles
J1 Debit
Credit
1 Cash .................................................... 20,000 L. Chang, Capital ...........................
20,000
1 Vehicles .............................................. 25,000 Cash ............................................... Notes Payable................................
5,000 20,000
1 Prepaid Insurance .............................. Cash ...............................................
2,800 2,800
5 Accounts Receivable ......................... Service Revenue............................
3,300
12 Supplies.............................................. Accounts Payable .........................
2,100
18 Salaries Expense ............................... Cash ...............................................
3,000
25 Accounts Receivable ......................... Service Revenue............................
8,900
28 Cash .................................................... Accounts Receivable ....................
3,300
31 Fuel Expense………………………… .. Cash ...............................................
550
31 L. Chang, Drawings ........................... Cash ...............................................
2,600
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3,300
2,100
3,000
8,900
3,300
550 2,600
Chapter 4
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (a), (c), and (f) Note items in italics are the balances used to prepare the trial balance in part (b). Cash Date July
Explanation
1 1 1 18 28 31 31
Ref.
Debit
J1 J1 J1 J1 J1 J1 J1
20,000
Credit
Balance
550 2,600
20,000 15,000 12,200 9,200 12,500 11,950 9,350
Credit
Balance
5,000 2,800 3,000 3,300
Accounts Receivable Date July 5 25 28 31
Explanation
Ref.
Debit 3,300 8,900
Adjusting
J1 J1 J1 J2
3,300 1,500
3,300 12,200 8,900 10,400
Supplies Date July 12 31
Explanation
Ref.
Debit 2,100
Adjusting
J1 J2
Credit
Balance
1,400
2,100 700
Credit
Balance
233
2,800 2,567
Prepaid Insurance Date July 1 31
Solutions Manual .
Explanation
Ref.
Debit 2,800
Adjusting
J1 J2
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (a), (c), and (f) (Continued)
Date July
Explanation 1
Vehicles Ref.
Debit
Credit Balance
J1
25,000
25,000
Accumulated Depreciation—Vehicles Date
Explanation
Ref.
July 31
Adjusting
J2
Debit
Credit
Balance
417
417
Credit
Balance
2,100
2,100
Credit
Balance
800
800
Credit
Balance
Accounts Payable Date
Explanation
Ref.
July 12
Debit
J1
Salaries Payable Date
Explanation
Ref.
July 31
Adjusting
J2
Debit
Interest Payable Date
Explanation
Ref.
July 31
Adjusting
J2
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Debit
92
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (a), (c), and (f) (Continued) Notes Payable Date July
Explanation 1
Ref.
Debit
J1
Credit
Balance
20,000
20,000
Credit
Balance
L. Chang, Capital Date July
1 31 31
Explanation
Ref.
Closing Closing
J1 J3 J3
Debit
20,000 7,208 2,600
20,000 27,208 24,608
L. Chang, Drawings Date July 31 31
Explanation
Ref.
Debit 2,600
Closing
J1 J3
Credit
2,600
Balance 2,600 0
Income Summary Date
Explanation
Ref.
July 31 31 31
Closing Closing Closing
J3 J3 J3
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Debit
Credit 13,700
6,492 7,208
Chapter 4
Balance 13,700 7,208 0
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (a), (c), and (f) (Continued) Service Revenue Date July
5 25 31 31
Explanation
Ref.
Adjusting Closing
J1 J1 J2 J3
Debit
13,700
Credit
Balance
3,300 3,300 8,900 12,200 1,500 13,700 0
Fuel Expense Date July 31 31
Explanation
Ref.
Debit 550
Closing
J1 J3
Credit
Balance
550
550 0
Credit
Balance
3,800
3,000 3,800 0
Credit
Balance
1,400
1,400 0
Salaries Expense Date July 18 31 31
Explanation
Ref.
Debit
Adjusting Closing
J1 J2 J3
3,000 800
Supplies Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
1,400
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (a) , (c), and (f) (Continued)
Depreciation Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
417
Credit
Balance
417
417 0
Credit
Balance
233
233 0
Credit
Balance
Insurance Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
233
Interest Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
92
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92
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (b) LEE’S WINDOW WASHING Trial Balance July 31, 2017 Debit $9,350 8,900 2,100 2,800 25,000
Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Prepaid insurance.............................................. Vehicles .............................................................. Accounts payable .............................................. Notes payable .................................................... L. Chang, capital ................................................ L. Chang, drawings............................................ 2,600 Service revenue ................................................. Fuel expense ...................................................... 550 Salaries expense................................................ 3,000 Totals ............................................................. $54,300
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Credit
$ 2,100 20,000 20,000 12,200
$54,300
Chapter 4
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (c) GENERAL JOURNAL Date
Account Titles
J2 Debit
July 31 Accounts Receivable ......................... Service Revenue............................
1,500
31 Depreciation Expense ....................... Accumulated Depreciation —Vehicles ...................................... ($25,000 ÷ 5 years) × 1/12
417
31 Insurance Expense ............................ Prepaid Insurance ......................... ($2,800 ÷ 12)
233
31 Supplies Expense .............................. Supplies ......................................... ($2,100 − $700)
1,400
31 Salaries Expense ............................... Salaries Payable ............................
800
31 Interest Expense ................................ Interest Payable............................. ($20,000 × 5.5% × 1/12)
92
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Credit
1,500
417
233
1,400
800
92
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (d) LEE’S WINDOW WASHING Adjusted Trial Balance July 31, 2017 Debit $9,350 10,400 700 2,567 25,000
Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Prepaid insurance.............................................. Vehicles .............................................................. Accumulated depreciation—vehicles............... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Chang, capital ................................................ L. Chang, drawings............................................ 2,600 Service revenue ................................................. Depreciation expense ........................................ 417 Fuel expense ...................................................... 550 Insurance expense ............................................ 233 Interest expense ................................................ 92 Salaries expense................................................ 3,800 Supplies expense .............................................. 1,400 Totals ............................................................. $57,109
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Credit
$
417 2,100 800 92 20,000 20,000 13,700
$57,109
Chapter 4
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (e) LEE’S WINDOW WASHING Income Statement Month Ended July 31, 2017 Revenues Service revenue ............................................................... $13,700 Expenses Depreciation expense ................................... $ 417 Fuel expense ................................................. 550 Insurance expense ........................................ 233 Interest expense ............................................ 92 Salaries expense ........................................... 3,800 Supplies expense .......................................... 1,400 Total expenses........................................................ 6,492 Profit ................................................................................. $7,208 LEE’S WINDOW WASHING Statement of Owner's Equity Month Ended July 31, 2017 L. Chang, capital, July 1 .................................................. Add: Investments.............................................. $20,000 Profit ........................................................ 7,208 Less: Drawings ............................................................... L. Chang, capital, July 31 ................................................
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$
0
27,208 27,208 2,600 $24,608
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (e) (Continued) LEE’S WINDOW WASHING Balance Sheet July 31, 2017 Assets Current assets Cash ............................................................................. Accounts receivable ................................................... Supplies ....................................................................... Prepaid insurance ....................................................... Total current assets................................................ Property, plant, and equipment Vehicles .......................................................... $25,000 Less: Accumulated depreciation-vehicles . 417 Total assets .............................................................
$ 9,350 10,400 700 2,567 23,017
24,583 $47,600
Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ Salaries payable .......................................................... Interest payable ........................................................... Notes payable, current portion................................... Total current liabilities............................................ Long term liabilities Notes payable .............................................................. Total liabilities .................................................................. Owner's equity L. Chang, capital ......................................................... Total liabilities and owner's equity ........................
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$ 2,100 800 92 5,000 7,992 15,000 22,992 24,608 $47,600
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (f) GENERAL JOURNAL Date
Account Titles
J3 Debit
Credit
July 31 Service Revenue ................................ 13,700 Income Summary ..........................
13,700
31 Income Summary ............................... Depreciation Expense .................. Fuel Expense ................................. Insurance Expense........................ Interest Expense............................ Salaries Expense ........................... Supplies Expense..........................
6,492 417 550 233 92 3,800 1,400
31 Income Summary ............................... L. Chang, Capital ...........................
7,208
31 L. Chang, Capital................................ L. Chang, Drawings .......................
2,600
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-5A (Continued) (g) LEE’S WINDOW WASHING Post-Closing Trial Balance July 31, 2017
Cash ................................................................... Accounts receivable .......................................... Supplies.............................................................. Prepaid insurance.............................................. Vehicles .............................................................. Accumulated depreciation—vehicles............... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Chang, capital ................................................
Debit $ 9,350 10,400 700 2,567 25,000
$48,017
Credit
$ 417 2,100 800 92 20,000 24,608 $48,017
Taking It Further: Lee’s Window Washing will need to record adjusting journal entries every month if it wishes to prepare financial statements each month. Closing entries are done only at the end of the fiscal year.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-6A
(a) GENERAL JOURNAL Date
Account Titles
J2 Debit
Oct. 31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($140,000 ÷ 10 years) Accumulated Depreciation —Vehicles ...................................... ($110,000 ÷ 8 years)
27,750
31 Supplies Expense .............................. Supplies ......................................... ($6,000 − $2,000)
4,000
31 Salaries Expense ............................... Salaries Payable ............................
2,550
31 Interest Expense ................................ Interest Payable............................. ($60,000 × 5.5% × 1/12)
275
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Credit
14,000
13,750
4,000
2,550
275
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 4-6A (Continued) (a) (Continued) SILVER RIDGE PLUMBING Adjusted Trial Balance October 31, 2017 Debit Credit Cash.................................................................. $ 35,420 Supplies ($6,000 – $4,000)............................... 2,000 Equipment ........................................................ 140,000 $ 56,000 * Accumulated depreciation—equipment......... Vehicles ............................................................ 110,000 61,875 ** Accumulated depreciation—vehicles............. Accounts payable ............................................ 7,950 Salaries payable............................................... 2,550 Notes payable .................................................. 60,000 Interest payable ............................................... 275 H. Burke, capital............................................... 75,750 H. Burke, drawings .......................................... 36,000 Service revenue ............................................... 200,525 27,750 Depreciation expense ...................................... Fuel expense .................................................... 28,038 Insurance expense .......................................... 9,500 Interest expense ($3,392 + $275) .................... 3,667 Rent expense ................................................... 21,000 Salaries expense ($45,000 + $2,550)............... 47,550 Supplies expense ............................................ 4,000 $464,925 $464,925 * $42,000 + $14,000 = $56,000 ** $48,125 + $13,750 = $61,875
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-6A (Continued) (b) Revenues Service revenue........................................... $200,525 Expenses Depreciation expense ................................. $27,750 Fuel expense ............................................... 28,038 Insurance expense ...................................... 9,500 Interest expense .......................................... 3,667 Rent expense ............................................... 21,000 Salaries expense ......................................... 47,550 Supplies expense ........................................ 4,000 141,505 Profit ................................................................. $59,020 (c) SILVER RIDGE PLUMBING Statement of Owner's Equity Year Ended October 31, 2017 H. Burke, capital, November 1, 2016 ....................................$73,750 * Add: Investments ............................................... $ 2,000 Profit........................................................ 59,020 61,020 134,770 Less: Drawings .................................................................. 36,000 H. Burke, capital, October 31, 2017 .................................... $98,770 * $75,750 – $2,000 = $73,750
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-6A (Continued) (c)
(Continued) SILVER RIDGE PLUMBING Balance Sheet October 31, 2017 Assets
Current assets Cash ...................................................................................... $ 35,420 Supplies .................................................................................... 2,000 Total current assets......................................................... 37,420 Property, plant, and equipment Equipment............................................ $140,000 Less: Accumulated depreciation ... 56,000 $84,000 Vehicles ........................................... 110,000 Less: Accumulated depreciation ... 61,875 48,125 132,125 Total assets ............................................................. $169,545 Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,950 Salaries payable ................................................................... 2,550 Interest payable ............................................................. 275 Current portion of notes payable ........................................ 10,000 Total current liabilities..................................................... 20,775 Long-term liabilities Notes payable ......................................................................... 50,000 Total liabilities.................................................................. 70,775 Owner's equity H. Burke, capital ................................................................... 98,770 Total liabilities and owner's equity....................................... $169,545
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-6A (Continued) (d) GENERAL JOURNAL Date
Account Titles
Debit
Credit
Oct. 31 Service Revenue ................................. 200,525 Income Summary ..........................
200,525
31 Income Summary ................................ 141,505 Depreciation expense ................... Fuel expense ................................. Insurance expense ........................ Interest expense ............................ Rent expense ................................. Salaries expense ........................... Supplies expense ..........................
27,750 28,038 9,500 3,667 21,000 47,550 4,000
31 Income Summary .................................. 59,020 H. Burke, Capital ...........................
59,020
31 H. Burke, Capital ................................... 36,000 H. Burke, Drawings ......................
36,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-6A (Continued) (d) (Continued) Clos. Clos.
Clos.
Income Summary 141,505 Clos. 200,525 Bal. 59,020 59,020 Bal. 0
H. Burke, Capital Bal. 75,750 36,000 Clos. 59,020 Bal. 98,770
H. Burke, Drawings Bal. 36,000 Clos. 36,000 Bal. 0
The ending balance in the capital account after the closing entries have been posted is $98,770. This is the same as the ending balance on the statement of owner’s equity.
Taking It Further: Although the amount of the investment of $2,000 made by the owner H. Burke was correctly recorded as an increase to the capital account during the year, you will need to know the amount of the transaction in order to show it properly in the statement of owner’s equity. The investment of $2,000 will appear as an addition to the opening balance at November 1, 2016 along with the profit for the year.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-7A (a)
(1) INCORRECT ENTRY 1.Cash ......................... Accts. Receivable
950
2.Misc. Expense.......... Cash .....................
75
3.Salaries Expense ..... Cash .....................
1,900
310
5.Equipment................ Cash .....................
69
(3) CORRECTING ENTRY
Cash .......................... Accts. Receivable
590
950
75
75
Advertising Expense Cash...................... Salaries Expense ..... Salaries Payable ...... Cash......................
1,200 700
310
310
Equipment ................ Accounts Payable Maintenance Expense Cash......................
96
69
1,900
4.Supplies ................... Accounts Payable
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(2) CORRECT ENTRY
4-93
Accounts Receivable Cash.......................
360
590
75
75
Advertising Expense Misc. Expense....... Salaries Payable ...... Salaries Expense ..
700
Equipment ................. Supplies ................
310
Maintenance Expense Cash....................... Equipment .............
96
360
75
700
1,900
310 96
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 4-7A (Continued) (b) GLOBAL CABLE Trial Balance April 30, 2017 Debit Cash ($4,100 – $360 – $27) ................................ $ 3,713 Accounts receivable ($3,200 + $360) ................ 3,560 Supplies ($800 – $310) ...................................... 490 Equipment ($10,600 + $310 – $69) .................... 10,841 Accumulated depreciation—equipment........... Accounts payable .............................................. Salaries payable ($700 – $700).......................... Unearned revenue ............................................. S. Spade, capital ................................................ Service revenue ................................................. Salaries expense ($3,300 – $700)...................... 2,600 Advertising expense ($600 + $75)..................... 675 Miscellaneous expense ($290 – $75) ................ 215 Depreciation expense........................................ 500 Maintenance expense........................................ 96 $22,690
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Credit
$ 1,350 2,100 0 890 12,900 5,450
$22,690
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 4-7A (Continued) Taking It Further: If error 4 was not detected, the Supplies account would initially be overstated, but only until the end-of-year adjustment process, at which time the Supplies account would be reduced to the amount of supplies remaining on hand. Assuming we ignore the effect of recording depreciation expense on the equipment that should have been recorded, this error would have the following effects on the financial statements: Income statement: Supplies expense overstated by $310 Profit understated by $310 Statement of owner’s equity: Profits understated by $310 Owner’s capital understated by $310 Balance sheet: Property, plant, and equipment understated by $310 Owner’s capital understated by $310 For subsequent accounting periods, the depreciation that would have been recorded on the equipment would affect the profit in those fiscal years and corresponding owner’s equity balances.
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PROBLEM 4-8A 1.
2.
3.
4.
5.
6.
Solutions Manual .
Cash .................................................. Rent Payable ..............................
500
Rent Expense.................................... Cash............................................
500
Service Revenue............................... Cash............................................
400
Cash .................................................. Accounts Receivable.................
400
Cash .................................................. Utilities Expense ........................
320
Utilities Expense ............................... Cash............................................
230
Unearned Revenue ........................... Accounts Receivable.................
850
Accounts Receivable ....................... Service Revenue ........................
850
Interest Receivable ........................... Interest Expense ........................
600
Interest Receivable ........................... Interest Revenue........................
600
500
500
400
400
320
230
850
850
600
600
No error
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PROBLEM 4-8A (Continued) 7.
8.
Service Revenue............................... Cash............................................
300
Cash .................................................. Unearned Revenue ....................
300
Accounts Payable............................. Repair Expense..........................
2,000
Equipment ......................................... Accounts Payable ......................
2,000
300
300
2,000 2,000
Taking It Further: Since the work has been done, the revenue has been earned. It does not matter that the customer has not paid cash yet. Many students make the error of thinking that cash must be received in order for the revenue to be earned.
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PROBLEM 4-9A (a) Although not required, the closing entries would be: GENERAL JOURNAL Date
Account Titles
Debit
Dec. 31 Service Revenue ................................ Interest Revenue ................................ Income Summary .........................
Credit
65,000 1,100 66,100
31 Income Summary .............................. 16,700 Depreciation Expense ................... Insurance Expense........................ Interest Expense ........................... Supplies Expense..........................
10,000 1,500 2,800 2,400
31 Income Summary .............................. F. Dunder, Capital .........................
49,400 49,400
31 F. Dunder, Capital ............................. F. Dunder, Drawings ....................
33,000
Closing
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F. Dunder, Capital Dec. 31, 2016 July 18 33,000 Bal. Closing Dec. 31, 2017
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33,000
14,100 3,200 17,300 49,400 33,700
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PROBLEM 4-9A (Continued) (b) DUNDER TOUR COMPANY Balance Sheet December 31, 2017 Assets Current assets Cash ............................................................................. $ 4,500 Short-term investments .............................................. 2,700 Accounts receivable ................................................... 3,500 Interest receivable....................................................... 100 Supplies ....................................................................... 3,100 Prepaid insurance ....................................................... 2,900 Total current assets................................................ 16,800 Long-term Investment Notes receivable.......................................................... 18,400 Property, plant, and equipment Equipment ...................................................... $50,000 Less: Accumulated depreciation ................ 15,000 35,000 Intangible asset Patents ............................................................................. 15,000 Total assets ................................................................. $85,200 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 7,300 Interest payable ........................................................... 700 Unearned revenue ....................................................... 3,500 Current portion of notes payable ............................... 3,000 Total current liabilities ........................................... 14,500 Long-term liabilities Notes payable.............................................................. 37,000 Total liabilities......................................................... 51,500 Owner's equity F. Dunder, capital ............................................................ 33,700 Total liabilities and owner's equity ............................ $85,200
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PROBLEM 4-9A (Continued)
(c) December 31, 2017
December 31, 2016
Working Capital
$16,800 − $14,500 = $2,300
$17,400 − $22,300 = $(4,900)
Current Ratio
$16,800 ÷ $14,500 = 1.16:1
$17,400 ÷ $22,300 = 0.78:1
December 31, 2017
December 31, 2016
$10,800* ÷ $14,500 = 0.74:1
$15,600 ÷ $22,300 = 0.70:1
(d)
Acid-test Ratio
*$10,800 = $4,500 + $2,700 + $3,500 + $100
Taking It Further: Although the acid-test ratio shows very little change, the working capital and current ratios both show a substantial improvement in 2017 over 2016. In 2016, the working capital was negative and the current ratio less than 1, indicating that the company did not have sufficient current assets to cover current liabilities. In 2017, the company had a positive working capital amount of $2,300 and a current ratio greater than 1. Dunder Tour Company’s liquidity has improved.
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PROBLEM 4-10A (a) Amounts in thousands
Cash Income tax recoverable Accounts receivable Acid-test assets Inventories Prepaid expenses Current assets
June 28, 2014 $13,507 3,461 638 17,606 21,721 643 $39,970
June 29, 2013 $24,541 358 1,197 26,096 22,810 803 $49,709
June 30, 2012 $34,332 426 517 35,275 24,891 799 $60,965
Payables and accruals $ 9,185 $10,101 $10,161 Deferred revenue 1,511 1,548 1,463 Other current liabilities 94 99 124 Current liabilities $10,790 $11,748 $11,748 (b) Amounts in thousands June 28, 2014 June 29, 2013 June 30, 2012 Working Capital
$39,970 − $10,790 = $29,180
$49,709 − $11,748 = $37,961
$60,965 − $11,748 = $49,217
Current Ratio
$39,970 ÷ $10,790 = 3.70:1
$49,709 ÷ $11,748 = 4.23:1
$60,965 ÷ $11,748 = 5.19:1
Acid-test Ratio
$17,606 ÷ $10,790 = 1.63:1
$26,096 ÷ $11,748 = 2.22:1
$35,275 ÷ $11,748 = 3.00:1
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PROBLEM 4-10A (Continued) (c)
The acid-test ratio is a measure of the company’s immediate short-term liquidity. The current ratio is a measure of the short-term debt-paying ability. Finally, working capital is the excess of current assets over current liabilities. If the amount is negative, the term used is a working capital deficiency. Danier Leather demonstrates very strong short-term liquidity and current debt-paying ability at each point in time. Any current ratio in excess of 2:1 or acid-test ratio in excess of 1:1 is considered very strong. Although each ratio has deteriorated in the period from June 30, 2012 to June 28, 2014, they remain very strong.
Taking It Further: When looking at the ratio analysis, we see that there is a large difference between the current and the acid-test ratios each year. Danier’s largest current asset, by far, is inventory. In 2014 the inventory amount made up 54% of total current assets. Since in the acid-test ratio inventory is excluded, this would lead to the acid-test ratio being less than half that of the current ratio. This is normal for a retail operation.
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Accounting Principles, Seventh Canadian Edition
*PROBLEM 4-11A ELBOW CYCLE REPAIR SHOP Work Sheet Year Ended January 31, 2017 Account Titles
Trial Balance Debit Credit 3,200
Cash Accounts receivable 6,630 Prepaid insurance 6,420 Supplies 5,240 Land 50,000 Building 190,000 Accum. deprec.— building Equipment 27,000 Accum. deprec.— equipment Accounts payable Interest payable
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Adjustments Debit Credit
(1) 4,280 (2) 3,930
11,000
Adjusted Trial Balance Debit Credit 3,200
Income Statement Debit Credit
6,630
6,630
2,140 1,310 50,000 190,000
2,140 1,310 50,000 190,000
(3) 3,800
14,800 27,000
4,500
14,800 27,000
(3) 3,000
7,500
7,500
(4)758
6,400 758
6,400 758
6,400
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Balance Sheet Debit Credit 3,200
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Accounting Principles, Seventh Canadian Edition
*PROBLEM 4-11A (Continued) Account Titles
Trial Balance Debit Credit
Adjustments Debit Credit
Adjusted Trial Balance Debit Credit
Income Statement Debit Credit
Balance Sheet Debit Credit
Unearned revenue 21,950 (5)1,300 20,650 20,650 Mortgage payable 182,000 182,000 182,000 H. Dude, capital 61,000 61,000 61,000 H. Dude, drawings 101,100 101,100 101,100 Service revenue 235,550 (5) 1,300 236,850 236,850 Deprec. exp. (3) 6,800 6,800 6,800 Insurance exp. (1) 4,280 4,280 4,280 Interest exp. 5,610 (4) 758 6,368 6,368 Salaries exp. 115,200 115,200 115,200 (2) 3,930 3,930 3,930 Supplies exp. Utilities exp. 12,000 _ 12,000 12,000 Totals 522,400 522,400 17,068 17,068 529,958 529,958 148,578 236,850 381,380 293,108 Profit 88,272 88,272 Totals 236,850 236,850 381,380 381,380 Taking It Further: Adjusting entries must be recorded in a journal and posted to the general ledger. Otherwise, the account balances will not agree with the financial statements.
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Accounting Principles, Seventh Canadian Edition
*PROBLEM 4-12A
Trial Balance Debit Credit 35,420 6,000 140,000
Account Titles Cash Supplies Equipment Accum. deprec.– equipment 42,000 Vehicle 110,000 Accum.deprec.– vehicle 48,125 Accounts payable 7,950 Salaries payable Interest payable
Solutions Manual .
SILVER RIDGE PLUMBING Worksheet Year Ended October 31, 2017 Adjusted Trial Adjustments Balance Debit Credit Debit Credit 35,420 (2)4,000 2,000 140,000 (1)14,000
Balance Sheet Debit Credit 35,420 2,000 140,000
56,000 110,000
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Income Statement Debit Credit
56,000 110,000
(1)13,750
61,875
61,875
(3)2,550 (4) 275
7,950 2,550 275
7,950 2,550 275
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Accounting Principles, Seventh Canadian Edition
*PROBLEM 4-12A (Continued)
Account Titles Notes payable H. Burke, capital H. Burke, drawings Service revenue Deprec. exp. Fuel exp. Insurance exp. Interest exp. Rent exp. Salaries exp. Supplies exp. Totals Profit Totals
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Trial Balance
Adjustments
Adjusted Trial Balance
Debit
Debit
Debit
Credit
Credit
60,000 75,750
Credit
Income Statement Debit
Credit
Balance Sheet Debit
60,000 75,750
36,000
60,000 75,750
36,000 200,525
Credit
36,000 200,525
(1)27,750
200,525
27,750 27,750 28,038 28,038 28,038 9,500 9,500 9,500 3,392 (4) 275 3,667 3,667 21,000 21,000 21,000 45,000 (3) 2,550 47,550 47,550 (2)4,000 4,000 4,000 434,350 434,350 34,575 34,575 464,925 464,925 141,505 200,525 323,420 264,400 59,020 59,020 200,525 200,525 323,420 323,420
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*PROBLEM 4-12A (Continued) Taking It Further: The preparation of the work sheet is optional because it is not part of the company’s books but basically a tool for accountants in the preparation of financial statements. Since all of the adjustments recorded on the worksheet ultimately get recorded in the general ledger, the preparation of the work sheet is not absolutely necessary. Adjusting entries can be posted as they are recorded in the journal to arrive at the adjusted trial balance and financial statements.
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*PROBLEM 4-13A
(b) GENERAL JOURNAL Date
Account Titles
J2 Debit
Sept. 30 Interest Receivable ............................ Interest Revenue ........................... ($50,000 × 3.5% × 6/12)
875
30 Salaries Expense ............................... Salaries Payable ............................
2,400
30 Interest Expense ................................ Interest Payable............................. ($80,000 × 5% × 2/12)
667
30 Depreciation Expense ....................... Accumulated Depreciation ...........
4,250
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Credit
875
2,400
667
4,250
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*PROBLEM 4-13A (Continued) (a) and (b) Interest Receivable Sept. 30 875 Bal. 875
Interest Revenue Sept. 30 Bal.
Salaries Payable Sept. 30 2,400 Bal.
2,400
Interest Payable Sept. 30 Bal.
667 667
Accumulated Depreciation Sept. 30 4,250
Bal.
4,250 8,500
875 875
Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400 Interest Expense Sept.30 3,333 667 Bal. 4,000 Depreciation Expense Sept. 30 4,250 Bal.
4,250
(c) GENERAL JOURNAL Date
Account Titles and Explanation
Sept. 30 Interest Revenue ............................... Income Summary .........................
Debit 875
30 Income Summary ................................ 163,650 Salaries expense ........................... Interest expense ............................ Depreciation expense ...................
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Credit
875 155,400 4,000 4,250
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*PROBLEM 4-13A (Continued) (c) (Continued) Interest Receivable Sept. 30 875 Bal. 875
Interest Revenue Sept. 30 Clos. 875 Bal.
Salaries Payable Sept. 30 2,400 Bal.
2,400
Interest Payable Sept. 30 Bal.
667 667
Accumulated Depreciation Sept. 30 4,250 4,250 8,500
Bal.
875 0
Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400 Clos. 155,400 Bal. 0 Interest Expense Sept.30 3,333 667 Bal. 4,000 Clos. 4,000 Bal. 0 Depreciation Expense Sept. 30 4,250 Bal. Bal.
4,250 Clos. 0
4,250
(d) GENERAL JOURNAL Date Oct.
Account Titles
Debit
1 Interest Revenue ................................ Interest Receivable .......................
875
1 Salaries Payable................................. Salaries Expense ...........................
2,400
1 Interest Payable ................................. Interest Expense............................
667
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Credit
875
2,400 667
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*PROBLEM 4-13A (Continued) (d) (Continued) Interest Receivable Sept. 30 875 Bal. 875 Rev. Bal.
875
0
Rev.
Salaries Payable Sept. 30 2,400 Rev.
2,400 Bal.
0
Interest Payable Sept. 30 Rev.
Interest Revenue Sept. 30 Clos. 875 Bal.
667
667 Bal.
0
875 0
875
Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400 Clos. 155,400 Bal. 0 Rev. 2,400 Bal. 2,400 Interest Expense Sept.30 3,333 667 Bal. 4,000 Clos. 4,000 Bal. 0 Rev. 667 Bal. 667
(e) GENERAL JOURNAL Date Oct.
Account Titles
Debit
1 Cash .................................................... Interest Revenue ...........................
875
2 Salaries Expense ............................... Cash ...............................................
3,000
31 Interest Expense ................................ Cash ...............................................
1,000
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Credit
875
3,000 1,000
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*PROBLEM 4-13A (Continued) (e) (Continued) Interest Receivable Sept. 30 875 Bal. 875 Rev. Bal.
875
Rev.
0
Salaries Payable Sept. 30 2,400
Rev.
2,400 Bal.
Interest Payable Sept. 30 Rev.
Interest Revenue Sept. 30 Clos. 875 Bal.
0
667
667 Bal.
0
875 Oct. 1 Bal.
875 0 875 0
Salaries Expense Sept. 30 153,000 2,400 Bal. 155,400 Clos. 155,400 Oct. 2 3,000 Rev. 2,400 Bal. 600 Interest Expense Sept.30 3,333 667 Bal. 4,000 Clos. 4,000 Oct. 31 1,000 Rev. 667 Bal. 333
Taking It Further: Reversing entries can be useful because they simplify the recording of cash transactions after the fiscal year end. It is not necessary to look at the previous year’s adjusting entries to decide how to record a cash transaction after the year end.
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*PROBLEM 4-14A (a) May 31 Accounts Receivable .............................. Service Revenue.................................
750 750
31 Supplies Expense ($2,910 – $765) ............. 2,145 Supplies ..............................................
2,145
31 Depreciation Expense ($115,000 ÷ 10)... 11,500 11,500 Accumulated Depreciation—Equipment 31 Salaries Expense ........................................ 1,390 Salaries Payable ................................. 31 Interest Expense ($60,000 × 6% × 1/12) . Interest Payable..................................
300
31 Unearned Revenue ................................. Service Revenue ($1,500 − $700).......
800
June 1 Service Revenue ..................................... Accounts Receivable .........................
750
1,390
300
800
(b)
750
1 Salaries Payable ......................................... 1,390 Salaries Expense ................................ 1 Interest Payable ...................................... Interest Expense.................................
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1,390
300 300
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*PROBLEM 4-14A (Continued) (c) June 1 Interest Expense ($60,000 × 6% × 1/12) . Cash ....................................................
300
2 Salaries Expense .................................... Cash ....................................................
1,980
19 Cash ($750 + $1,150)............................... Service Revenue.................................
1,900
June 1 Interest Payable ...................................... Cash ($60,000 × 6% × 1/12) ................
300
2 Salaries Expense .................................... Salaries Payable...................................... Cash ....................................................
590 1,390
19 Cash ($750 + $1,150)............................... Accounts Receivable ......................... Service Revenue.................................
1,900
300
1,980
1,900
(d)
300
1,980 750 1,150
Taking It Further: Reversing entries should only be used for adjusting journal entries that are accruals: accrued revenues and accrued expenses. Reversing prepayment adjusting entries would not provide the objective achieved through their use.
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PROBLEM 4-1B (a) GENERAL JOURNAL Date
J14
Account Titles
Debit
Credit
Dec. 31 Service Revenue ............................... 61,000 Income Summary .........................
61,000
31 Income Summary .............................. 50,100 Advertising Expense .................... Depreciation Expense ................... Insurance Expense ....................... Interest Expense ........................... Salaries Expense .......................... Supplies Expense .........................
8,400 5,600 3,500 600 28,000 4,000
31 Income Summary ............................... 10,900 J. Unser, Capital ............................
10,900
31 J. Unser, Capital................................. J. Unser, Drawings .......................
7,000
7,000
(b) Income Summary 50,100 61,000 10,900 Bal. 10,900 Bal. 0 J. Unser, Capital 12/31 Clos. 7,000
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Bal 13,600 Clos. 10,900 Bal.17,500
J. Unser, Drawings 12/31 Bal 7,00 Clos. 7,000 Bal.0
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PROBLEM 4-1B (Continued) (b) (Continued) Service Revenue 12/31 Bal. Clos. 61,000 61,000 Bal.0 Depreciation Expense 12/31 Bal. 5,600 5,600 Bal.0
Insurance Expense 12/31Bal. 3,500 Clos.3,500 Bal.0
Interest Expense 12/31 Bal. 600 Clos.600 Bal.0
Salaries Expense 12/31Bal. 28,000 Clos.28,000 Bal.0
Supplies Expense 12/31 Bal.
Advertising Expense 12/31 Bal. 8,400
4,000 Clos.4,000
Clos.8,400
Bal.0
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Bal.0
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PROBLEM 4-1B (Continued) (c) UNSER COMPANY Post-Closing Trial Balance December 31, 2017
Debit Cash................................................................. $ 5,300 Accounts receivable ........................................ 10,800 Supplies............................................................ 1,500 Prepaid insurance............................................ 2,000 Equipment ........................................................ 27,000 Accumulated depreciation—equipment......... Notes payable .................................................. Accounts payable ............................................ Salaries payable............................................... J. Unser, capital ............................................... Totals ........................................................... $46,600
Credit
5,600 15,000 6,100 2,400 17,500 $46,600
Taking It Further: A classified balance sheet groups together similar assets and similar liabilities, using standard classifications as follows: Assets Liabilities and Owner’s Equity Current assets Current liabilities Long-term investments Non-current liabilities Property, plant, and equipment Owner’s (shareholders’) equity Intangible assets Goodwill This is useful as items within a group have similar characteristics. These groupings help readers determine such things as whether the company has enough assets to pay its debts as they come due, and the claims of short- and long-term creditors on total assets.
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PROBLEM 4-2B (a) EDGEMONT ENTERTAINMENT SOLUTIONS Income Statement For the Year Ended December 31, 2017 Revenues Service revenue........................................... Expenses Depreciation expense ................................. Insurance expense ...................................... Salaries expense ......................................... Utilities expense .......................................... Total expenses..................................... Loss ...................................................................
$46,000 2,800 1,200 $39,600 4,000 47,600 $1,600
EDGEMONT ENTERTAINMENT SOLUTIONS Statement of Owner’s Equity For the Year Ended December 31, 2017 L. Bray, Capital, January 1*........................................... Add: Investment............................................................. Less: Loss .......................................................... $1,600 Drawings................................................... 7,200 L. Bray, Capital, December 31.......................................
$30,000 4,000 34,000 8,800 $25,200
*($34,000 - $4,000)
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PROBLEM 4-2B (Continued) (a) (Continued) EDGEMONT ENTERTAINMENT SOLUTIONS Balance Sheet December 31, 2017 Assets Current assets Cash ............................................................. $ 6,200 Accounts receivable ................................... 7,500 Prepaid insurance ....................................... 1,800 Total current assets............................. 15,500 Property, plant, and equipment Equipment ................................................... $33,000 Less: Accumulated depreciation— equipment 8,600 24,400 Total assets.......................................... $39,900 Liabilities and Owner’s Equity Current liabilities Accounts payable .......................................
$14,700
Owner’s equity M. Edgemont, capital .................................. Total liabilities and owner’s equity.....
25,200 $39,900
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PROBLEM 4-2B (Continued) (b) GENERAL JOURNAL Date
Account Titles
J14 Debit
Credit
Dec. 31 Service Revenue ............................... 46,000 Income Summary .........................
46,000
31 Income Summary .............................. 47,600 Depreciation Expense ................... Insurance Expense ....................... Salaries Expense .......................... Utilities Expense ...........................
2,800 1,200 39,600 4,000
31 M. Edgemont, Capital ........................ Income Summary ..........................
1,600 1,600
31 M. Edgemont, Capital ........................ M. Edgemont, Drawings ...............
7,200
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PROBLEM 4-2B (Continued) (c) Income Summary Clos. 47,600 Clos. 46,000 Bal. 1,600 Clos. 1,600 Bal. 0 M. Edgemont, Capital Bal. 34,000 Clos. 1,600 Clos. 7,200 25,200
M. Edgemont, Drawings Bal. 7,200 Clos. 7,200 Bal.
0
Service Revenue Bal. 46,000 Clos. 46,000 Bal. 0 Depreciation Expense Bal. 2,800 Clos. 2,800 Bal. 0
Insurance Expense Bal. 1,200 Clos. 1,200 Bal. 0
Utilities Expense Bal. 4,000 Clos. Bal. 0
Salaries Expense Bal. 39,600 Clos. 39,600 Bal. 0
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PROBLEM 4-2B (Continued) (d)
EDGEMONT ENTERTAINMENT SOLUTIONS Post-Closing Trial Balance December 31, 2017
Debit Cash................................................................. $ 6,200 Accounts receivable ........................................ 7,500 Prepaid insurance............................................ 1,800 Equipment ........................................................ 33,000 Accumulated depreciation—equipment......... Accounts payable ............................................ M. Edgemont, capital ....................................... Totals ........................................................... $48,500
Credit
$ 8,600 14,700 25,200 $48,500
Taking It Further: Current assets are normally cash and other assets that are expected to be converted to cash, sold, or used up within one year from the balance sheet date, or its operating cycle, whichever is longer. Current assets are listed on the balance sheet in liquidity order, with the most liquid asset, normally cash, listed first.
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PROBLEM 4-3B (a) Revenues Service revenue ............................................................. $114,300 Expenses Depreciation expense ................................. $10,025 Insurance expense ...................................... 5,625 Interest expense .......................................... 4,950 Salaries expense ......................................... 37,200 Supplies expense ........................................ 7,125 Utilities expense .......................................... 6,750 Total expenses ............................................................ 71,675 Profit ..................................................................................... $ 42,625
(b) BOREAL ROCK CLIMBING CENTRE Statement of Owner's Equity Year Ended January 31, 2017 L. Massak, capital, February 1, 2016 * .............................. $147,000 Add: Investment ................................................ $ 3,700 Profit........................................................ 42,625 46,325 193,325 Less: Drawings ............................................................. 52,500 L. Massak, capital, January 31, 2017 ................................ $140,825 *($150,700 − $3,700)
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PROBLEM 4-3B (Continued) (c) BOREAL ROCK CLIMBING CENTRE Balance Sheet January 31, 2017 Assets Current assets Cash ...................................................................................... $ 9,650 Short-term investments ....................................................... 9,375 Supplies ................................................................................ 1,780 Total current assets......................................................... 20,805 Equity investments ................................................................... 20,000 Property, plant, and equipment Land ........................................................................ $58,500 Building............................................ $165,000 Less: Accumulated depreciation ... 27,500 137,500 Equipment........................................ $ 45,250 Less: Accumulated depreciation ... 22,625 22,625 218,625 Total assets ............................................................. $259,430 Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,355 Salaries payable ................................................................... 1,250 Current portion of notes payable ............................................ 5,500 Total current liabilities..................................................... 14,105 Long-term liabilities Notes payable ........................................................................ 104,500 Total liabilities ..................................................................... 118,605 Owner's equity L. Massak, capital .................................................................. 140,825 Total liabilities and owner's equity .................................. $259,430
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PROBLEM 4-3B (Continued) (d) GENERAL JOURNAL Date
Account Titles
J14 Debit
Credit
Jan. 31 Service Revenue ............................... 114,300 Income Summary .........................
114,300
31 Income Summary .............................. 71,675 Depreciation Expense ................... Insurance Expense ....................... Interest Expense ........................... Salaries Expense .......................... Supplies Expense ......................... Utilities Expense ...........................
10,025 5,625 4,950 37,200 7,125 6,750
31 Income Summary ............................... 42,625 L. Massak, Capital .........................
42,625
31 L. Massak, Capital.............................. 52,500 L. Massak, Drawings ....................
52,500
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PROBLEM 4-3B (Continued) (e) Income Summary Clos.71,675 Clos.114,30 0 Clos.42,625 Bal. 42,625 Bal. 0 L. Massak, Capital 1/31 Bal. 150,700 Clos.52,500 Clos.42,625 Bal. 140,825
L. Massak, Drawings 1/31 Bal.52,500 Clos.52,500 Bal.
0
Service Revenue 1/31 Clos.114,300 Bal.114,300 Bal. 0 Depreciation Expense 1/31 Bal.10,025 10,025 Bal. 0
Insurance Expense 1/31 Bal.5,625 Clos.5,625 Bal. 0
Interest Expense 1/31 Bal.4,950 Clos.4,950 Bal. 0
Salaries Expense 1/31 Bal.37,200 Clos.37,200 Bal. 0
Supplies Expense 1/31 Bal.7,125 Clos.7,125 Bal. 0
Utilities Expense 1/31 Bal.6,750 Clos.6,750 Bal. 0
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PROBLEM 4-3B (Continued) (f) BOREAL ROCK CLIMBING CENTRE Post-Closing Trial Balance January 31, 2017
Debit $ 9,650 9,375 1,780 20,000 58,500 165,000
Credit
Cash................................................................. Short-term investment..................................... Supplies............................................................ Equity investments .......................................... Land .................................................................. Building ............................................................ Accumulated depreciation—building ............. $ 27,500 Equipment ........................................................ 45,250 Accumulated depreciation—equipment......... 22,625 Accounts payable ............................................ 7,355 Salaries payable............................................... 1,250 Notes payable .................................................. 110,000 L. Massak, capital ............................................ 140,825 Totals ........................................................... $309,555 $309,555 The balance of L. Massak capital shown in the post-closing trial balance matches the balance shown on the statement of owner’s equity.
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PROBLEM 4-3B (Continued) Taking It Further: When deciding how to present financial information in the classified balance sheet, Boreal Rock Climbing Centre could show the presentation as was followed in part (c) above but it could have chosen to prepare the classified balance sheet following the International Financial Reporting Standards (IFRS). Had it followed IFRS, the statement would likely have been titled Statement of Financial Position. The content of the balance sheets would have been the same as to amounts and key sub-totals but the sequence of the major categories of the elements in the balance sheet would have changed.
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PROBLEM 4-4B (a) GENERAL JOURNAL Date
Account Titles
Debit
Credit
Sept. 30 Accounts Receivable ............................ 5,350 Service Revenue...............................
5,350
30 Insurance Expense ($4,140 × 8/12) ...... 2,760 Prepaid Insurance ............................
2,760
30 Supplies Expense ($3,780 – $560) ....... 3,220 Supplies ............................................
3,220
30 Depreciation Expense .......................... 7,000 Accumulated Depreciation —Building ($100,000 ÷ 50) ............... Accumulated Depreciation —Equipment ($40,000 ÷ 8) ............... 30 Salaries Expense .................................. 1,975 Salaries Payable ............................... 30 Interest Expense ................................... Interest Payable................................ ($125,000 × 4.5% × 1/12)
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5,000
1,975
469
30 Unearned Revenue ($3,300 × ¾) .......... 2,475 Service Revenue...............................
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469
2,475
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PROBLEM 4-4B (Continued) (b) EDGE SPORTS REPAIR SHOP Adjusted Trial Balance September 30, 2017 Account Titles Debit Credit Cash.................................................................... $ 6,750 Accounts receivable ($11,540 + $5,350) ........... 16,890 Prepaid insurance ($4,140 – $2,760)................. 1,380 Supplies ($3,780 – $3,220)................................. 560 Land .................................................................... 55,000 Building .............................................................. 100,000 Accumulated depreciation—building ($19,150 + $2,000) ............................................ $ 21,150 Equipment .......................................................... 40,000 Accumulated depreciation—equipment ($11,500 + $5,000) ............................................ 16,500 Accounts payable .............................................. 8,850 Interest payable ($0 + $469) .............................. 469 Salaries payable ($0 + $1,975)........................... 1,975 Unearned revenue ($3,300 – $2,475)................. 825 Mortgage payable .............................................. 125,000 R. Brachman, capital ......................................... 60,000 R. Brachman, drawings ..................................... 103,525 Service revenue ($189,250 + $5,350 + $2,475) . 197,075 Depreciation expense ........................................ 7,000 Insurance expense ............................................ 2,760 Interest expense ($6,302 + $469) ...................... 6,771 Salaries expense ($75,900 + $1,975)................. 77,875 Supplies expense .............................................. 3,220 Utilities expense ................................................ 10,113 $431,844 $431,844
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PROBLEM 4-4B (Continued) (c) EDGE SPORTS REPAIR SHOP Income Statement Year Ended September 30, 2017 Service revenue ............................................................... $197,075 Expenses Depreciation expense ..................................... $ 7,000 Insurance expense ........................................ 2,760 Interest expense ............................................ 6,771 Salaries expense .............................................. 77,875 Supplies expense .......................................... 3,220 Utilities expense .............................................. 10,113 Total expenses.......................................... 107,739 Profit ................................................................................. $ 89,336
EDGE SPORTS REPAIR SHOP Statement of Owner's Equity Year Ended September 30, 2017
R. Brachman, capital, October 1, 2016* Add: Investment....................................... Profit................................................
$56,000 $ 4,000 89,336
93,336 149,336 Less: Drawings ................................................................. 103,525 R. Brachman, capital, September 30, 2017 ........................ $45,811 *($60,000 − $4,000)
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PROBLEM 4-4B (Continued) (c) (Continued) EDGE SPORTS REPAIR SHOP Balance Sheet September 30, 2017 Assets Current assets Cash ............................................................................. $ 6,750 Accounts receivable ................................................... 16,890 Prepaid insurance ....................................................... 1,380 Supplies ....................................................................... 560 Total current assets................................................ 25,580 Property, plant, and equipment $55,000 Land .......................................................... Building......................................... $100,000 78,850 Less: Accumulated depreciation 21,150 Equipment................................... 40,000 23,500 157,350 Less: Accumulated depreciation 16,500 Total assets ............................................................... $182,930 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 8,850 Current portion of mortgage payable ...................... 5,400 Interest payable ........................................................... 469 Salaries payable .......................................................... 1,975 Unearned revenue ....................................................... 825 Total current liabilities............................................ 17,519 Long-term liabilities Mortgage payable .......................................................... 119,600 Total liabilities ............................................................. 137,119 Owner's equity R. Brachman, capital .................................................... 45,811 Total liabilities and owner's equity .......................... $182,930
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PROBLEM 4-4B (Continued) (d) GENERAL JOURNAL Date
Account Titles
Debit
Credit
Sept. 30 Service Revenue ................................. 197,075 Income Summary ..........................
197,075
30 Income Summary ................................ 107,739 Depreciation Expense ................... Insurance Expense........................ Interest Expense............................ Salaries Expense ........................... Supplies Expense.......................... Utilities Expense............................
7,000 2,760 6,771 77,875 3,220 10,113
30 Income Summary .................................. 89,336 R. Brachman, Capital ....................
89,336
30 R. Brachman, Capital .......................... 103,525 R. Brachman, Drawings ................
103,525
Taking It Further: Likely the reason that Ralph had to invest $4,000 cash into the business in November of 2016 is because during the year he withdrew $103,525 cash when the business’ profit was only $89,336. Ralph should be concerned that his capital balance is diminishing and he should try to reduce his drawings in the coming year.
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PROBLEM 4-5B (a) GENERAL JOURNAL Date Mar.
Account Titles
J1 Debit
Credit
1 Cash .................................................... 10,000 L. Eddy, Capital .............................
10,000
1 Vehicles .............................................. Cash ............................................... Notes Payable................................
6,500 1,500 5,000
3 Supplies.............................................. Accounts Payable .........................
1,200
5 Prepaid Insurance .............................. Cash ...............................................
1,200
12 Accounts Receivable ......................... Service Revenue............................
4,800
18 Accounts Payable .............................. Cash ...............................................
500
20 Salaries Expense ............................... Cash ...............................................
1,800
21 Cash .................................................... Accounts Receivable ....................
1,400
25 Accounts Receivable ......................... Service Revenue............................
2,500
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1,200
1,200
4,800
500
1,800
1,400 2,500
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PROBLEM 4-5B (Continued) (a) (Continued) Mar. 31 Fuel Expense...................................... Cash ...............................................
375
31 L. Eddy, Drawings .............................. Cash ...............................................
900
375 900
(a), (c), and (f) Note items in italics are the balances used to prepare the trial balance in part (b). Cash Date Mar.
Explanation
1 1 5 18 20 21 31 31
Ref.
Debit
J1 J1 J1 J1 J1 J1 J1 J1
10,000
1,400
Credit
Balance
10,000 1,500 8,500 1,200 7,300 500 6,800 1,800 5,000 6,400 375 6,025 900 5,125
Accounts Receivable Date Mar. 12 21 25 31
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Explanation
Ref.
Adjusting
J1 J1 J1 J2
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Debit
Credit
Balance
4,800 1,400 2,500 500
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PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Supplies Date Mar. 3 31
Explanation
Ref.
Debit 1,200
Adjusting
J1 J2
Credit
Balance
800
1,200 400
Credit
Balance
100
1,200 1,100
Prepaid Insurance Date Mar. 5 31
Date Mar.
Explanation
Ref.
Debit 1,200
Adjusting
J1 J2
Explanation 1
Vehicles Ref.
Debit
Credit Balance
J1
6,500
6,500
Accumulated Depreciation—Vehicles Date
Explanation
Ref.
Mar. 31
Adjusting
J2
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Debit
Credit
Balance
108
108
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PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Accounts Payable Date Mar.
Explanation
Ref.
3 18
J1 J1
Debit
Credit
Balance
1,200
1,200 700
Credit
Balance
500
500
Credit
Balance
500
Salaries Payable Date
Explanation
Ref.
Mar. 31
Adjusting
J2
Debit
Interest Payable Date
Explanation
Ref.
Mar. 31
Adjusting
J2
Debit
19
19
Notes Payable Date Mar.
Explanation 1
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Debit
Credit
Balance
5,000
5,000
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PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) L. Eddy, Capital Date Mar.
1 31 31
Explanation
Ref.
Closing Closing
J1 J3 J3
Debit
Credit
Balance
10,000 4,098
10,000 14,098 13,198
900
L. Eddy, Drawings Date Mar. 31 31
Explanation
Ref.
Closing
J1 J3
Debit
Credit
Balance
900
900 0
900
Income Summary Date
Explanation
Ref.
Mar. 31 31 31
Closing Closing Closing
J3 J3 J3
Debit
Credit
Balance
7,800
7,800 4,098 0
3,702 4,098
Service Revenue Date Mar. 12 25 31 31
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Explanation
Ref.
Adjusting Closing
J1 J1 J2 J3
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Debit
Credit
Balance
4,800 2,500 500 7,800
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4,800 7,300 7,800 0
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PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Depreciation Expense Date
Explanation
Ref.
Mar. 31 31
Adjusting Closing
J2 J3
Debit
Credit
Balance
108
108 0
108
Fuel Expense Date Mar. 31 31
Explanation
Ref.
Closing
J1 J3
Debit
Credit
Balance
375
375 0
375
Insurance Expense Date
Explanation
Ref.
Mar. 31 31
Adjusting Closing
J2 J3
Debit
Credit
Balance
100
100 0
100
Interest Expense Date
Explanation
Ref.
Mar. 31 31
Adjusting Closing
J2 J3
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Debit
Credit
Balance
19 19
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19 0
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PROBLEM 4-5B (Continued) (a), (c), and (f) (Continued) Salaries Expense Date Mar. 20 31 31
Explanation
Ref.
Adjusting Closing
J1 J2 J3
Debit
Credit
Balance
1,800 500
1,800 2,300 0
2,300
Supplies Expense Date
Explanation
Ref.
Mar. 31 31
Adjusting Closing
J2 J3
Debit
Credit
Balance
800 800
(b) EDDY’S CARPET CLEANERS Trial Balance March 31, 2017 Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 5,900 Supplies.............................................................. 1,200 Prepaid insurance.............................................. 1,200 Vehicles .............................................................. 6,500 Accounts payable .............................................. Notes payable .................................................... L. Eddy, capital .................................................. L. Eddy, drawings .............................................. 900 Service revenue ................................................. Fuel expense ...................................................... 375 Salaries expense................................................ 1,800 Totals ............................................................. $23,000
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Credit
$
700 5,000 10,000 7,300
$23,000
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800 0
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PROBLEM 4-5B (Continued) (c) GENERAL JOURNAL Date
Account Titles
J2 Debit
Mar. 31 Depreciation Expense ....................... Accumulated Depreciation —Vehicles ...................................... ($6,500 ÷ 5 years) × 1/12
108
31 Insurance Expense ............................ Prepaid Insurance ......................... ($1,200 ÷ 12)
100
31 Supplies Expense .............................. Supplies ......................................... ($1,200 − $400)
800
31 Salaries Expense ............................... Salaries Payable ............................
500
31 Interest Expense ................................ Interest Payable............................. ($5,000 × 4.5% × 1/12)
19
31 Accounts Receivable ........................ Service Revenue............................
500
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Credit
108
100
800
500
19
500
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PROBLEM 4-5B (Continued) (d)
EDDY’S CARPET CLEANERS Adjusted Trial Balance March 31, 2017
Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 6,400 Supplies.............................................................. 400 Prepaid insurance.............................................. 1,100 Vehicles .............................................................. 6,500 Accumulated depreciation—vehicles............... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Eddy, capital .................................................. L. Eddy, drawings .............................................. 900 Service revenue ................................................. Depreciation expense ........................................ 108 Fuel expense ...................................................... 375 Insurance expense ............................................ 100 Interest expense ................................................ 19 Salaries expense................................................ 2,300 Supplies expense .............................................. 800 Totals ............................................................. $24,127
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Credit
$
108 700 500 19 5,000 10,000 7,800
$24,127
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PROBLEM 4-5B (Continued) (e) EDDY’S CARPET CLEANERS Income Statement Month Ended March 31, 2017 Revenues Service revenue........................................................... Expenses Depreciation expense ................................... $ 108 Fuel expense ................................................. 375 Insurance expense ........................................ 100 Interest expense ............................................ 19 Salaries expense ........................................... 2,300 Supplies expense .......................................... 800 Total expenses........................................................ Profit .................................................................................
$7,800
3,702 $4,098
EDDY’S CARPET CLEANERS Statement of Owner's Equity Month Ended March 31, 2017 L. Eddy, capital, March 1 ................................................. Add: Investments.............................................. $10,000 Profit ........................................................ 4,098 Less: Drawings ............................................................... L. Eddy, capital, March 31 ...............................................
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$
0
14,098 14,098 900 $13,198
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PROBLEM 4-5B (Continued) (e) (Continued) EDDY’S CARPET CLEANERS Balance Sheet March 31, 2017 Assets Current assets Cash ............................................................................. $ 5,125 Accounts receivable ................................................... 6,400 Supplies ....................................................................... 400 Prepaid insurance ....................................................... 1,100 Total current assets................................................ 13,025 Property, plant, and equipment Vehicles ......................................................... $6,500 Less: Accumulated depreciation ................. 108 6,392 Total assets ................................................................. $19,417 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 700 Salaries payable .......................................................... 500 Interest payable ........................................................... 19 Current portion of notes payable ............................... 2,000 Total current liabilities............................................ 3,219 Long term liabilities Notes payable .............................................................. 3,000 Total liabilities......................................................... 6,219 Owner's equity L. Eddy, capital ................................................................ 13,198 Total liabilities and owner's equity ............................ $19,417
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PROBLEM 4-5B (Continued) (f) GENERAL JOURNAL Date
Account Titles
J3 Debit
Mar. 31 Service Revenue ................................ Income Summary ..........................
7,800
31 Income Summary ............................... Depreciation Expense .................. Fuel Expense ................................. Insurance Expense........................ Interest Expense............................ Salaries Expense ........................... Supplies Expense..........................
3,702
31 Income Summary ............................... L. Eddy, Capital .............................
4,098
31 L. Eddy, Capital .................................. L. Eddy, Drawings .........................
900
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Credit
7,800 108 375 100 19 2,300 800
4,098 900
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PROBLEM 4-5B (Continued) (g) EDDY’S CARPET CLEANERS Post-Closing Trial Balance March 31, 2017
Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Prepaid insurance.............................................. Vehicles .............................................................. Accumulated depreciation—Vehicles .............. Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Eddy, capital ..................................................
Debit $ 5,125 6,400 400 1,100 6,500
$19,525
Credit
$ 108 700 500 19 5,000 13,198 $19,525
Taking It Further: Eddy’s Carpet Cleaners will need to record adjusting journal entries every month if it wishes to prepare financial statements each month. Closing entries are done only at the end of the fiscal year.
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PROBLEM 4-6B
(a) GENERAL JOURNAL Date
Account Titles
J2 Debit
Aug. 31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($108,000 ÷ 12 years) Accumulated Depreciation —Vehicles ...................................... ($98,000 ÷ 8 years)
Credit
21,250 9,000
12,250
31 Supplies Expense .............................. 21,900 Supplies ......................................... ($23,400 − $1,500)
21,900
31 Unearned Revenue ............................ Service Revenue............................ ($4,500 − $2,500)
2,000 2,000
31 Interest Receivable ............................ Interest Revenue ........................... ($18,000 × 4% × 6/12)
360
31 Salaries Expense ............................... Salaries Payable ............................
1,850
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1,850
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PROBLEM 4-6B (Continued) (a) (Continued) NAZARI ELECTRICAL SERVICES Adjusted Trial Balance August 31, 2017 Debit Credit Cash.................................................................. $ 13,870 Interest receivable ........................................... 360 Supplies............................................................ 1,500 Debt investments ............................................. 18,000 Equipment ........................................................ 108,000 Accumulated depreciation—equipment......... $ 47,250 * Vehicles ............................................................ 98,000 Accumulated depreciation—vehicles............. 55,125 ** Accounts payable ............................................ 7,115 Salaries payable............................................... 1,850 Unearned revenue ($4,500 − $2,000) .............. 2,500 Notes payable .................................................. 48,000 A. Nazari, capital .............................................. 68,175 A. Nazari, drawings.......................................... 32,400 Service revenue ($180,115 + $2,000) .............. 182,115 Interest revenue ($360 + $360) ........................ 720 21,250 Depreciation expense ...................................... Fuel expense .................................................... 25,235 Insurance expense .......................................... 8,550 Interest expense .............................................. 2,535 Rent expense ................................................... 18,900 Salaries expense ($40,500 + $1,850)............... 42,350 Supplies expense ............................................ 21,900 $412,850 $412,850 * $38,250 + $9,000 = $47,250 ** $42,875 + $12,250 = $55,125
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PROBLEM 4-6B (Continued) (b) Revenues Service revenue........................................... $182,115 Interest ....................................................... 720 $182,835 Expenses Depreciation expense ................................. 21,250 Fuel expense ............................................... 25,235 Insurance expense ...................................... 8,550 Interest expense .......................................... 2,535 Rent expense ............................................... 18,900 Salaries expense ......................................... 42,350 Supplies expense ........................................ 21,900 140,720 Profit ................................................................. $ 42,115 (c) NAZARI ELECTRICAL SERVICES Statement of Owner's Equity Year Ended August 31, 2017 A. Nazari, capital, September 1, 2016 .................................$ 65,175 * Add: Investments ............................................... $ 3,000 Profit........................................................ 42,115 45,115 110,290 Less: Drawings .................................................................. 32,400 A. Nazari, capital, August 31, 2017 .................................... $ 77,890 * $68,175 – $3,000 = $65,175
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PROBLEM 4-6B (Continued) (c)
(Continued) NAZARI ELECTRICAL SERVICES Balance Sheet August 31, 2017 Assets
Current assets Cash ...................................................................................... $ 13,870 Interest receivable................................................................ 360 Supplies ................................................................................. 1,500 Total current assets......................................................... 15,730 Debt investments ...................................................................... 18,000 Property, plant, and equipment Equipment........................................... $ 108,000 Less: Accumulated depreciation ... 47,250 $ 60,750 Vehicles ........................................... 98,000 Less: Accumulated depreciation ... 55,125 42,875 103,625 Total assets ............................................................. $137,355 Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,115 Salaries payable ................................................................... 1,850 Unearned revenue ................................................................ 2,500 Current portion of notes payable ......................................... 8,000 Total current liabilities..................................................... 19,465 Long-term liabilities Notes payable ......................................................................... 40,000 Total liabilities.................................................................. 59,465 Owner's equity A. Nazari, capital..................................................................... 77,890 Total liabilities and owner's equity .................................. $137,355
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PROBLEM 4-6B (Continued) (d) GENERAL JOURNAL Date
Account Titles
Debit
Credit
Aug. 31 Service Revenue ................................. 182,115 Interest Revenue ................................ 720 Income Summary ..........................
182,835
31 Income Summary ................................ 140,720 Depreciation expense ................... Fuel expense ................................. Insurance expense ........................ Interest expense ............................ Rent expense ................................. Salaries expense ........................... Supplies expense ..........................
21,250 25,235 8,550 2,535 18,900 42,350 21,900
31 Income Summary .................................. 42,115 A. Nazari, Capital ...........................
42,115
31 A. Nazari, Capital................................... 32,400 A. Nazari, Drawings .......................
32,400
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PROBLEM 4-6B (Continued) (d) (Continued) Clos. Clos.
Clos.
Income Summary 140,720 Clos. 182,835 Bal. 42,115 42,115 Bal. 0 A. Nazari, Capital Bal. 68,175 32,400 Clos. 42,115 Bal. 77,890
A. Nazari, Drawings Bal. 32,400 Clos. 32,400 Bal. 0
The ending balance in the capital account after the closing entries have been posted is $77,890. This is the same as the ending balance on the statement of owner’s equity.
Taking It Further: Although the amount of the investment of $3,000 made by the owner A. Nazari was correctly recorded as an increase to the capital account during the year, you will need to know the amount of the transaction in order to show it properly in the statement of owner’s equity. The investment of $3,000 will appear as an addition to the opening balance at September 1, 2016 along with the profit for the year.
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PROBLEM 4-7B (a) (1)
INCORRECT ENTRY
(2)
CORRECT ENTRY
(3)
CORRECTING ENTRY
1. Supplies 5,200 Equipment 5,100 Equipment 5,100 Accounts Payable Accounts Payable 5,200 Accounts Payable Supplies 2. Misc. Expense Cash
2,050
Rent Expense 2,050 Cash
2,050
5,100 100 5,200
Rent Expense 2,050 2,050 Miscellaneous Expense 2,050
3. Cash 1,735 Cash 1,735 Service Revenue 1,735 Service Revenue 1,735 Accounts Receivable 1,735 Accounts Receivable 1,735 4. Cash 575 Accounts Payable Accounts Receivable 575 Cash
5. Salaries Payable Cash
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575
Accounts Receivable 575 575 Accounts Payable 575 Cash 1,150
2,250 750
Salaries Expense Salaries Payable 3,000
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2,250 2,250
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Accounting Principles, Seventh Canadian Edition
PROBLEM 4-7B (Continued) (a) Continued (1) INCORRECT ENTRY
6. Salary Expense Cash
(2) CORRECT ENTRY
(3) CORRECTING ENTRY
1,800 M. Hubert, Drawings 1,800 1,800 Cash 1,800
M. Hubert, Drawings 1,800 Salary Expense 1,800
7. No entry
Depreciation exp. 295 Depreciation expense 295 Accum. Depr.—Equip. 295 Accum. Depr.—Equip. 295 [($12,620 + $5,100) ÷ 5 ÷ 12 = $295]
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PROBLEM 4-7B (Continued) (b) INTERACTIVE COMPUTER INSTALLATIONS Trial Balance March 31, 2017 Debit Cash ($6,680 − $1,150) ....................................... $ 5,530 Accounts receivable ($3,850 − $1,735 + $575).. 2,690 Supplies ($5,900 − $5,200) ................................. 700 Equipment ($12,620 + $5,100)............................ 17,720 Accumulated depreciation ($6,000 + $295)....... Accounts payable ($5,330 – $100 − $575)........ Salaries payable (−$2,250 + $2,250) .................. Unearned revenue .............................................. M. Hubert, capital ............................................... M. Hubert, drawings ($0 + $1,800) ..................... 1,800 Service revenue ($7,800 − $1,735)..................... Depreciation expense ($0 + $295) ..................... 295 Miscellaneous expense ($3,360 − $2,050) ........ 1,310 Rent expense ($0 + $2,050)................................ 2,050 Salaries expense ($4,800 + $2,250 − $1,800) .... 5,250 $37,345
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Credit
$ 6,295 4,655 0 4,955 15,375 6,065
$37,345
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PROBLEM 4-7B (Continued) Taking It Further: Error 6 would have the following effects on the financial statements: Income statement: Salary expense overstated by $1,800 Profit understated by $1,800 Statement of owner’s equity: Drawing understated by $1,800 Profit understated by $1,800 While it is true that M. Hubert’s capital account balance reported on the balance sheet is not affected, other financial statements, including the income statement and the statement of owner’s equity are affected as described above. This error might alarm creditors, for example, who feel that the expenses for salaries are too high. Creditors are also very concerned about how much an owner withdraws from the business.
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PROBLEM 4-8B
1.
2.
3.
4.
5.
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Accounts Payable ............................. Supplies Expense.......................
700
Supplies ............................................. Accounts Payable ......................
700
Accounts Payable ............................. Cash ............................................
600
Accounts Payable ............................. Cash ............................................
600
Unearned Revenue............................ Service Revenue ........................
350
Cash ................................................... Unearned Revenue .....................
575
Accumulated Depreciation ............... Depreciation Expense ................
1,280
Depreciation Expense....................... Accumulated Depreciation ........
1,820
Service Revenue ............................... Unearned Revenue .....................
650
Accounts Receivable ........................ Service Revenue ........................
650
4-157
700
700
600
600
350
575
1,280
1,820
650 650
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PROBLEM 4-8B (Continued) (b) Continued 6.
7.
8.
Interest Payable ................................ Interest Receivable.....................
750
Interest Expense ............................... Interest Payable..........................
750
Cash ................................................... Accounts Receivable .................
500
Cash ................................................... Accounts Receivable .................
500
Cash ................................................... Rent Expense .............................
950
J. Fu, Drawings ................................. Cash ............................................
950
750
750
500
500
950 950
Taking It Further: The owner’s apartment rental cost is a personal expense and not a business expense. Charging personal expenses to the business as a business expense is unethical and causes the business’ expenses to be overstated and the profit understated. Although J. Fu’s capital account balance remains unaffected, from a tax perspective, the rent expense is not a deductible item and so there would be a violation of the reporting of the business income on the tax return for the owner.
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PROBLEM 4-9B (a) Although not required, the closing entries would be: GENERAL JOURNAL Date
Account Titles
Debit
Credit
Mar. 31 Service Revenue................................. 79,800 Interest Revenue ................................ 400 Income Summary ..........................
80,200
31 Income Summary .............................. 29,500 Advertising Expense ..................... Depreciation Expense ................... Insurance Expense ........................ Interest Expense ............................ Supplies Expense ..........................
12,000 8,000 4,000 1,800 3,700
31 Income Summary .............................. 50,700 N. Anderson, Capital .....................
50,700
31 N. Anderson, Capital ......................... 57,700 N. Anderson, Drawings ................
57,700
Closing
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N. Anderson, Capital Mar. 31, 2016 Sept. 20 Bal. 57,700 Closing Mar. 31, 2017
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PROBLEM 4-9B (Continued) (b) MATRIX CONSULTING SERVICES Balance Sheet March 31, 2017 Assets Current assets Cash............................................................................. $ 3,900 Short-term investments.............................................. 3,000 Accounts receivable ................................................... 4,700 Interest receivable ...................................................... 200 Supplies....................................................................... 2,300 Prepaid insurance....................................................... 4,400 Total current assets ............................................... 18,500 Long-term Investment Notes receivable ......................................................... 10,000 Property, plant, and equipment Equipment ...................................................... $48,000 Less: Accumulated depreciation ................ 20,000 28,000 Intangible asset Patents ............................................................................ 16,000 Total assets ......................................................................... $72,500 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 11,650 Interest payable .......................................................... 150 Unearned revenue ...................................................... 1,200 Current portion of notes payable .............................. 15,000 Total current liabilities ........................................... 28,000 Long-term liabilities Notes payable * ............................................................... 15,000 Total liabilities ........................................................ 43,000 Owner's equity N. Anderson, capital ....................................................... 29,500 Total liabilities and owner's equity ........................... $72,500 *($30,000 – $15,000)
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PROBLEM 4-9B (Continued) (c) March 31, 2017
March 31, 2016
Working Capital
$18,500 − $28,000 = $(9,500)
$30,700 − $15,950 = $14,750
Current Ratio
$18,500 ÷ $28,000 = 0.66:1
$30,700 ÷ $15,950 = 1.92:1
March 31, 2017
March 31, 2016
$11,800* ÷ $28,000 = 0.42:1
$25,500 ÷ $15,950 = 1.60:1
(d)
Acid-test Ratio
*$11,800 = $3,900 + $3,000 + $4,700 + $200
Taking It Further: Working capital has turned negative in 2017, and by a significant amount. This means that there are insufficient current assets to pay off current liabilities. This also explains why the current ratio of 2017 is less than 1. There was a substantial decline in all ratios from 2016 to 2017; indicating a severe weakening in the company’s liquidity from 2016 to 2017.
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PROBLEM 4-10B (a) Amounts in thousands
Cash Current taxes receivable Accounts receivable Acid test assets Inventories Prepaid expense Current assets Acc. payable and accr. liabilities Dividends payable Current taxes payable Cur. portion of long-term debt Current liabilities
Dec. 30, 2014 $1,484 21,2,44713 1,473 5,198 3,813 669 $9,680
Dec. 30, 2013 $2,317 1,353 1,353 3,670 2,983 754 $7,407
Dec. 30, 2012 $4,281 2,358 2,358 6,639 3,892 364 $10,895
$3,583 1,375 0 0 $4,958
$4,100 1,214 1,953 0 $7,267
$3,978 1,214 426 700 $6,318
(b) Amounts in thousands Dec. 30, 2014 Working Capital
Dec. 30, 2013
Dec. 30, 2012
$9,680 – $4,958 $7,407 – $7,267 $10,895 – $6,318 = $4,722 = $140 = $4,577
Current Ratio
$9,680 ÷ $4,958 = 1.95:1
$7,407 ÷ $7,267 = 1.02:1
$10,895 ÷ $6,318 = 1.72:1
Acid-test Ratio
$5,198 ÷ $4,958 = 1.05:1
$3,670 ÷ $7,267 = 0.51:1
$6,639 ÷ $6,318 = 1.05:1
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PROBLEM 4-10B (Continued) (c) The acid-test ratio is a measure of the company’s immediate short-term liquidity. The current ratio is a measure of the short-term debt-paying ability. Finally, working capital is the excess of current assets over current liabilities. If the amount is negative, the term used is working capital deficiency. The amount of working capital was similar in 2014 and 2012 and low at the 2013 year end. The current ratio was close to 2:1 in 2014 and the acid-test ratio was in excess of 1:1 in 2014, after being much lower at the 2013 year end. This demonstrates a liquidity that is considered very strong.
Taking It Further: Any type of business that holds merchandise inventory will always have a larger current ratio than acid-test ratio. Since inventory and prepaid expenses are excluded in the acid-test ratio and all current liabilities are included in both ratios, this will invariably be the result. Since an airline would not have merchandise inventory and Big Rock has substantial amounts of inventory, the difference between the current ratio and the acid-test ratio will be much larger for Big Rock than for WestJet Airlines. This is why a company like Big Rock should not be compared to an airline when using the acid-test ratio.
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*PROBLEM 4-11B
Trial Balance Debit Credit 6,750
EDGE SPORTS REPAIR SHOP Worksheet Year Ended September 30, 2017 Adjusted Trial Income Adjustments Balance Statement Debit Credit Debit Credit Debit Credit 6,750
Account Titles Cash Accounts receivable 11,540 (1) 5,350 16,890 Prepaid insurance 4,140 (2) 2,760 1,380 Supplies 3,780 (3) 3,220 560 Land 55,000 55,000 Building 100,000 100,000 Accum. deprec.— bldg. 19,150 (4) 2,000 21,150 Equipment 40,000 40,000 Accum. deprec.— equip. 11,500 (4) 5,000 16,500 Accounts payable 8,850 8,850 Interest payable (6) 469 469 Salaries payable (5) 1,975 1,975
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Balance Sheet Debit Credit 6,750 16,890 1,380 560 55,000 100,000 21,150 40,000 16,500 8,850 469 1,975
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*PROBLEM 4-11B (Continued) Trial Balance
Adjustments
Adjusted Trial Balance
Income Statement
Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Unearned revenue 3,300 (7)2,475 825 825 Mortgage payable 125,000 125,000 125,000 R. Brachman, capital 60,000 60,000 60,000 R. Brachman, 103,525 103,525 103,525 drawings Service (1) 5,350 revenue 189,250 (7) 2,475 197,075 197,075 Deprec. expense (4) 7,000 7,000 7,000 Insurance expense (2) 2,760 2,760 2,760 Interest expense 6,302 (6) 469 6,771 6,771 Salaries expense 75,900 (5) 1,975 77,875 77,875 Supplies expense (3) 3,220 3,220 3,220 Utilities expense 10,113 10,113 10,113 Totals 417,050 417,050 23,249 23,249 431,844 431,844 107,739 197,075 324,105 234,769 Profit 89,336 89,336 Totals 197,075 197,075 324,105 324,105 Taking It Further: Adjusting entries must be recorded in a journal and posted to the general ledger. Otherwise the account balances will not agree with the financial statements.
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*PROBLEM 4-12B
Trial Balance Debit Credit 13,870
NAZARI ELECTRICAL SERVICES Worksheet Year Ended August 30, 2017 Adjusted Trial Income Adjustments Balance Statement Debit Credit Debit Credit Debit Credit 13,870
Account Titles Cash Interest receivable (4) 360 360 Supplies 23,400 (2)21,900 1,500 Debt investments 18,000 18,000 Equipment 108,000 108,000 Accum. deprec.— equipment 38,250 (1) 9,000 47,250 Vehicle 98,000 98,000 Accum.deprec.— vehicle 42,875 (1)12,250 55,125 Accounts payable 7,115 7,115 Salaries payable (5)1,850 1,850 Unearned revenue 4,500 (3)2,000 2,500
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Balance Sheet Debit Credit 13,870 360 1,500 18,000 108,000 47,250 98,000 55,125 7,115 1,850 2,500
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*PROBLEM 4-12B (Continued)
Account Titles Notes payable A. Nazari, capital A. Nazari, drawings Service revenue Interest revenue Deprec. exp. Fuel exp. Insurance exp. Interest exp. Rent exp. Salaries exp. Supplies exp. Totals Profit Totals
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Trial Balance
Adjustments
Adjusted Trial Balance
Debit
Debit
Debit
Credit
Credit
Credit
48,000 68,175
Income Statement Debit
Credit
Balance Sheet Debit
48,000 68,175
32,400
48,000 68,175
32,400 180,115 360
(3)2,000 (4) 360
Credit
32,400 182,115 720
(1)21,250
182,115 720
21,250 21,250 25,235 25,235 25,235 8,550 8,550 8,550 2,535 2,535 2,535 18,900 18,900 18,900 40,500 (5) 1,850 42,350 42,350 (2)21,900 21,900 21,900 389,390 389,390 47,360 47,360 412,850 412,850 140,720 182,835 272,130 230,015 42,115 42,115 182,835 182,835 272,130 272,130
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* PROBLEM 4-12B (Continued) Taking It Further: The preparation of the work sheet is optional because it is not part of the company’s books. It is a tool for accountants to use in the preparation of financial statements. Since all of the adjustments recorded on the work sheet ultimately get recorded in the general ledger, the preparation of the work sheet is not absolutely necessary. Adjusting entries can be posted as they are recorded in the journal to arrive at the adjusted trial balance and financial statements.
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*PROBLEM 4-13B
(b) GENERAL JOURNAL Date
Account Titles
Debit
Oct. 31 Interest Receivable............................. Interest Revenue ............................ ($60,000 × 3.75% × 6/12)
1,125
31 Salaries Expense ................................ Salaries Payable ............................
3,200
31 Interest Expense................................. Interest Payable ............................. ($90,000 × 5% × 2/12)
750
31 Depreciation Expense ........................ Accumulated Depreciation ...........
5,500
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Credit
1,125
3,200
750
5,500
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*PROBLEM 4-13B (Continued) (a) and (b) Interest Receivable Oct. 31 1,125 Bal. 1,125 Salaries Payable Oct. 31
Bal.
Interest Revenue Oct. 31 1,125 Bal. 1,125
3,200
3,200
Interest Payable Oct. 31 Bal.
750 750
Accumulated Depreciation Oct. 31 16,500 5,500 22,000
Bal.
Salaries Expense Oct. 31 156,000 3,200 Bal. 159,200 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Depreciation Expense Oct. 31 5,500 Bal.
5,500
(c) GENERAL JOURNAL Date
Account Titles
Debit
Credit
Oct. 31 Interest Revenue .................................... 1,125 Income Summary ...........................
1,125
31 Income Summary ............................... 169,200 Depreciation expense .................... Interest expense ............................ Salaries expense............................
5,500 4,500 159,200
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*PROBLEM 4-13B (Continued) (c) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125
Salaries Payable Oct. 31 Bal.
3,200 3,200
Interest Payable Oct. 31 Bal.
Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 1,125 Bal. 0
750 750
Accumulated Depreciation Oct. 31 16,500
Bal.
5,500 22,000
Salaries Expense Oct. 31 156,000 3,200 Bal. 159,200 Clos. 159,200 Bal. 0 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Clos. 4,500 Bal. 0 Depreciation Expense Oct. 31 5,500 Bal. Bal.
5,500 Clos. 0
5,500
(d) GENERAL JOURNAL Date Nov.
Account Titles 1 Interest Revenue ................................ Interest Receivable ........................
Debit 1,125
1 Salaries Payable ................................. Salaries Expense ...........................
3,200
1 Interest Payable.................................. Interest Expense ............................
750
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Credit 1,125
3,200 750
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*PROBLEM 4-13B (Continued) (d) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125 Rev. 1,125
Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 0
Bal.
Rev.
0 Salaries Payable Oct. 31
Rev.
3,200
3,200 Bal.
0
Interest Payable Oct. 31 Rev.
750
750 Bal.
0
1,125
Salaries Expense Oct. 31 156,000 2,400 Bal. 159,200 Clos. 159,200 Bal. 0 Rev. 3,200 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Clos. 4,500 Bal. 0 Rev. 750
(e) GENERAL JOURNAL Date Nov.
Dec.
Account Titles
Debit
1 Cash .................................................... Interest Revenue ............................
1,125
6 Salaries Expense ................................ Cash................................................
6,000
1 Interest Expense................................. Cash................................................
1,125
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Credit
1,125
6,000 1,125
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*PROBLEM 4-13B (Continued) (e) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125 Rev. 1,125
Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 0
Bal.
Rev.
0
Salaries Payable Oct. 31 Rev.
3,200
3,200 Bal.
Interest Payable Sept. 30 Rev.
0
750
750 Bal.
0
1,125 Nov. 1 Bal.
1,125 0
Salaries Expense Oct. 31 156,000 3,200 Bal. 159,200 Clos. 159,200 Bal. 0 Rev. 3,200 Nov. 6 6,000 Bal. 2,800 Interest Expense Oct. 31 3,750 750 Bal. 4,500 Clos. 4,500 Bal. 0 Rev. 750 Dec. 1 1,125 Bal. 375
Taking It Further: Reversing entries can be useful because they simplify the recording of cash transactions after the fiscal year end. It is not necessary to look at the previous year’s adjusting entries to decide how to record a cash transaction after the year end.
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*PROBLEM 4-14B (a) Apr. 30 Accounts Receivable ............................. Fees Earned .......................................
1,550
30 Supplies Expense ($4,270 – $880)......... Supplies..............................................
3,390
30 Depreciation Expense ($130,000 ÷ 10) .. Accumulated Depreciation —Equipment.......................................
13,000
30 Salaries Expense .................................... Salaries Payable ................................
2,150
30 Interest Expense ($90,000 × 4.5% × 1/12) Interest Payable .................................
338
30 Unearned Revenue ................................. Fees Earned .......................................
565
1 Fees Earned ............................................ Accounts Receivable .........................
1,550
1 Salaries Payable ..................................... Salaries Expense ...............................
2,150
1 Interest Payable...................................... Interest Expense ................................
338
1,550
3,390
13,000
2,150
338
565
(b) May
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1,550
2,150 338
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*PROBLEM 4-14B (Continued) (c) May
1 Interest Expense ($90,000 × 4.5% × 1/12) Cash....................................................
338
8 Salaries Expense ................................... Cash....................................................
4,300
21 Cash ($2,750 + $1,550) ........................... Fees Earned .......................................
4,300
1 Interest Payable ($90,000 × 4.5% × 1/12) Cash....................................................
338
8 Salaries Expense .................................... Salaries Payable ..................................... Cash....................................................
2,150 2,150
21 Cash ........................................................ Accounts Receivable ......................... Fees Earned .......................................
4,300
338
4,300
4,300
(d) May
338
4,300 1,550 2,750
Taking It Further: Reversing entries should only be used for adjusting journal entries that are accruals: accrued revenues and accrued expenses. Reversing adjusting entries other than accruals would not provide the objective achieved through their use.
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CUMULATIVE COVERAGE–CHAPTERS 2 TO 4 (b) GENERAL JOURNAL Date
Account Titles
J1 Debit
Credit
Sept. 1 Cash .................................................... 10,000 Notes Payable ................................
10,000
2 Rent Expense ..................................... Cash................................................
500 500
8 Salaries Expense ................................ Cash................................................
1,050
12 Cash .................................................... Accounts Receivable .....................
1,500
15 Cash .................................................... Service Revenue ............................
5,700
17 Supplies .............................................. Accounts Payable ..........................
1,300
20 Accounts Payable .............................. Cash................................................
2,300
21 Telephone Expense............................ Cash................................................
200
22 Salaries Expense ................................ Cash................................................
1,050
27 Accounts Receivable ......................... Service Revenue ............................
900
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1,050
1,500
5,700
1,300
2,300
200
1,050 900
Chapter 4
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (b) (Continued) Sept. 29 Cash .................................................... Unearned Revenue ........................
550
30 J. Alou, Drawings ............................... Cash................................................
800
550 800
(a), (c), (e), and (h)
Aug. 31 Sept. 1
Sept. 12 Sept. 15
Sept. 29 Bal.
Aug. 31 Sept. 27 Bal. Aug. 31 Sept. 17 Bal. Bal.
Solutions Manual .
Cash 2,790 10,000 Sept. 2 Sept. 8 1,500 5,700 Sept. 20 Sept. 21 Sept. 22 550 Sept. 30 14,640 Accounts Receivable 7,910 Sept. 12 900 7,310 Supplies 8,500 1,300 9,800 Sept. 30 1,000
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500 1,050
2,300 200 1,050 800
1,500
8,800
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (a), (c), (e), and (h) (Continued)
Aug. 31
Equipment 9,000
Accumulated Depreciation—Equipment Aug. 31 1,800 Sept. 30 1,800 Bal. 3,600
Sept. 20
Sept. 30
Solutions Manual .
Accounts Payable Aug. 31 Sept. 17 2,300 Bal. Unearned Revenue Aug. 31 Sept. 29 Bal. 500 Bal.
3,100 1,300 2,100
400 550 950 450
Salaries Payable Sept. 30
630
Interest Payable Sept. 30
42
Notes Payable Sept. 1
10,000
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (a), (c), (e), and (h) (Continued)
Clos
Aug. 31 Sept. 30 Bal. Bal.
Clos 30 Clos
Clos
Aug. 31 Sept. 2 Bal. Bal.
Solutions Manual .
J. Alou, Capital Aug. 31 Clos. 30 16,400 Bal. J. Alou, Drawings 15,600 800 16,400 Clos 0 Income Summary 46,372 Clos 10,328 Bal. Service Revenue Aug. 31 Sept. 15 Sept. 27 Bal. Sept. 30 56,700 Bal. Bal. Rent Expense 5,500 500 6,000 Clos 0
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21,200 10,328 15,128
16,400
56,700 0
49,600 5,700 900 56,200 500 56,700 0
6,000
Chapter 4
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (a), (c), (e), and (h) (Continued) Aug. 31 Sept. 8 Sept. 22 Bal. Sept. 30 Bal. Bal.
Salaries Expense 24,570 1,050 1,050 26,670 630 27,300 Clos 0
Aug. 31 Sept. 21 Bal. Bal.
Telephone Expense 2,230 200 2,430 Clos 0
Sept. 30 Bal.
Supplies Expense 8,800 Clos 0
8,800
Sept. 30 Bal.
Depreciation Expense 1,800 Clos 0
1,800
Sept. 30 Bal.
Interest Expense 42 Clos 0
42
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27,300
2,430
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (d) ALOU EQUIPMENT REPAIR Unadjusted Trial Balance September 30, 2017 Debit Cash ....................................................................$ 14,640 Accounts receivable .......................................... 7,310 Supplies .............................................................. 9,800 Equipment........................................................... 9,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Unearned revenue .............................................. Notes payable ..................................................... J. Alou, capital .................................................... J. Alou, drawings................................................ 16,400 Service revenue.................................................. Rent expense ...................................................... 6,000 Salaries expense ................................................ 26,670 Telephone expense ............................................ 2,430 Totals .............................................................. $92,250
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Credit
$ 1,800 2,100 950 10,000 21,200 56,200
$92,250
Chapter 4
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (e) GENERAL JOURNAL Date
Account Titles
J2 Debit
Sept. 30 Supplies Expense............................... Supplies.......................................... ($9,800 – $1,000)
8,800
30 Salaries Expense ................................ Salaries Payable ............................
630
30 Depreciation Expense ........................ Accumulated Depreciation —Equipment................................... ($9,000 ÷ 5 years)
1,800
30 Unearned Revenue ............................. Service Revenue ............................ ($950 – $450)
500
30 Interest Expense................................. Interest Payable ............................. ($10,000 × 5% × 1/12)
42
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Credit
8,800
630
1,800
500
42
Chapter 4
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (f) ALOU EQUIPMENT REPAIR Adjusted Trial Balance September 30, 2017 Debit Cash .................................................................... $14,640 Accounts receivable .......................................... 7,310 Supplies .............................................................. 1,000 Equipment........................................................... 9,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Unearned revenue .............................................. Salaries payable ................................................. Interest payable .................................................. Notes payable ..................................................... J. Alou, capital .................................................... J. Alou, drawings................................................ 16,400 Service revenue.................................................. Depreciation expense ........................................ 1,800 Interest expense ................................................. 42 Rent expense ...................................................... 6,000 Salaries expense ................................................ 27,300 Supplies expense ............................................... 8,800 Telephone expense ............................................ 2,430 Totals .............................................................. $94,722
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Credit
$ 3,600 2,100 450 630 42 10,000 21,200 56,700
$94,722
Chapter 4
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (g) ALOU EQUIPMENT REPAIR Income Statement Year Ended September 30, 2017 Revenues Service revenue .............................................................. $56,700 Expenses Salaries expense............................................ $27,300 Supplies expense .......................................... 8,800 Rent expense ................................................. 6,000 Telephone expense ....................................... 2,430 Depreciation expense.................................... 1,800 Interest expense ........................................... 42 Total expenses ....................................................... 46,372 Profit................................................................................. $10,328
ALOU EQUIPMENT REPAIR Statement of Owner's Equity Year Ended September 30, 2017 J. Alou, capital, Oct. 1, 2016 ........................................ Add: Profit................................................................... Less: Drawings............................................................ J. Alou, capital, Sept. 30, 2017 ....................................
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$21,200 10,328 31,528 16,400 $15,128
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (g) (Continued) ALOU EQUIPMENT REPAIR Balance Sheet September 30, 2017 Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies....................................................................... Total current assets ............................................... Property, plant, and equipment Equipment ........................................................ $9,000 Less: Accumulated depreciation ................... 3,600 Total assets ............................................................
$14,640 7,310 1,000 22,950
5,400 $28,350
Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... Salaries payable.......................................................... Interest payable .......................................................... Unearned revenue ...................................................... Total current liabilities ........................................... Long-term liabilities Notes payable ............................................................. Total liabilities ................................................................. Owner's equity J. Alou, capital ............................................................ Total liabilities and owner's equity .......................
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$ 2,100 630 42 450 3,222 10,000 13,222 15,128 $28,350
Chapter 4
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (h) GENERAL JOURNAL Date
Account Titles
J3 Debit
Credit
Sept. 30 Service Revenue................................. 56,700 Income Summary ...........................
56,700
30 Income Summary ............................... 46,372 Rent Expense ................................. Salaries Expense ........................... Telephone Expense ....................... Depreciation Expense .................. Supplies Expense .......................... Interest Expense ............................
6,000 27,300 2,430 1,800 8,800 42
30 Income Summary ............................... 10,328 J. Alou, Capital ...............................
10,328
30 J. Alou, Capital ................................... 16,400 J. Alou, Drawings...........................
16,400
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (i) ALOU EQUIPMENT REPAIR Post-Closing Trial Balance September 30, 2017 Debit Cash .................................................................... $14,640 Accounts receivable .......................................... 7,310 Supplies .............................................................. 1,000 Equipment........................................................... 9,000 Accumulated depreciation—equipment ........... Accounts payable............................................... Interest payable .................................................. Notes payable ..................................................... Salaries payable ................................................. Unearned revenue .............................................. J. Alou, capital ................................................... $31,950
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Credit
$ 3,600 2,100 42 10,000 630 450 15,128 $31,950
Chapter 4
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BYP4-1 FINANCIAL REPORTING PROBLEM
(a)
Corus’ balance sheet (statement of financial position) is classified based on the liquidity of the assets and liabilities. Classifications include current and non-current assets, current and non-current liabilities, and shareholders’ equity.
(b) The current assets are listed in the order of liquidity. Within the non-current assets, investments and long-term receivables are shown first, followed by tangible long-term assets and intangible assets making up the majority of the assets. Second to last listed is goodwill followed by deferred tax assets.
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BYP4-1 (Continued) (c), (d), and (e) (Amounts in thousands) Working Capital Current ratio
=
Acid-test ratio
=
Working Capital Current ratio
=
Acid-test ratio
=
2014 $217,394 –
$175,725
$217,394 $175,725 $11,585 + $183,009 +$9,768 $175,725
2013 $310,070 –
$168,384
$310,070 $168,384 $81,266 + $164,302 + $351 $168,384
=
$41,669
=
1.24 : 1
=
1.16 : 1
=
$141,686
=
1.84 : 1
=
1.46 : 1
The working capital and the current and acid-test ratios show a weakening trend in Corus’ liquidity.
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BYP 4-2 INTERPRETING FINANCIAL STATEMENTS (a) When comparing the liquidity position in fiscal year 2011 and 2015, one can conclude that The Gap’s liquidity position has improved, but only slightly. Working capital and the current ratio both provide a good indication of liquidity. Working capital provides more information in that it provides the dollar value. The change in the liquidity during the period could be explained by general economic conditions or by opening or closing of stores. (b) Creditors lend money to companies with the expectation that they will be repaid at a specified point in time in the future. In 2011 to 2015, the current ratio was somewhat comfortable, in spite of exceeding 2:1 only once. Liquidity remains strong. Accordingly, the Gap’s creditors will not likely be concerned about its liquidity. Creditors generally look at the performance of other retailers in the industry before becoming alarmed.
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BYP4-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP4-4 COMMUNICATION ACTIVITY MEMO To:
Friend
From:
A. Student
Re:
Steps in the Accounting Cycle
The required steps in the accounting cycle, in the order in which they should be completed, are: 1. 2. 3. 4. 5. 6. 7. 8. 9.
Analyze business transactions. Journalize the transactions. Post to the ledger accounts. Prepare a trial balance. Journalize and post the adjusting entries. Prepare an adjusted trial balance. Prepare the financial statements. Journalize and post the closing entries. Prepare a post-closing trial balance.
The optional steps in the accounting cycle include preparing a work sheet and preparing reversing entries. If a work sheet is prepared, it is done after step 3 above, and it includes steps 4 and 6. The work sheet is a form used to make it easier to prepare the adjusting entries and financial statements. If reversing entries are prepared, they are journalized and posted after step 9, at the beginning of the next accounting period. A reversing entry is the exact opposite of a previously recorded adjusting entry, and simplifies the recording of subsequent transactions.
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BYP4-5 “ALL ABOUT YOU” ACTIVITY Answers will vary depending on students’ circumstances.
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BYP4-6 Santé Smoothie Saga (a) SANTÉ SMOOTHIES Income Statement Two Months Ended May 31, 2017
Revenue ..............................................................
$ 1,225
Expenses $ 325 Advertising expense...................................... Depreciation expense.................................... 66 Interest expense ............................................ 11 Salaries expense............................................ 48 Supplies expense .......................................... 211 Telephone expense ....................................... 174 Total expenses ....................................................... Profit.................................................................................
835 $ 390
(b) SANTÉ SMOOTHIES Statement of Owner's Equity Two Months Ended May 31, 2017 N. Koebel, capital, April 1 ............................................... Add: Investments .......................................................... Profit ..................................................................... Less: Drawings............................................................... N. Koebel, capital, May 31...............................................
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$
0 1,725 390 2,115 0 $2,115
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BY4-6 (Continued) (b) (Continued) SANTÉ SMOOTHIES Balance Sheet May 31, 2017 Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies....................................................................... Total current assets ............................................... Property, plant, and equipment Equipment ........................................................ $1,550 Less: Accumulated depreciation ................... 66 Total assets ...............................................
$3,060 675 95 3,830
1,484 $5,314
Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... Interest payable .......................................................... Unearned revenue ...................................................... Notes payable ............................................................. Total current liabilities ........................................... Owner's equity N. Koebel, capital ........................................................ Total liabilities and owner's equity .......................
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$
88 11 100 3,000 3,199
2,115 $5,314
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BY4-6 (Continued) (c) 1. Working Capital = 2.
Current Ratio =
$3,830 –
$3,199
$3,830
=
$ 631
=
1.20:1
=
1.17:1
$3,199 3.
Acid-test ratio =
$3,060 + $675 $3,199
Santé Smoothie’s liquidity at May 31, 2017 is moderately strong. Current assets are adequate to cover current liabilities.
(d) 2017 May 31 Revenue ............................................. Income Summary ..........................
1,225 1,225
31 Income Summary .............................. Advertising Expense .................... Depreciation Expense .................. Interest Expense ........................... Salaries Expense .......................... Supplies Expense ......................... Telephone Expense ......................
835
31 Income Summary .............................. N. Koebel, Capital .........................
390
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325 66 11 48 211 174 390
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BY4-6 (Continued) (e) SANTÉ SMOOTHIES Post-Closing Trial Balance May 31, 2017 Account Debit Cash .................................................................... $3,060 Accounts receivable .......................................... 675 Supplies .............................................................. 95 Equipment........................................................... 1,550 Accumulated depreciation—equipment ........... Accounts payable............................................... Interest payable .................................................. Unearned revenue .............................................. Notes payable ..................................................... N. Koebel, capital ............................................... $5,380
Credit
$
66 88 11 100 3,000 2,115 $5,380
(f) Ignoring the effects of depreciation expense, not correcting the error would have resulted in the expenses being overstated by $725. Profit would be understated by $725. Assets and N. Koebel’s capital would be understated by $725.
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Accounting Principles, Seventh Canadian Edition
CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE Learning Objectives 1. Describe the differences between service and merchandising companies. 2. Prepare entries for purchases under a perpetual inventory system. 3. Prepare entries for sales under a perpetual inventory system. 4. Perform the steps in the accounting cycle for a merchandising company. 5. Prepare single-step and multiple-step income statements. 6. Calculate the gross profit margin and profit margin.
Questions 1, 2, 3, 4
*7. Prepare the entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A)
Brief Exercises 1, 2
Exercises 1, 2, 5, 6
Problems Set A 1
Problems Set B 1
5, 6, 7, 8, 9, 11, 12
3, 4, 5,
2, 3, 5, 6, 7
2, 3, 4, 5
2, 3, 4, 5
7, 10, 11, 12, 13, 14
6, 7, 8
2, 4, 5, 6, 7
2, 3, 4, 5
2, 3, 4, 5
15, 16, 17
9, 10
2, 8, 10
6, 7
6, 7
18, 19, 20, 21,
11, 12
2, 9, 10, 11
5, 6, 7
5, 6, 7
22, 23
13
2, 11, 12
6, 8
6, 8
*24, *25, *26
* 14, *15, *16
*13, *14, *15, *16
*9, *10, *11, *12, *13
*9, *10, *11, *12, *13
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendices to each chapter.
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Identify problems and recommend inventory system.
Moderate
20-30
2A
Record and post inventory transactions – perpetual system. Record inventory transactions– perpetual system.
Moderate
30-40
Moderate
20-30
4A
Record inventory transactions and post to inventory account – perpetual system.
Moderate
30-40
5A
Record and post inventory transactions – perpetual system. Prepare partial income statement.
Moderate
50-60
6A
Prepare adjusting and closing entries and single-step income statement – perpetual system. Calculate ratios.
Moderate
40-50
7A
Prepare adjusting and closing entries and financial statements – perpetual system.
Moderate
50-60
8A
Calculate ratios and comment.
Moderate
20-25
*9A
Record inventory transactions – periodic system.
Moderate
30-40
*10A
Record inventory transactions – periodic system.
Moderate
30-40
*11A
Record and post inventory transactions – periodic system. Prepare partial income statement.
Moderate
60-70
*12A
Prepare correct multiple-step income statement, statement of owner’s equity and classified balance sheet – periodic system.
Moderate
60-70
*13A
Prepare financial statements and closing entries – periodic system.
Moderate
60-70
1B
Identify problems and recommend inventory system.
Moderate
20-30
2B
Record and post inventory transactions – perpetual system.
Moderate
30-40
3B
Record inventory transactions – perpetual system.
Moderate
20-30
4B
Record inventory transactions and post to inventory account – perpetual system.
Moderate
30-40
3A
Solutions Manual .
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Time Allotted (min.)
5B
Record and post inventory transactions – perpetual system. Prepare partial income statement.
Moderate
50-60
6B
Prepare adjusting and closing entries and single-step income statement – perpetual system. Calculate ratios.
Moderate
40-50
7B
Prepare adjusting and closing entries, single-step and multiple step income statements – perpetual system.
Moderate
50-60
8B
Calculate ratios and comment.
Moderate
20-25
*9B
Record inventory transactions – periodic system.
Moderate
30-40
*10B
Record inventory transactions – periodic system.
Moderate
30-40
*11B
Record and post inventory transactions – periodic system. Prepare partial income statement.
Moderate
60-70
*12B
Prepare correct multiple-step income statement, statement of owner’s equity and classified balance sheet – periodic system.
Moderate
60-70
*13B
Prepare financial statements and closing entries – periodic system.
Moderate
60-70
Solutions Manual .
Difficulty Level
5-3
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material
1.
Learning Objective Describe the differences between service and merchandising companies.
Knowledge E5-2
Comprehension Q5-1 Q5-2 Q5-3 Q5-4 E5-1 P5-1A P5-1B Q5-6 Q5-7 Q5-9 Q5-11 BE5-3
2.
Prepare entries for purchases under a perpetual inventory system.
Q5-5 Q5-8 E5-2
3.
Prepare entries for sales under a perpetual inventory system.
Q5-12 E5-2
Q5-7 Q5-10 Q5-11 Q5-13 Q5-14 BE5-6
4.
Perform the steps in the accounting cycle for a merchandising company.
E5-2 Q5-17
Q5-15 Q5-16
Solutions Manual .
Application BE5-1 BE5-2 E5-5 E5-6
Analysis
Synthesis
Evaluation
BE5-4 BE5-5 E5-3 E5-5 E5-6 E5-7 P5-2A P5-3A P5-4A P5-5A P5-2B P5-3B P5-4B P5-5B BE5-7 BE5-8 E5-4 E5-5 E5-6 E5-7 P5-2A P5-3A P5-4A P5-5A P5-2B P5-3B P5-4B P5-5B BE5-9 BE5-10 E5-6 E5-7 E5-8 E5-10 P5-6A P5-7A P5-6B P5-7B
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued)
5.
6.
Learning Objective Prepare single-step and multiple-step income statements.
Calculate the gross profit margin and profit margin.
*7. Prepare the entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A)
Knowledge Q5-18 Q5-19 E5-2
Comprehension Q5-20 Q5-21
E5-2
Q5-22
*Q5-24 *Q5-25
*Q5-26
Application BE5-11 BE5-12 E5-9 E5-10 E5-11 P5-5A P5-6A P5-7A P5-5B P5-6B P5-7B Q5-23 BE5-13 BE5-14 E5-11 P5-6A P5-6B *BE5-14 *BE5-15 *BE5-16 *E5-13 *E5-14 *E5-15 *E5-16 *P5-9A *P5-10A *P5-11A *P5-12A *P5-13A *P5-9B *P5-10B *P5-11B *P5-12B *P5-13B Santé Smoothie Saga Cumulative Coverage Chapters 2-5 BYP5-3
Broadening Your Perspective
Solutions Manual .
5-5
Analysis
Synthesis
Evaluation
E5-12 P5-8A P5-8B
BYP5-1 BYP5-2
BYP5-4 BYP5-5
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Profit for a merchandising company is determined principally by the gross profit created by the difference between sales revenue and cost of goods sold. Service companies will have service revenue or service fees earned as their primary source of revenue. Service companies do not have an expense comparable to cost of goods sold. Both types of companies will have operating expenses such as advertising expense, depreciation expense, insurance expense, rent expense, and salaries expense.
2.
A “perpetual” inventory system reflects changes for inventory purchases and sales on a “perpetual” or continuous basis. The company keeps detailed records of quantity and cost of inventory on hand for every item. When inventory is sold, the cost of goods sold is recorded as part of the sale transaction and the Merchandise Inventory account is decreased. A “periodic” inventory system does not keep detailed records of inventory on hand throughout the period. Cost of goods sold and ending inventory are determined at the end of the “period”, usually by an inventory count. When inventory is sold, the cost of goods sold is not recorded and the Merchandise Inventory account is not decreased.
3.
A physical count is an important control feature. With a perpetual inventory system a company knows what should be on hand, but there still could be errors in the record keeping or shortages in stock. By performing a physical count and comparing it to the perpetual inventory records, an error or shortage can be detected. If an error or shortage is found, it is important to adjust the accounting records to reflect actual quantities on hand.
4.
The benefits of the perpetual inventory system are that it continuously— perpetually—shows the quantity and cost of the inventory purchased, sold, and on hand. Under a perpetual inventory system, the cost of goods sold and reduction in inventory are recorded each time a sale occurs. A perpetual inventory system gives stronger internal control over inventories compared with a periodic system. Another benefit of a perpetual inventory system is that it makes it easier to answer questions from customers about merchandise availability. Management can also maintain optimum inventory levels and avoid running out of stock. In a periodic system the number of items on hand cannot be determined without physically examining the inventory. A perpetual inventory system requires more record keeping and therefore is more expensive to use than a periodic system. For example, a perpetual inventory system usually requires an investment in a point-ofsale system that is integrated with the inventory system. In a periodic system, this not required.
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 5.
A subsidiary ledger is a group of accounts that share a common characteristic (for example, all inventory accounts). The subsidiary ledger frees the general ledger from the details of individual balances. In addition to having one for inventory, it is very common to have subsidiary ledgers for accounts receivable (to track individual customer balances), accounts payable (to track individual creditor balances), and payroll (to track individual employee pay records).
6.
Disagree. Sales taxes include the federal Goods and Services Tax (GST), the Provincial Sales Tax (PST), and the Harmonized Sales Tax (HST) (which is a combination of GST and PST). GST and HST are paid by merchandising companies on inventory purchases. Companies conducting business in provinces that are subject to PST do not pay PST on merchandise purchased for resale. PST is paid by the final customer only.
7.
The letters FOB mean free on board. FOB shipping point means that the goods are placed on a carrier (such as a truck or train) by the seller, and the buyer pays the freight costs. Ownership transfers to the buyer as soon as the goods are placed on the carrier. FOB destination means that the goods are shipped to the buyer’s place of business, and the seller pays the freight. Ownership transfers to the buyers when the goods are delivered to the buyer’s place of business. Freight costs paid on inventory purchases are added to the cost of the inventory. Freight costs paid on sales are recorded as an expense such as Freight Out or Delivery Expense.
8.
Purchase returns occur when goods purchased for resale are returned to a supplier. If the merchandise does not correspond to what was ordered or the quantity shipped is in excess of quantities ordered, goods are shipped back to the supplier for credit. In this case, the Merchandise Inventory account is reduced (credited) and the Accounts Payable account is reduced (debited) for the cost amount of the goods returned. In the case of a purchase allowance, the merchandise is not returned. Purchase allowances are granted by suppliers when the product has some defect or deficiency when received by the buyer. An amount is negotiated to reduce the purchase price of the goods and an allowance is granted by the supplier. In this case the Merchandise Inventory account is reduced (credited) and the Accounts Payable account is reduced (debited) for the reduction in the purchase price.
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 9.
Fukushima Company should take advantage of the discount offered. The bank rate of 7.25% is an annual rate which is equivalent to 0.4% for 20 days (7.25% × 20/365). Since 0.4% cost of borrowing is less than 1% saved by paying 10 days after the purchase—20 days before the final due date—it is advantageous to borrow and pay within the discount period. Another way to explain the advantage is to convert the discount to an annual rate. In order to obtain the 1% discount the company must pay 20 days ahead of the final due date (30 days – 10 days = 20 days). The effective annual interest rate of doing this is 18.25% (1% × 365/20). Since the 18.25% savings is greater than the 7.25% rate on the bank loan, the company should borrow from the bank and take advantage of the discount.
10. The company needs to record a credit to Sales for $75 and to debit Cost of Goods Sold for $50 instead of the $25 credit to Gross Profit. Recording the sales and cost of goods sold in separate accounts allows the company and users of financial information to do ratio analysis to measure the company’s profitability and it allows management to analyze trends and variances in both revenues and expenses separately. A debit will also be recorded for $75 of cash received and a credit will be recorded for $50 of inventory that was sold. 11. A quantity discount gives a reduction in price according to the volume of the purchase—in other words, the larger the number of items purchased, the larger the discount. Quantity discounts are not the same as purchase discounts, which are offered to customers for early payment of the balance due. Purchase discounts are noted on the invoice by the use of credit terms that specify the amount and time period for the purchase discount. Quantity discounts are not recorded or accounted for separately, whereas purchase discounts are recorded separately. When an invoice is paid within the discount period, the Merchandise Inventory account will be reduced by the amount of the discount because inventory is recorded at cost. By paying within the discount period, a company reduces the cost of its inventory. A sales discount is the counterpart of the purchase discount. A purchase discount is a discount taken by the purchaser, and a sales discount is the discount offered by the seller. When the invoice is paid within the discount period, the discount is recorded in a separate contra revenue account called Sales Discount.
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 12.
By using separate sales accounts for major product lines, management can monitor sales trends more closely and respond more strategically to changes in sales patterns and manage inventory. For example, a car dealership that sells cars and car parts would want to be able to track car sales separately from parts sales. This would allow managing these two segments of the business separately and possibly apply different strategies to increase sales. For internal reporting purposes the sales amounts would be reported separately as it is meaningful to managers in both segments of the business. For distribution of information to outsiders, sales would be grouped into a single amount. This ensures that the financial information is simple and easy to understand. It also protects the business from revealing detailed information that could be used against it if the information fell into the hands of competitors.
13.
Disagree with Geoff’s advice. Sales returns are not debited directly to the Sales account because this would not provide information on the amount of sales returns and allowances. This information is important to management as it may suggest inferior merchandise, errors in billing, or incorrect sales techniques. Debiting returns directly to sales may also cause problems in comparing sales for different periods. Geoff may be suggesting this to hide the volume of returns associated with his sales if many of the sales returns are from his customers. Raymond should record the sales returns in a separate contra account in order to have better information to manage the company.
14.
A sales allowance occurs when the buyer keeps the merchandise, but the sales price is adjusted. This may happen because the purchaser is dissatisfied because the goods are damaged, of inferior quality, or do not meet the purchaser’s specifications. Since the goods are not returned, the Merchandise Inventory account cannot be debited. The transaction is recorded as a reduction to Accounts Receivable or Cash and a debit to Sales Returns and Allowances. When goods are returned and are in saleable condition, they are available to be resold to another customer. A journal entry will debit Merchandise Inventory and credit Cost of Goods Sold for the same amount as the original cost of the inventory. If the goods are damaged and cannot be resold, the transaction is recorded in the same way as a sales allowance; there is no entry to Merchandise Inventory or Cost of Goods Sold. Since the items are damaged they do not represent assets to the company and cannot be returned to the Merchandise Inventory account.
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 15.
Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service enterprise. The types of transactions are different, but the steps in the accounting cycle are the same.
16.
This difference could be the result of errors in the perpetual inventory records, or because of errors in the annual physical inventory count. An adjustment at the end of the period will be necessary to correctly reflect the actual inventory on hand at year end. If the dollar value of actual inventory on hand is greater than what is reflected in the perpetual inventory records, the difference will be an increase (debit) to Merchandise Inventory and a decrease (credit) to Cost of Goods Sold.
17.
The additional accounts that must be closed for a merchandising company using a perpetual inventory system are Sales, Sales Returns and Allowances, Sales Discounts, Cost of Goods Sold, and Freight Out. The Sales account is debited to close it to the Income Summary account. The remaining accounts have normal debit balances and are credited when closed to Income Summary.
18.
The single-step income statement differs from the multiple-step income statement in that (1) all data are classified into two categories: revenues and expenses; and (2) only one step, subtracting total expenses from total revenues, is required in determining profit (or loss). A multiple step income statement includes three main steps: (1) cost of goods sold is subtracted from sales to determine gross profit (2) operating expenses are subtracted from gross profit to determine profit from operations, and (3) non-operating expenses are subtracted from (and nonoperating revenues are added to) profit from operations to determine profit.
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 19.
Net sales is calculated by deducting the contra revenue accounts, Sales Returns and Allowances and Sales Discounts, from Sales. Gross profit is calculated by subtracting cost of goods sold from net sales. Profit from operations is calculated by subtracting operating expenses from gross profit. Profit is calculated by subtracting non-operating expenses from (or adding non-operating revenues to) profit from operations. Only merchandising companies show net sales and gross profit; service companies would show service revenues. Profit from operations is used by both merchandising and service companies as both of these types of companies may have non-operating revenues or expenses.
20.
Interest expense is a non-operating expense because it relates to how a company’s operations are financed, so it is not an expense related to main operating activities.
21.
Yes, it is possible for profit from operations and profit to be the same. This would occur if the company has no non-operating expenses or revenues. If companies do not have non-operating expenses or revenues, the profit from operations is referred to as profit.
22.
Operating expenses are those expenses related to the main activity or main operations of the business. Recurring expenses of different types are incurred to generate the revenue from providing goods or services. Non-operating expenses have more to do with how the business is financed or how much cash it has available to invest and generate additional revenues beyond its main source of revenue from operations. If a business is partly financed with debt, it will have interest expense. If a company has excess cash, it can earn revenue from investments, including interest revenue. The multiple-step income statement highlights the non-operating expenses and presents them separately so that income from operations can be reported. This is not the case when the single-step income statement format is used.
23.
Gross profit is calculated as the difference between net sales revenue and cost of goods sold and is expressed in dollars. Gross profit margin represents gross profit expressed as a percentage of net sales. The gross profit margin allows the company to compare its results with past periods, competitors, and industry averages. It shows the relative relationship between net sales and gross profit.
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) *24. In a periodic inventory system, purchases are debited to the Purchases account. Purchase returns and allowances, purchase discounts, and freight in are also recorded in separate accounts. In a perpetual inventory system, purchases, purchase returns and allowances, purchase discounts, and freight in are recorded directly to the Merchandise Inventory account. In a perpetual system, cost of goods sold and inventory are updated as each sale occurs. This does not happen in a periodic system. *25. To arrive at the cost of goods purchased using the periodic system, purchase discounts and purchase returns (contra accounts to purchases) are deducted from the account Purchases. Freight in, on the other hand, is added to Purchases.
*26. The purpose of these entries is to update the Merchandise Inventory account to the correct ending balance (i.e., adjust for the change between the beginning and ending inventories).
Solutions Manual .
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) & (b) Company A Cost of goods sold = $227,500 ($350,000-$122,500) Profit = $17,500 ($122,500-$105,000) (c) & (d) Company B Gross profit = $367,500 ($735,000-$367,500) Operating expenses = $294,000 ($367,500-$73,500) (e) & (f) Company C Gross Profit = $210,000 ($525,000-$315,000) Profit = $94,500 ($210,000-$115,500) (g) & (h) Company D Sales = $495,000 ($346,500+$148,500) Loss = $(39,600) ($148,500-$188,100)
BRIEF EXERCISE 5-2 (1) (a) Cost of goods available for sale = $250,000 + $170,000 = $420,000. (b) Cost of goods sold = $420,000 – $50,000 = $370,000 (2) (c) Cost of goods available for sale = $108,000 + $70,000 = $178,000. (d) Ending inventory = $178,000 – $90,000 = $88,000. (3) (e) Purchases = $130,000 – $75,000 = $55,000. (f) Ending inventory = $130,000 – $38,000 = $92,000. (4) (g) Beginning inventory = $95,000 – $75,000 = $20,000. (h) Cost of goods sold = $95,000 – $45,000 = $50,000.
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 5-3 (a) Mar. 16 Merchandise Inventory.................... 15,000 Accounts Payable ....................... 15,000 18 Accounts Payable............................ Merchandise Inventory ...............
750 750
25 Accounts Payable ($15,000 – $750) 14,250 Merchandise Inventory ($14,250 × 2%) ............................. 285 Cash ............................................. 13,965 (b) Date Mar. 16 18 25
Assets Inventory + $15,000 Inventory – $750 Inventory – $285 Cash – $13,965
Liabilities Accounts Payable + $15,000 Accounts Payable – $750 Accounts Payable – $14,250
Owner’s Equity NE NE NE
BRIEF EXERCISE 5-4 Jan. 2 Merchandise Inventory.................... Accounts Payable .......................
20,000
Jan. 4 Merchandise Inventory.................... Cash .............................................
215
Jan. 6 Accounts Payable............................ Merchandise Inventory ...............
1,500
Feb. 1
18,500
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Accounts Payable............................ Cash .............................................
5-14
20,000
215
1,500 18,500
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 5-5 Mar. 12 Merchandise Inventory....................... 25,000 Accounts Payable ....................... 25,000 13 No entry required. 14 Accounts Payable............................ Merchandise Inventory ...............
2,000 2,000
21 Accounts Payable ($25,000 – $2,000) 23,000 Merchandise Inventory ($23,000 × 2%) ............................. 460 Cash ............................................. 22,540
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 5-6 (a) Mar. 16 Accounts Receivable ...................... Sales ............................................
15,000
Cost of Goods Sold ......................... Merchandise Inventory ...............
8,700
17 Freight Out ....................................... Cash .............................................
170
18 Sales Returns and Allowances ....... Accounts Receivable ..................
750
25 Cash ($14,250 – $285) ..................... Sales Discounts ($14,250 × 2%) ..... Accounts Receivable ($15,000 – $750)...........................
13,965 285
15,000
8,700
170
750
14,250
(b) Date Mar.16 16 17 18 25
Solutions Manual .
Assets Accounts Receivable + $15,000 Merchandise Inventory – $8,700 Cash – $170 Accounts Receivable – $750 Cash + $13,965 Accounts Receivable – $14,250
5-16
Liabilities NE
Owner’s Equity + $15,000
NE NE NE
– $8,700 – $170 – $750
NE – $285
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 5-7 Jan. 2 Accounts Receivable ...................... Sales ............................................
20,000
Cost of Goods Sold ......................... Merchandise Inventory ...............
7,900
20,000
7,900
4 No entry required. 6 Sales Returns and Allowances ....... Accounts Receivable ..................
1,500
Merchandise Inventory.................... Cost of Goods Sold.....................
590
Feb. 1 Cash ($20,000 – $1,500)................... Accounts Receivable ..................
18,500
1,500
590 18,500
BRIEF EXERCISE 5-8 Mar. 12 Accounts Receivable ...................... Sales ............................................
25,000
Cost of Goods Sold ......................... Merchandise Inventory ...............
13,250
13 Freight Out ....................................... Cash .............................................
265
14 Sales Returns and Allowances ....... Accounts Receivable ..................
2,000
22 Cash ($23,000 – $460) ..................... Sales Discounts ($23,000 × 2%) ..... Accounts Receivable ..................
22,540 460
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5-17
25,000
13,250
265
2,000
23,000
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 5-9 Cost of Goods Sold.............................. Merchandise Inventory ($98,000 – $96,100) ..........................
1,900 1,900
BRIEF EXERCISE 5-10 Sept. 30 Sales ................................................. 218,750 Income Summary ........................
218,750
30 Income Summary ............................. 171,000 Sales Returns and Allowances .. Sales Discounts .......................... Cost of Goods Sold .................... Freight Out .................................. Salaries Expense ........................
3,150 950 125,000 1,900 40,000
Merchandise Inventory and Supplies are (permanent) accounts and are not closed.
balance
sheet
BRIEF EXERCISE 5-11 NELSON COMPANY Income Statement For the Month Ended October 31, 2017 Sales* ............................................................................ Less: Sales returns and allowances .............. $11,000 Sales discounts ................................... 5,000 Net sales ....................................................................... * ($280,000 + $95,000)
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$375,000 16,000 $359,000
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 5-12 (a) Net sales = $539,000 ($561,000 – $5,500 – $16,500) (b) Gross profit = $154,000 ($539,000 – $385,000) (c) Operating expenses = $115,500 ($13,200 + $3,300 + $44,000 + $55,000) (d) Profit from operations $38,500 ($154,000 – $115,500) (e) Profit = $36,300 ($38,500 + $8,800 – $11,000)
BRIEF EXERCISE 5-13 2017 Gross profit margin = 36.84% [($950,000 – $600,000) ÷ $950,000] Profit margin = 7.37% [$70,000 ÷ $950,000] 2016 Gross profit margin = 37.50% [($800,000 – $500,000) ÷ $800,000] Profit margin = 8.13% [$65,000 ÷ $800,000] GS Retail’s profitability has deteriorated since both its gross profit margin and its profit margin have decreased from the previous year.
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Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 5-14 Feb. 5
Purchases .......................................12,000 Accounts Payable ......................
6 Freight In ......................................... Cash ............................................
12,000
110 110
8 Accounts Payable........................... 1,000 Purchase Returns and Allowances
1,000
11 Accounts Payable ($12,000 − $1,000) ...........................11,000 Purchases Discounts ($11,000 × 2%) Cash ($11,000 – $220) ................
220 10,780
*BRIEF EXERCISE 5-15 Feb. 5 Accounts Receivable ..................... 12,000 Sales ...........................................
12,000
6 No entry required.
Solutions Manual .
8 Sales Returns and Allowances ....... 1,000 Accounts Receivable .................
1,000
11 Cash ($11,000 – $220) .................... 10,780 Sales Discounts ($11,000 × 2%) ........ 220 Accounts Receivable .................
11,000
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 5-16 Cost of goods sold Merchandise inventory, beginning ................ $ 51,000 Purchases .................................. $340,000 Less: Purchase discounts ... $6,800 Purchase returns and allowances....... 9,350 16,150 Net purchases ........................ 323,850 Add: Freight in ........................ 13,600 Cost of goods purchased ............................. 337,450 Cost of goods available for sale .............. 388,450 Merchandise inventory, ending ................... 68,000 Cost of goods sold ............................................................ $320,450
Note: Freight out is not included; it is an operating expense.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 5-1 (a)
Jean-Pierre’s retail business has more complex inventory management issues. The company stocks 2,000 separate items and monthly physical inventory counts are becoming onerous and likely expensive. Management can maintain optimum inventory levels and avoid running out of stock. Financing of excess inventory can be reduced as well as a savings in warehousing space taken up by excess inventory. Monthly reporting to the bank can be accomplished easily without a physical count because a perpetual system keeps track of all the inventory that should be on hand at any time. Jean-Pierre can also estimate the approximate amount of shrinkage and recognize that on a monthly basis for monthly reporting. A perpetual inventory system also makes it easier to answer questions from customers about merchandise availability. Physical inventory counts can be done only once or twice a year and any differences between actual and the accounting records can be immediately investigated.
(b)
Perpetual records capture the transactions occurring involving inventory. This does not mean that the records are perfect. If employees make errors in recording sales or purchases, or if there is theft, the inventory value will not be correct. Management needs to ensure that procedures and policies are put in place to correctly manage the new system. The major drawback is the cost of acquisition and the conversion and retraining of employees involved in changing systems.
(c)
With the bank wanting up-to-date inventory information, and the expected growth in revenue, conversion to a perpetual record is strongly recommended. The benefits of the change far exceed the drawbacks in the long run.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-2 (a)
3
Cost of goods sold
(b)
8
Subsidiary ledger
(c)
14
Contra revenue account
(d)
4
Purchase returns
(e)
10
FOB destination
(f)
7
Periodic inventory system
(g)
11
Sales allowance
(h)
1
Gross profit
(i)
12
Non-operating activities
(j)
6
FOB shipping point
(k)
2
Perpetual inventory system
(l)
15
Merchandise inventory
(m)
13
Profit margin
(n)
9
Sales discounts
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-3 (a) Mar. 1 Merchandise Inventory ...................... Accounts Payable...........................
9,000
2 Merchandise Inventory ....................... Cash ................................................
155
3 Accounts Payable ............................... Merchandise Inventory...................
1,000
9,000
155
1,000
21 Merchandise Inventory ...................... 13,000 Accounts Payable...........................
13,000
22 (FOB destination point means the seller pays the freight, therefore no entry required here.) 23 Accounts Payable ............................... Merchandise Inventory...................
400
30 Accounts Payable ($9,000 – $1,000) .. Cash ................................................
8,000
400
31 Accounts Payable ($13,000 – $400) ... 12,600 Merchandise Inventory ($12,600 × 2%) .......................... Cash ..........................................
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8,000
252 12,348
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-3 (Continued) (b) Merchandise Inventory Mar. 1 9,000 2 155 Mar. 3 1,000 21 13,000 23 400 31 252 20,503 Cash payments: March 2 $ 155 March 30 8,000 March 31 12,348 Total cash payments for inventory in March $20,503
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-4 (a) Mar. 1 Accounts Receivable ......................... Sales ...............................................
9,000 9,000
Cost of Goods Sold ................................. 3,960 Merchandise Inventory ..................
3,960
2 (FOB shipping point means the buyer pays the freight, therefore no entry required here.) 3 Sales Returns and Allowances ......... Accounts Receivable.....................
1,000
Merchandise Inventory ....................... Cost of Goods Sold .......................
440
1,000
440
21 Accounts Receivable .......................... 13,000 Sales ............................................... Cost of Goods Sold............................. Merchandise Inventory ..................
5,720
22 Freight Out........................................... Cash ................................................
170
23 Sales Returns and Allowances ......... Accounts Receivable.....................
400
30 Cash ($9,000 – $1,000) ........................ Accounts Receivable......................
8,000
31
.
5,720
170
400
Cash ..................................................... 12,348 Sales Discounts ($12,600 × 2%) ......... 252 Accounts Receivable ($13,000 – $400)
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13,000
8,000
12,600
Chapter 5
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-4 (Continued)
(b) Sales ($9,000 + $13,000) Less: Sales returns ($1,000 + $400) Less: Sales discounts Net sales
$22,000 1,400 252 $20,348
Cost of goods sold ($3,960 + $5,720) Less: Returns to inventory Cost of goods sold
$9,680 440 $9,240
Net sales (above) Less: Cost of goods sold (above) Gross profit
$20,348 9,240 $11,108
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Accounting Principles, Seventh Canadian Edition
EXERCISE 528
(a) Apr. 5 Merchandise Inventory................ 12,000 Accounts Payable ...................
12,000
6 Merchandise Inventory................ Cash .........................................
300 300
8 Accounts Payable........................ Merchandise Inventory ...........
1,800 1,800
May 4 Accounts Payable ($12,000 – $1,800) ........................ 10,200 Cash .........................................
10,200
(b) Apr. 5 Accounts Receivable .................. 12,000 Sales ............................................
12,000
Cost of Goods Sold ......................... 8,500 Merchandise Inventory ...........
8,500
6 No entry required. 8 Sales Returns and Allowances ... Accounts Receivable ..............
1,800
May 4 Cash ($12,000 – $1,800) ................ 10,200 Accounts Receivable ..............
1,800 10,200
(c) Gross profit = $1,700 = ($12,000 – $1,800 – $8,500)
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Accounting Principles, Seventh Canadian Edition
EXERCISE 529
(a) Dec. 3 Accounts Receivable .................. 32,000 Sales ........................................
32,000
Cost of Goods Sold ..................... 18,000 Merchandise Inventory. ..........
18,000
4 Freight Out ................................... Cash .........................................
650
8 Sales Returns and Allowances ... Accounts Receivable ..............
1,800
Merchandise Inventory................ Cost of Goods Sold.................
990
650
1,800
990
13 Cash ($30,200 × 98%) .................. 29,596 Sales Discounts ($30,200 × 2%) . 604 Accounts Receivable ($32,000 – $1,800)....................
30,200
(b) Dec. 3 Merchandise Inventory................ 32,000 Accounts Payable ...................
32,000
4 No entry required. 8 Accounts Payable........................ Merchandise Inventory ...........
1,800
13 Accounts Payable........................ 30,200 Merchandise Inventory ($30,200 × 2%) ......................... Cash .........................................
1,800
604 29,596
(c) Merchandise Inventory Dec. 1 Dec. 3 Dec. 31
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6,000 32,000 Dec. 8 Dec. 13 35,596
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1,800 604
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 530
(a) Disagree (b) June 10 Merchandise Inventory................. 4,000 Accounts Payable .................... (a) Disagree (b) June 11 Merchandise Inventory................. 225 Cash .......................................... (a) Disagree (b) June 12 Accounts Payable......................... 200 Merchandise Inventory ............ (a) Disagree (b) June 20 Accounts Payable ($4,000 – $200) 3,800 Merchandise Inventory ($3,800 × 2%) ............................ Cash ($3,800 × 98%)................. (a) Disagree (b) July 15 Accounts Receivable ................... 9,275 Sales .........................................
(a) (b) (a) (b)
15 Cost of Goods Sold ...................... Merchandise Inventory ............ Disagree July 15 Freight Out .................................... Cash .......................................... Disagree July 17 Sales Returns and Allowances .... Accounts Receivable ...............
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5-30
4,000
225
200
76 3,724
9,275
3,800 3,800 175 175 300 300
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Accounting Principles, Seventh Canadian Edition
EXERCISE 531 (a) Jan. 31 Cost of goods sold ...................... Merchandise Inventory ........... ($21,600 –- $21,000)
600 600
(b) Jan. 31 Sales .............................................. 380,000 Income Summary ..................... 380,000 31 Income Summary.......................... 335,600 Cost of Goods Sold* ................ 218,600 Freight Out ............................... 7,000 Sales Returns and Allowances 13,000 Sales Discounts ....................... 10,000 Salaries Expense ..................... 55,000 Rent Expense ........................... 20,000 Insurance Expense .................. 12,000 ($218,000 + $600)
Solutions Manual .
31 Income Summary........................... 44,400 D. Flamont, Capital................... ($380,000 - $335,600)
44,400
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-9
Sales Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Other expenses Profit
Natural Family Cosmetics Grocery $215,000 (e) $360,000
SE Footwear $275,000
(a) 14,000 201,000 99,000 (b) 102,000 45,000
25,000 335,000 (f) 140,000 195,000 (g) 122,000
20,000 (i) 255,000 (j) 105,000 150,000 95,000
(c) 57,000 5,000 (d) $52,000
(h) 73,000 10,000 $63,000
(k) 55,000 (l) 14,000 $41,000
(a) Sales ........................................................................... $215,000 Less: *Sales returns and allowances ............................... (14,000) Net sales ..................................................................... $201,000 (b) Net sales ..................................................................... $201,000 Less: cost of goods sold ............................................ (99,000) *Gross profit ............................................................... $102,000 (c) Gross profit ................................................................ $102,000 Less: Operating expenses ......................................... (45,000) *Profit from operations ............................................... $ 57,000 (d) Profit from operations ................................................. $57,000 Less: Other expenses.................................................. (5,000) *Profit............................................................................ $52,000 (e) *Sales.......................................................................... $360,000 Less: Sales returns and allowances......................... (25,000) Net sales ..................................................................... $335,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-9 (Continued) (f)
Net sales................................................................... $335,000 *Cost of goods sold ................................................. (140,000) Gross profit .............................................................. $195,000
(g) Gross profit .............................................................. $195,000 *Operating expenses ............................................... (122,000) Profit from operations (from (h)) ............................ $73,000 (h) *Profit from operations............................................ Less: Other expenses ............................................. Profit .........................................................................
$73,000 (10,000) $63,000
(i)
Sales ......................................................................... $275,000 Less : Sales returns................................................. (20,000) *Net sales ................................................................. $255,000
(j)
Net sales................................................................... $255,000 Less: *Cost of goods sold....................................... (105,000) Gross profit .............................................................. $150,000
(k) Gross profit .............................................................. $150,000 Less: Operating expenses ...................................... (95,000) *Profit from operations............................................ $55,000 (l)
Profit from operations ............................................. Less: *Other expenses ............................................ Profit .........................................................................
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$55,000 (14,000) $41,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-10 (a) CRYSTAL COMPANY Income Statement Year Ended December 31, 2017 Revenues Net sales ($1,980,000 – $59,400 – $9,900) $1,910,700 Interest revenue ........................................ 10,000 Rent revenue ............................................. 24,000 Total revenues...................................... 1,944,700 Expenses Cost of goods sold ................................... $851,500 Salaries expense....................................... 650,000 Advertising expense................................. 55,000 Depreciation expense............................... 45,000 Freight out................................................. 25,000 Insurance expense ................................... 15,000 Interest expense ....................................... 10,500 Total expenses ..................................... 1,652,000 Profit............................................................... $ 292,700
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EXERCISE 5-10 (Continued) (b) Dec. 31 Sales ...............................................1,980,000 Interest Revenue ......................... 10,000 Rent Revenue .............................. 24,000 2,014,000 Income Summary ..................... 31 Income Summary ...........................1,721,300 Sales Returns and Allowances ........ Sales Discounts ................................ Cost of Goods Sold........................... Salaries Expense .............................. Advertising Expenses....................... Depreciation Expense....................... Freight out ......................................... Insurance Expense ........................... Interest Expense ...............................
59,400 9,900 851,500 650,000 55,000 45,000 25,000 15,000 10,500
31 Income Summary ($2,014,000 – $1,721,300) ......... 292,700 L. Crystal, Capital..................... 292,700 31 L. Crystal, Capital .............................. 150,000 L. Crystal, Drawings................. 150,000 CRYSTAL COMPANY Post-closing Trial Balance December 31, 2017 Debit $ 75,700 100,000 70,000 450,000
Cash ............................................................. Notes receivable.......................................... Merchandise inventory ............................... Equipment.................................................... Accumulated depreciation—equipment .... Unearned revenue ....................................... Notes payable .............................................. *L. Crystal, capital ....................................... Totals ........................................................... $695,700
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Credit
$135,000 8,000 175,000 377,700 $695,700
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-10 (Continued) L. Crystal, capital
Clos.
150,000
Solutions Manual .
Bal.
235,000
Clos.
292,700
Bal.
377,700*
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-11 (a) RIKARDS COMPANY Income Statement Year Ended August 31, 2017 Sales................................................................................. $465,000 Less: Sales returns and allowances ......................... 16,300 Net sales...................................................................... 448,700 Cost of goods sold .......................................................... 271,500 Gross profit...................................................................... 177,200 Operating expenses Salaries expense............................................ $50,000 Rent expense ................................................. 24,000 Depreciation expense.................................... 7,000 Supplies expense .......................................... 6,325 Insurance expense ........................................ 3,575 Total operating expenses ...................................... 90,900 Profit from operations..................................................... 86,300 Other expenses Interest expense ......................................................... 2,100 Profit................................................................................. $ 84,200 RIKARDS COMPANY Statement of Owner’s Equity Year Ended August 31, 2017 R. Smistad, capital September 1, 2016* ............................ $ 62,250 Add: Investment.............................................. $ 3,500 Profit ....................................................... 84,200 87,700 149,950 Less: Drawings .................................................................... 80,000 R. Smistad, capital, August 31, 2017.................................. $69,950 *($65,750 – $3,500)
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-11 (Continued) (a) (Continued) RIKARDS COMPANY Balance Sheet August 31, 2017
Assets Current assets Cash............................................................................. $ 15,450 Merchandise inventory.............................................. 70,350 Supplies....................................................................... 950 Prepaid insurance....................................................... 575 Total current assets ............................................... 87,325 Property, plant, and equipment Equipment .................................... $35,000 Less: Accumulated depreciation 14,000 $21,000 Furniture ......................................... 42,000 Less: Accumulated depreciation 17,500 24,500 Total property, plant, and equipment ..................... 45,500 Total assets .............................................................. $132,825 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... $ 15,500 Salaries payable.......................................................... 2,250 Interest payable .......................................................... 525 Unearned revenue ...................................................... 2,600 Current portion of non-current notes payable.......... 6,000 Total current liabilities ........................................... 26,875 Long-term liabilities Notes payable* ............................................................... 36,000 Total liabilities ........................................................ 62,875 Owner’s equity R. Smistad, capital ....................................................... 69,950 Total liabilities and owner’s equity ............................. $132,825 *($42,000 – $6,000)
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-11 (Continued) (b) Gross profit margin = $177,200 ÷ $448,700 = 39.5% Profit margin = $84,200 ÷ $448,700 = 18.8%
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Accounting Principles, Seventh Canadian Edition
EXERCISE 5-12 (a) Gross profit margin 2015 = 50.9% [($1,797,213– $883,033) ÷ $1,797,213] 2014 = 52.8% [($1,591,188 – $751,112) ÷ $1,591,188] 2013 = 55.7% [($1,370,358 – $607,532) ÷ $1,370,358] Profit margin 2015 = 13.3% [$239,033 ÷ $1,797,213] 2014 = 17.6% [$279,547 ÷ $1,591,188] 2013 = 19.8% [$271,431 ÷ $1,370,358] (b) Profit margin (Profit from operations) 2015 = 20.9% [$376,033 ÷ $1,797,213] 2014 = 24.6% [$391,358 ÷ $1,591,188] 2013 = 27.5% [$376,439 ÷ $1,370,358] (c) The gross profit margin has declined steadily from 2013 to 2015, from 55.7% to 50.9%. The profit margin has decreased steadily from 19.8% in 2013 to 13.3% in 2015. The profit margin based on profit from operations also weakened from 27.5% in 2013 to 20.9% in 2015.
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*EXERCISE 5-41 (a) Apr. 5 Purchases .................................... 12,000 Accounts Payable ...................
12,000
6 Freight In ...................................... Cash .........................................
300 300
8 Accounts Payable........................ Purchase Returns and Allowances ..............................
1,800 1,800
May 4 Accounts Payable ($12,000 – $1,800) ........................ 10,200 Cash .........................................
10,200
(b) Apr. 5 Accounts Receivable .................. 12,000 Sales .........................................
12,000
6 No entry required. 8 Sales Returns and Allowances ... Accounts Receivable ..............
1,800
May 4 Cash ($12,000 – $1,800)............... 10,200 Accounts Receivable ..............
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1,800 10,200
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Accounting Principles, Seventh Canadian Edition
*EXERCISE 5-14 (a) July 2
3
4
8
11
15
25
Solutions Manual .
Purchases ...................................... 15,000 Accounts Payable ....................
15,000
Accounts Payable............................ 1,200 Purchase Returns and Allowances ...............................
1,200
Freight In ....................................... Cash ..........................................
500
Cash ................................................. 2,000 Sales ......................................... Accounts Payable ($15,000-$1,200) Purchase Discounts ($13,800 × 2%) .......................... Cash ($13,800 × 98%)...............
500
2,000 13,800 276 13,524
Accounts Receivable ...................... 6,000 Sales .........................................
6,000
Cash ($6,000 × 99%) ........................ 5,940 Sales Discounts ($6,000 × 1%) .... 60 Accounts Receivable ...............
6,000
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*EXERCISE 5-14 (Continued) (b) Sales revenues Sales ($2,000 + $6,000) ............................................... Less: Sales discounts ............................................... Net sales...................................................................... Cost of goods sold Merchandise inventory, July 1 .................... $ 0 Purchases ................................... $15,000 Less: Purchase returns and 1,200 allowances ..................... Less: Purchase discounts ......... 276 Net purchases ............................. 13,524 Add: Freight in ............................ 500 Cost of goods purchased......................... 14,024 Cost of goods available for sale .............. 14,024 Merchandise inventory, July 31 ............... 10,500 Cost of goods sold................................................. Gross profit......................................................................
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$8,000 60 7,940
3,524 $4,416
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*EXERCISE 5-44 (a) Sales revenues Sales .............................................................................. $840,000 Less: Sales discounts .............................. $5,000 Sales returns and allowances ........ 10,000 15,000 Net sales .......................................................................... 825,000 Cost of goods sold Merchandise inventory, Jan. 1 ..................... $ 50,000 Purchases ................................... $509,000 Less: Purchase returns and 2,000 allowances ..................... Less: Purchase discounts ......... 6,000 Net purchases ............................. 501,000 Add: Freight in ............................ 4,000 505,000 Cost of goods purchased......................... Cost of goods available for sale .............. 555,000 Merchandise inventory, Dec. 31 .............. 66,000 Cost of goods sold................................................. 489,000 Gross profit...................................................................... $336,000 (b) Gross profit...................................................................... $336,000 Less profit........................................................................ 130,000 Operating expenses ........................................................ $206,000
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Accounting Principles, Seventh Canadian Edition
*EXERCISE 5-16 (a) OKANAGAN COMPANY Income Statement Year Ended January 31, 2017 Sales revenues Sales .............................................................................. $325,000 Less: Sales returns and allowances............. $20,000 Sales discounts.................................... 14,000 34,000 Net sales .............................................................................. 291,000 Cost of goods sold Merchandise Inventory, beginning ................ $ 61,000 Purchases .................................. $210,000 Less: Purchase discounts .$12,000 Purchase returns and allowances........ 16,000 28,000 Net purchases ........................ 182,000 Add: Freight in ........................... 6,500 Cost of goods purchased ............................. 188,500 Cost of goods available for sale .............. 249,500 Merchandise Inventory, ending ................... 42,000 Cost of goods sold ............................................................. 207,500 Gross profit...................................................................... 83,500 Operating expenses Freight out ................................................. $ 7,000 Insurance expense .................................. 12,000 Rent expense ........................................... 20,000 Salary expense ......................................... 61,000 Total operating expenses ...................................... 100,000 Loss from operations...................................................... (16,500) Other expenses Interest expense ......................................................... 6,000 Loss ................................................................................. $ (22,500)
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Accounting Principles, Seventh Canadian Edition
*EXERCISE 5-16 (Continued) (b) Jan. 31 Sales ................................................. 325,000 Merchandise Inventory (end of year) 42,000 Purchase Returns and Allowances. 16,000 Purchase Discounts ........................... 12,000 Income Summary ....................
395,000
31 Income Summary ............................. 417,500 Merchandise Inventory (beginning of year).................. Purchases................................ Freight In ................................. Freight Out .............................. Insurance Expense ................. Rent Expense .......................... Salaries Expense .................... Interest Expense ..................... Sales Returns and Allowances Sales Discounts ......................
61,000 210,000 6,500 7,000 12,000 20,000 61,000 6,000 20,000 14,000
31 O. G. Pogo, Capital............................. 22,500 Income Summary ....................
22,500
31 O. G. Pogo, Capital............................. 42,000 O. G. Pogo, Drawings .............
42,000
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 5-1A (a)
A company’s operating cycle is the average time it takes to go from cash to cash in producing revenues. The operating cycle for a merchandising company covers the period of time between when you pay for your inventory, sell it, and eventually collect the accounts receivable from a sale. You are having problems paying your bills because suppliers expect to be paid in 30 days and it takes 45 days, on average, to sell merchandise and an additional 60 days to collect accounts receivable.
(b)
Your inventory system is contributing to the problem because the periodic system does not keep track of inventory as sales occur. Therefore you do not know what inventory you have on hand at any given time and you often run out of inventory.
Taking It Further: You should consider switching to a perpetual inventory method because it has detailed records of each inventory purchase and sale. This system continuously—perpetually—shows the quantity and cost of the inventory purchased, sold, and on hand. This will allow you to order inventory on a more timely basis. Perpetual systems are more expensive, so a cost-benefit analysis should be conducted. Since your business is profitable, it could be worthwhile obtaining quotes on a perpetual system. Depending on the number of transactions per month, it might not make sense to invest in the required technology for a perpetual system.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 5-2A (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Apr. 2 Merchandise Inventory ....................... Accounts Payable...........................
6,400
4 Accounts Payable [5 × ($6,400 ÷ 160)] Merchandise Inventory...................
200
5 Accounts Receivable (45 × $90) ......... Sales ................................................
4,050
Cost of Goods Sold (45 × $40) ........... Merchandise Inventory...................
1,800
6 Sales Returns and Allowances .......... Accounts Receivable (15 × $90) ....
1,350
Merchandise Inventory (15 × $40) ...... Cost of Goods Sold ........................
600
10 Cash (40 × $90) .................................... Sales ...............................................
3,600
Cost of Goods Sold (40 × $40) ........... Merchandise Inventory...................
1,600
12 Sales Returns and Allowances .......... Cash (10 × $90) ...............................
900
Merchandise Inventory (10 × $40) ...... Cost of Goods Sold ........................
400
17 Sales Returns and Allowances .......... Cash (10 × $90) ...............................
900
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Credit
6,400
200
4,050
1,800
1,350
600
3,600
1,600
900
400 900
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PROBLEM 5-2A (Continued) (a) (Continued) Apr. 25 Accounts Receivable (60 × $90) ............. 5,400 Sales ................................................
5,400
Cost of Goods Sold (60 × $40)................ 2,400 Merchandise Inventory...................
2,400
29 Sales Returns and Allowances .............. 2,250 Accounts Receivable (25 × $90) ....
2,250
Merchandise Inventory (25 × $40) .......... 1,000 Cost of Goods Sold .......................
1,000
(b) Apr. 1 2 6 12 29 Bal.
Inventory 2,000 6,400 4 5 600 10 400 25 1,000 4,400
200 1,800 1,600 2,400
Cost of Goods Sold Apr. 5 1,800 6 600 10 1,600 12 400 25 2,400 29 1,000
Bal.
Sales Apr. 5 10 25
4,050 3,600 5,400
Bal.
13,050
3,800
Sales Returns and Allowances Apr. 6 1,350 12 900 17 900 29 2,250 Bal. 5,400
The April 1 inventory is 50 racquets times $40, or $2,000.
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PROBLEM 5-2A (Continued) Taking It Further: The owner will be missing the detail of the amount of sales returns. This can convey important information about the quality of the merchandise, or sales practices. A significant amount of sales returns can negatively affect customer loyalty and satisfaction. It is also time consuming and expensive to process the sales returns and to restock the returned merchandise. Therefore, the owner should know the amount of sales returns to determine if any of these problems exist.
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PROBLEM 5-3A GENERAL JOURNAL Date
Account Titles
J1 Debit
Credit
Sept. 1 Merchandise Inventory........................ 45,000 Accounts Payable .......................
45,000
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Payable............................ Merchandise Inventory ...............
3,000
15 Accounts Receivable....................... Sales ............................................
70,000
Cost of Goods Sold ($45,000 – $3,000) ............................ Merchandise Inventory ...............
3,000
70,000 42,000 42,000
16 Freight Out ....................................... Cash .............................................
1,800
17 Sales Returns and Allowances ...... Accounts Receivable ..................
5,000
Merchandise Inventory.................... Cost of Goods Sold.....................
3,000
25 Sales Discounts ($65,000 × 2%)...... Cash ($65,000 – $1,300)................... Accounts Receivable ($70,000 – $5,000)........................
1,300 63,700
1,800
5,000
3,000
30 Accounts Payable ($45,000 – $3,000) 42,000 Cash .............................................
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65,000 42,000
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PROBLEM 5-3A (Continued) Oct.
1 Merchandise Inventory.................... Accounts Payable .......................
52,000
2 Merchandise Inventory.................... Cash .............................................
1,100
3 Accounts Payable............................ Merchandise Inventory ...............
2,000
52,000
1,100
2,000
10 Accounts Payable ($52,000 – $2,000) 50,000 Cash ($50,000 – $1,000) ............. Merchandise Inventory ($50,000 × 2%)
49,000 1,000
11 Accounts Receivable........................... 83,500 Sales ............................................
83,500
Cost of Goods Sold ($52,000 + $1,100 – $2,000 – $1,000) Merchandise Inventory ...............
50,100 50,100
12 (FOB shipping point means the buyer pays the freight, therefore no entry required here.) 17 Sales Returns and Allowances ....... Accounts Receivable ..................
1,500
31 Cash ................................................. 82,000 Accounts Receivable ($83,500 – $1,500)........................ (No discount as not received within 10 days)
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PROBLEM 5-3A (Continued) Taking It Further: Companies should take all available discounts since not taking the discount is equivalent to paying interest for the use of the money owing to the seller. For the Sept. 1 purchase from Hillary Company, the interest rate is calculated as follows: Amount owing to Hillary Company ($45,000 − $3,000) = $42,000 Credit terms: 1/15, n/30 Discount not taken: $42,000 × 1% = $420. This equals to an annual interest rate of 24.33% (1% x (365 ÷ 15)). For the Oct. 1 purchase from Kimmel Company, the interest rate is calculated as follows: Amount owing to Kimmel Company ($52,000 − $2,000) = $50,000 Credit terms: 2/10, n/30 Discount taken: $50,000 × 2% = $1,000. This equals to an annual interest rate of 36.50% (2% x (365 ÷ 20)). In both cases, Norlan Company should be able to obtain financing from the bank at a lower rate of interest.
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PROBLEM 5-4A (a) GENERAL JOURNAL Date
Account Titles
Debit
Credit
July 1 Merchandise Inventory (50 × $30) .......... 1,500 Accounts Payable...........................
1,500
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 4 Accounts Payable ............................... Merchandise Inventory...................
150
10 Accounts Receivable (45 × $55) ........ Sales ................................................
2,475
Cost of Goods Sold (45 × $30) ........... Merchandise Inventory...................
1,350
12 Sales Returns and Allowances .......... Accounts Receivable.....................
275
Merchandise Inventory (5 × $30) ........ Cost of Goods Sold ........................
150
15 Merchandise Inventory (60 × $27.50) Accounts Payable...........................
1,650
18 Merchandise Inventory ....................... Cash ................................................
150
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2,475
1,350
275
150
1,650 150
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PROBLEM 5-4A (Continued) (a) (Continued) July 21 Accounts Receivable (54 × $55) ......... Sales ................................................
2,970
Cost of Goods Sold (54 × $30) ........... Merchandise Inventory...................
1,620
23 Sales Returns and Allowances .......... Accounts Receivable.....................
110
30 Accounts Payable ............................... Cash ($1,500 – $150) ......................
1,350
31 Cash ($2,475 – $275) ........................... Accounts Receivable .....................
2,200
2,970
1,620
110
1,350
2,200
(b) Merchandise Inventory Bal. 750* July 1 1,500 July 4 150 10 1,350 12 150 15 1,650 18 150 21 1,620 Bal. 1,080 * Balance from June 30 = 25 suitcases × $30 per suitcase
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PROBLEM 5-4A (Continued) (c)
There are 36* suitcases on hand on July 31. The balance in the merchandise inventory account is $1,080: $30 per suitcase × 36 suitcases = $1,080. Quantity Beginning inventory 25 Purchased July 1 50 Returned to supplier July 4 (5) Sold July 10 (45) Returned by customer July 12 5 Purchased July 15 60 Sold July 21 (54) Ending Inventory 36*
Note that the units returned on July 23 were disposed of and are therefore not included in the ending inventory. Taking It Further: Freight terms indicate when ownership of the goods transfers from the seller to the buyer and who pays for the transportation charges. In the July 1st transaction, the freight terms are FOB destination. The seller, Trunk Manufacturers, pays for the freight charges, resulting in an inventory cost of $30 per item (50 suitcases × $30 = $1,500). When the seller pays for the freight costs, this usually results in a higher unit cost to cover the shipping expense, as shown in the July 1st transaction. In the July 15th transaction, the freight terms are FOB shipping point. The buyer, Travel Warehouse, pays for the freight charges, resulting in a lower unit cost charged by the vendor. Invoice cost (60 suitcases × $27.50) $1,650 Freight 150 Total inventory cost $1,800 Cost per suitcase ($1,800 ÷ 60) $30
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PROBLEM 5-4A (Continued) Shipping terms also impact the cost of merchandise by identifying the beginning of the discount period for calculating discounts on purchases. With FOB shipping point, the discount period starts when the goods are shipped. With FOB destination, the discount period starts when the goods are received.
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PROBLEM 5-5A (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Credit
June 1 Merchandise Inventory ........................... 9,200 Accounts Payable...........................
9,200
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Receivable .......................... 12,000 Sales ................................................ Cost of Goods Sold............................. Merchandise Inventory...................
7,400
6 Sales Returns and Allowances .......... Accounts Receivable......................
900
Merchandise Inventory ....................... Cost of Goods Sold ........................
550
6 Freight Out........................................... Cash ................................................
300
7 Supplies ............................................... Cash ................................................
790
10 Merchandise Inventory ....................... Accounts Payable...........................
4,750
10 Merchandise Inventory ....................... Cash ................................................
130
12 Accounts Payable ............................... Merchandise Inventory...................
250
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12,000
7,400
900
550
300
790
4,750
130 250
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PROBLEM 5-5A (Continued) (a) (Continued) June 14 Accounts Payable ................................... 9,200 Merchandise Inventory ($9,200 × 1%) Cash ($9,200 − $92) ........................
92 9,108
15 Cash ($11,100 − $222) ......................... 10,878 Sales Discounts ($11,100 × 2%) ......... 222 Accounts Receivable ($12,000 – $900)
11,100
19 Cash ......................................................... 7,200 Sales ................................................
7,200
Cost of Goods Sold ................................. 4,600 Merchandise Inventory...................
4,600
20 Accounts Payable ($4,750 − $250) ......... 4,500 Merchandise Inventory ($4,500 × 2%) Cash ($4,500 − $90) ........................
90 4,410
25 Sales Returns and Allowances .......... Cash ................................................
500
30 Accounts Receivable .............................. 4,100 Sales ................................................
4,100
Cost of Goods Sold ................................. 2,600 Merchandise Inventory...................
2,600
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PROBLEM 5-5A (Continued) (b)
Date June 1 1 5 6 10 10 12 14 19 20 30
Date
Merchandise Inventory Explanation Ref. Debit
Credit Balance
J1 9,200 J1 J1 550 J1 4,750 J1 130 J1 J1 J1 J1 J1
5,900 15,100 7,700 8,250 13,000 13,130 12,880 12,788 8,188 8,098 5,498
Balance
Explanation
Sales Ref.
Debit
7,400
250 92 4,600 90 2,600
Credit Balance
June 5 19 30
J1 J1 J1
Date
Sales Returns and Allowances Explanation Ref. Debit Credit Balance
June 6 25
J1 J1
Date
.
12,000 19,200 23,300
900 500
900 1,400
Sales Discounts Explanation Ref. Debit
Credit Balance
June 15
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PROBLEM 5-5A (Continued) (b) (Continued)
Date
Cost of Goods Sold Explanation Ref. Debit
June 5 6 19 30
J1 J1 J1 J1
Credit Balance
7,400 550 4,600 2,600
7,400 6,850 11,450 14,050
(c) WILLINGHAM DISTRIBUTING COMPANY Income Statement (Partial) Month Ended June 30, 2017 Sales revenues Sales ................................................................................ $23,300 Less: Sales returns and allowances........ 1,400 Sales discounts.............................. 222 1,622 Net sales...................................................................... 21,678 Cost of goods sold .............................................................. 14,050 Gross profit...................................................................... $ 7,628 Taking It Further: Willingham would face uncertainty about the amount of sales recorded in June that may be returned in a subsequent accounting period. If Willingham experiences significant returns and accepts returns for up to six months after the initial sale, the June gross profit will be overstated. If a company experiences substantial returns, it has to record an estimate of them in the same time period as the related sale in order to properly reflect the gross profit for that period’s sale. This topic is usually explored further in an intermediate accounting course.
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PROBLEM 5-6A
(a) Aug. 31 Cost of Goods Sold ......................... 2,300 Merchandise Inventory ($57,000 − $54,700).....................
2,300
(b) WOLCOTT WAREHOUSE STORE Income Statement Year Ended August 31, 2017 Revenues Net sales ($704,000 – $3,300 – $14,700)..... $686,000 Interest revenue ......................................... 960 $686,960 Expenses Cost of goods sold ($575,500 + $2,300) ..... $577,800 Depreciation expense ................................. 6750 Freight out ................................................... 4,600 Insurance expense ...................................... 2,900 Interest expense .......................................... 2,000 Rent expense............................................... 15,500 Supplies expense ........................................ 5,600 615,150 Profit................................................................ $ 71,810
(c) Gross profit = $686,000 - $577,800 = $108,200 Gross profit margin = $108,200 ÷ $686,000 = 15.8% Profit margin = $71,810 ÷ $686,000 = 10.5% The gross profit margin has deteriorated significantly from 20% in 2016 to 15.8% in 2017. The profit margin however has improved from 9% in 2016 to 10.5% in 2017.
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PROBLEM 5-6A (Continued) (d) 960 Aug. 31 Interest Revenue ............................... Sales .................................................. 704,000 Income Summary..........................
704,960
31 Income Summary .............................. 632,970 Sales Returns and Allowances .... Sales Discounts ............................ Cost of Goods Sold ...................... Depreciation Expense ................ Freight Out .................................. Insurance Expense ..................... Interest Expense ........................... Rent Expense.............................. Supplies Expense .......................
14,700 3,300 577,800 6,570 4,600 2,900 2,000 15,500 5,600
31 Income Summary .............................. V. Wolcott, Capital ........................
71,990 71,990
31 V. Wolcott, Capital............................. V. Wolcott, Drawings ....................
61,200 61,200
Income Summary 704,960 632,970 Bal.* 71,990 71,990 Bal. 0 * Check $71,990 = Profit
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PROBLEM 5-6A (Continued) Taking It Further: The most important factor in increasing profitability is to generate as high a gross profit margin as possible. To improve gross profit, the primary steps are to try to increase sales at a higher rate than cost of the goods sold increases. Negotiating better purchase prices from its suppliers is the primary way businesses can attempt to price its product attractively to generate more sales with its customers. As for the profit margin, reduction of expenses will contribute to a healthier profit. Some expenses are fixed, such as rent, insurance, and depreciation, but other expenses can be managed. For example, Wolcott could negotiate shipping terms with its customers that would reduce freight out costs. Depending on how Wolcott is financed, there could be measures taken to finance the business with more investments by the owner to reduce the debt and therefore the corresponding interest expense. Finally Wolcott should investigate the possibility of reducing its supplies expense in the future.
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PROBLEM 5-7A (a) Dec. 31 Supplies Expense .............................. Supplies ......................................... ($2,950 − $750)
2,200
31 Insurance Expense ............................ Prepaid Insurance ......................... ($3,000 × 10/12)
2,500
2,220
2,500
31 Depreciation Expense ....................... 14,500 Accumulated Depreciation —Equipment .................................. Accumulated Depreciation —Furniture..................................... 31 Interest Expense ................................ Interest Payable ............................
675
31 Unearned Revenue ............................ Sales ............................................. ($4,000 − $975)
3,025
31 Cost of Goods Sold ........................... Merchandise Inventory .................
1,750
31 Cost of Goods Sold .......................... Merchandise Inventory ................. [($37,050 − $1,750) − $32,750]
2,550
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10,000 4,500
675
3,025
1,750
2,550
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PROBLEM 5-7A (Continued) (b) WORLD ENTERPRISES Income Statement Year Ended December 31, 2017 Sales revenues Sales ($265,000 + $3,025) ........................................... $268,025 Less: Sales returns and allowances ............. $2,500 Sales discounts .................................... 3,275 5,775 Net sales...................................................................... 262,250 Cost of goods sold ($153,000 + $1,750 + $2,550) .......... 157,300 Gross profit...................................................................... 104,950 Operating expenses Salaries expense................................. 35,450 Utilities expense ............................................ 5,100 Supplies expense .......................................... 2,200 Insurance expense ........................................ 2,500 Depreciation expense ................................... 14,500 Total operating expenses ...................................... 59,750 Profit from operations..................................................... 45,200 Other expenses Interest expense ($6,875 + $675) ............................... 7,550 Profit ................................................................................ $ 37,650
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PROBLEM 5-7A (Continued) (c) WORLD ENTERPRISES Income Statement Year Ended December 31, 2017 Revenues Net sales ......................................................................... $262,250 Expenses Cost of goods sold ........................................$157,300 Depreciation expense....................................... 14,500 Insurance expense ............................................. 2,500 Interest expense ................................................. 7,550 Salaries expense .............................................. 35,450 Utilities expense ................................................. 5,100 Supplies expense .......................................... 2,200 224,600 Profit................................................................................. $ 37,650
(d) Dec. 31 Sales ............................................. 268,025 Income Summary ..................
268,025
31 Income Summary......................... 230,375 Sales Returns and Allowances Sales Discounts .................... Cost of Goods Sold............... Interest Expense ................... Salaries Expense .................. Utilities Expense ................... Supplies Expense ................. Insurance Expense ............... Depreciation Expense...........
2,500 3,275 157,300 7,550 35,450 5,100 2,200 2,500 14,500
31 Income Summary........................... 37,650 S. Kim, Capital .......................
37,650
31 S. Kim, Capital ............................... 48,000 S. Kim, Drawings...................
48,000
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PROBLEM 5-7A (Continued) Taking It Further: A multiple-step income statement separates operating transactions from the non-operating transactions and matches costs and expenses with related revenues. A singlestep format is simpler, and no one type of revenue or expense item is implied to have priority over any other. The multi-step is considered more useful than a single-step income statement because the steps give additional information about a company’s profitability. Management wants more information about gross profit as it is the result of the main focus of the business activity as a merchant. As well, when reading the multiple-step format, the reader can make comparisons, for example salaries expense, to gross profit. Management may find this relationship key in managing the work force. Finally, because it is more detailed, the multiple-step format provides the reader with the amount of sales returns, allowances, and discounts that they may find out of proportion to the amount of gross sales.
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PROBLEM 5-8A (a) 2014
2013
Gross profit margin
13.7%
($36,641 – $31,623) ÷ ($34,835 –$ 30,287) $36,641 ÷ $34,835
($30,837– ÷ $30,837
Profit margin
5.14%
4.48%
4.65%
$1,882 ÷ $36,641
$1,561 ÷ $34,835
$1,433 ÷ $30,837
1.36:1
1.37:1
$9,923 ÷ $7,309
$9,135 ÷ $6,684
Current 1.31:1 ratio $10,007 ÷ $7,611
13.1%
2012 12.4% $27,019)
(b) Magna International’s gross profit margin and profit margin have steadily improved from 2012 to 2014 with the exception of a modest decrease in profit margin in 2013. The current ratio decreased between 2012 and 2014 but only very slightly for an overall decrease in liquidity.
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PROBLEM 5-8A (Continued) Taking It Further The underlying financial statements, in particular the income statement, would provide additional information to explain the nature of the changes in the ratios and to help an investor assess performance. The balance sheet would also help a potential investor assess the change in liquidity over the 3-year period by examining the underlying current assets and liabilities. For example, an increase in inventory and receivables can signal a deteriorating liquidity even though the current ratio shows an increase over the previous year. The financial statements would also allow a potential investor to calculate additional ratios to assess profitability and liquidity as well as measure the level of growth in sales experienced by Magna.
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*PROBLEM 5-9A GENERAL JOURNAL Date
Account Titles
Debit
Credit
Sept. 1 Purchases ............................................ 45,000 Accounts Payable ........................
45,000
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Payable .................................. 3,000 Purchase Returns and Allowances
3,000
15 Accounts Receivable........................... 70,000 Sales ..............................................
70,000
16 Freight Out ....................................... Cash .............................................
1,800 1,800
17 Sales Returns and Allowances ...... Accounts Receivable ..................
5,000
25 Sales Discounts ($65,000 × 2%)...... 1,300 Cash ($65,000 − $1,300) ...................... 63,700 Accounts Receivable ($70,000 − $5,000)........................
5,000
65,000
30 Accounts Payable ($45,000 − $3,000) 42,000 Cash ............................................. 42,000 (No discount as not paid within discount period)
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*PROBLEM 5-9A (Continued) Oct.
1 Purchases ........................................ Accounts Payable .......................
52,000
2 Freight In .......................................... Cash .............................................
1,100
52,000
1,100
3 Accounts Payable............................ 2,000 Purchase Returns and Allowances
2,000
10 Accounts Payable ($52,000 − $2,000) 50,000 Cash ($50,000 − $1,000) ............. Purchase Discounts ($50,000 × 2%)
49,000 1,000
11 Accounts Receivable....................... Sales ............................................
83,500
83,500
12 (FOB shipping point means the buyer pays the freight, therefore no entry required here.) 17 Sales Returns and Allowances ....... Accounts Receivable ..................
1,500
31 Cash ................................................. 82,000 Accounts Receivable ($83,500 − $1,500)........................ (No discount as not received within 10 days)
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82,000
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*PROBLEM 5-9A (Continued) Taking It Further Norlan Company has few transactions (1 purchase and 1 sale per month). A periodic inventory system is less costly to implement and maintain than a perpetual system. If the company has relatively low inventory quantities and can maintain control over its inventory visually rather than electronically, then a periodic inventory system may be sufficient to meet their information needs.
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*PROBLEM 5-10A GENERAL JOURNAL Date July
Account Titles
Debit
1 Purchases (50 × $30) ........................ Accounts Payable ........................
Credit
1,500 1,500
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 4 Accounts Payable.............................. Purchase Returns and Allowances
150
10 Accounts Receivable (45 × $55) ...... Sales .............................................
2,475
12 Sales Returns and Allowances ........ Accounts Receivable ...................
275
15 Purchases (60 × $27.50) .................... Accounts Payable ........................
1,650
18 Freight In ............................................ Cash ..............................................
150
21 Accounts Receivable (54 × $55) ...... Sales .............................................
2,970
23 Sales Returns and Allowances ........ Accounts Receivable ...................
110
30 Accounts Payable.............................. Cash ($1,500 – $150) .....................
1,350
31 Cash ($2,475 − $275) ......................... Accounts Receivable ....................
2,200
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150
2,475
275
1,650
150
2,970
110
1,350 2,200
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*PROBLEM 5-10A (Continued) Taking It Further: A perpetual inventory system provides detailed records of inventory. This would allow Travel Warehouse to track the quantity and cost of inventory purchased, sold, and on hand. This would provide the benefit of being able to answer customer questions about merchandise availability and for management to maintain optimum inventory levels and avoid running out of stock. This system also allows the company to prepare financial statements more easily, since the cost of goods sold and ending inventory amounts are readily available. For a company such as Travel Warehouse, a perpetual system includes the freight-in costs in the inventory account rather than in a separate account. This would reflect the fact that the cost is the same regardless of whether Travel Warehouse or the supplier pays the freight. When the supplier pays the freight, they typically charge a higher amount for the inventory to compensate for the freight cost. A perpetual inventory system is more costly to implement and maintain because of the need to enter all merchandise in the accounting system. The accounting system must also be sufficiently sophisticated to track purchases and sales of merchandise, usually through the use of scanners.
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*PROBLEM 5-11A (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Credit
June 1 Purchases ................................................ 9,200 Accounts Payable ..........................
9,200
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Receivable ......................... 12,000 Sales ............................................... 6 Sales Returns and Allowances .......... Accounts Receivable .....................
900
6 Freight Out .......................................... Cash ...............................................
300
7 Supplies .............................................. Cash ...............................................
790
10 Purchases............................................ Accounts Payable ..........................
4,750
10 Freight In ............................................. Cash ...............................................
130
12 Accounts Payable .............................. Purchase Returns and Allowances
250
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900
300
790
4,750
130 250
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*PROBLEM 5-11A (Continued) (a) (Continued) June 14 Accounts Payable ............................... Purchase Discounts ($9,200 × 1%) Cash ($9,200 − $92) ........................
9,200 92 9,108
15 Cash ($11,100 − $222) ........................ 10,878 Sales Discounts ($11,100 × 2%) ......... 222 Accounts Receivable ($12,000 - $900)
11,100
19 Cash ......................................................... 7,200 Sales ...............................................
7,200
20 Accounts Payable ($4,750 − $250) ......... 4,500 Purchase Discounts ($4,500 × 2%) Cash ($4,500 − $90) ........................
90 4,410
25 Sales Returns and Allowances ......... Cash ................................................
500 500
30 Accounts Receivable .............................. 4,100 Sales ................................................
4,100
(b)
Date
Merchandise Inventory Explanation Ref. Debit
June 1
Balance
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*PROBLEM 5-11A (Continued) (b) (Continued)
Date
Explanation
Sales Ref.
Debit
Credit Balance
June 5 19 30
J1 J1 J1
Date
Sales Returns and Allowances Explanation Ref. Debit Credit Balance
June 6 25
J1 J1
Date
12,000 7,200 4,100
12,000 19,200 23,300
900 500
900 1,400
Sales Discounts Explanation Ref. Debit
Credit Balance
June 15
J1
222
222
Date
Purchases Ref. Debit
Credit Balance
Explanation
June 1 10
J1 J1
9,200 4,750
9,200 13,950
Purchases Discounts Date Explanation Ref. Debit June 14 J1 20 J1
Credit Balance 92 92 90 182
Purchases Returns and Allowances Date Explanation Ref. Debit Credit Balance June 12 J1 250 250
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*PROBLEM 5-11A (Continued) (b) (Continued) Freight In Ref.
Debit
Credit Balance
June 10
J1
130
130
Date
Freight Out Ref. Debit
Credit Balance
Date
Explanation
Explanation
June 6
J1
300
300
(c) WILLINGHAM DISTRIBUTING COMPANY Income Statement (Partial) Month Ended June 30, 2017 Sales revenues Sales ................................................................................ $23,300 Less: Sales returns and allowances ............... $1,400 Sales discounts................................. 222 1,622 Net sales........................................................ 21,678 Cost of goods sold Merchandise inventory, June 1................... 5,900 Purchases ....................................... $13,950 Less: Purchase discounts .......... $ 182 Purchase returns and allowances ................. 250 432 Net purchases ............................. 13,518 Add: Freight in ............................ 130 Cost of goods purchased......................... 13,648 Cost of goods available for sale .............. 19,548 Merchandise inventory, June 30.............. 5,498 Cost of goods sold ..................................................... 14,050 Gross profit...................................................................... $ 7,628
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*PROBLEM 5-11A (Continued) Taking It Further: The gross profit should be the same under both periodic and perpetual systems since the same transactions are recorded with the same impact on cash outflows, and the company will have the same amount of ending inventory because the balances are arrived at by the inventory count.
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*PROBLEM 5-12A NEW WEST COMPANY Income Statement Year Ended December 31, 2017 Sales................................................................................... $395,000 Less: Sales discounts ................................. $ 2,900 Sales returns and allowances........... 7,500 10,400 Net sales .......................................................................... 384,600 Cost of goods sold Inventory, January 1, 2017 ....................... 30,000 Purchases .................................. $232,000 Less: Purchase discounts ... $3,480 Purchase returns and allowances........ 4,000 7,480 Net purchases .............................. 224,520 Freight in .................................... 4,500 229,020 Goods available for sale........................... 259,020 Inventory, December 31, 2017.................. 24,000 Cost of goods sold................................................. 235,020 Gross profit...................................................................... 149,580 Operating expenses Freight out................................................. 9,500 Insurance expense ................................... 10,500 Rent expense ............................................ 18,000 Salary expense ......................................... 42,000 Depreciation expense............................... 7,000 Total operating expenses ...................................... 87,000 Profit from operations..................................................... 62,580 Other revenues and expenses Interest revenue ....................................... 1,500 (1,000) Interest expense ...................................... (2,500) Profit................................................................................. $ 61,580
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*PROBLEM 5-12A (Continued) NEW WEST COMPANY Statement of Owner’s Equity Year Ended December 31, 2017 L. Oliver, capital, January 1, 2017 .................................. Add: Investment............................................................. Profit ...................................................................... Less: Drawings................................................................ L. Oliver, capital, December 31, 2017.............................
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$75,000 3,500 61,580 140,080 48,000 $92,080
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*PROBLEM 5-12A (Continued) NEW WEST COMPANY Balance Sheet December 31, 2017
Assets Current assets Cash................................................................................ $ 16,780 Accounts receivable ................................................... 7,800 Merchandise inventory ................................................... 24,000 Total current assets ............................................... 48,580 Long-term investments Long-term investment ................................................ 50,000 Property, plant, and equipment Equipment ........................................................ 70,000 Less: Accumulated depreciation .................. 21,000 Total property, plant, and equipment........................ 49,000 Total assets .............................................................. $147,580 Liabilities and Owner’s Equity Current liabilities Unearned revenue ...................................................... $ 5,500 Loan payable, current portion ................................... 5,000 Total current liabilities ........................................... 10,500 Long-term liabilities Loan payable ($50,000 − $5,000) .................................... 45,000 Total liabilities ........................................................ 55,500 Owner’s equity L. Oliver, capital .............................................................. 92,080 Total liabilities and owner’s equity ............................. $147,580
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*PROBLEM 5-12A (Continued) Taking It Further: A company using a periodic inventory system does not have to show the details of how cost of goods sold is calculated. The company can show its income statement using only the account cost of goods sold or show the details produced by the periodic system. GAAP for private enterprises as well as IFRS do not require the additional detail produced by the periodic system to be disclosed. This is because the decision to use either the periodic or perpetual system is a question of cost of the system as opposed to its benefits for a particular company. The additional detail produced by the periodic system provides information that is valuable to management and not to outside users of the income statement.
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*PROBLEM 5-13A (a) BUD’S BAKERY Income Statement Year Ended November 30, 2017 Sales................................................................................... $872,000 Less: Sales discounts ................................. $ 8,250 Sales returns and allowances........... 9,845 18,095 Net sales .......................................................................... 853,905 Cost of goods sold Merchandise inventory, December 1, 2016 34,360 Purchases .................................. $634,700 Less: Purchase discounts ... $6,300 Purchase returns and allowances........ 13,315 19,615 Net purchases .............................. 615,085 Freight in .................................... 5,060 620,145 Goods available for sale........................... 654,505 Merchandise inventory, November 30, 2017 37,350 Cost of goods sold................................................. 617,155 Gross profit...................................................................... 236,750 Operating expenses Depreciation expense............................... 14,000 Property tax expense ............................... 3,500 Salaries expense....................................... 122,000 Freight out................................................. 8,200 Insurance expense ................................... 9,000 Utilities expense ....................................... 19,800 Total operating expenses ...................................... 176,500 Profit from operations..................................................... 60,250 Other revenues and expenses Rent revenue ............................................ 2,800 Interest expense ...................................... (5,300) (2,500) Profit................................................................................. $ 57,750
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*PROBLEM 5-13A (Continued) (a) (Continued) BUD’S BAKERY Statement of Owner’s Equity Year Ended November 30, 2017 B. Hachey, capital, December 1, 2016............................ $104,480 Add: Profit........................................................................ 57,750 162,230 Less: Drawings................................................................ 12,000 B. Hachey, capital, November 30, 2017.......................... $150,230
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*PROBLEM 5-13A (Continued) (a) (Continued) BUD’S BAKERY Balance Sheet November 30, 2017
Assets Current assets Cash............................................................................. $ 8,500 Accounts receivable ................................................... 13,770 Merchandise inventory............................................... 37,350 Prepaid insurance....................................................... 4,500 Total current assets ............................................... 64,120 Property, plant, and equipment Land ............................................................ $ 85,000 Building ........................................ $175,000 Less: Accumulated depreciation 61,200 113,800 Equipment .................................. 57,000 Less: Accumulated depreciation 19,880 37,120 Total property, plant, and equipment...................... 235,920 Total assets .............................................................. $300,040 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... $ 32,310 Salaries payable.......................................................... 8,500 Unearned revenue ...................................................... 3,000 Mortgage payable, current portion ............................ 8,500 Total current liabilities ........................................... 52,310 Long-term liabilities Mortgage payable ($106,000 − $8,500) .......................... 97,500 Total liabilities ............................................................ 149,810 Owner’s equity B. Hachey, capital ......................................................... 150,230 Total liabilities and owner’s equity ............................. $300,040
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*PROBLEM 5-13A (Continued) (b) Nov. 30 Sales ............................................... 872,000 Purchase Discounts ...................... 6,300 Purchase Returns and Allowances 13,315 Rent Revenue................................. 2,800 Merchandise Inventory (Nov. 30, 2017) 37,350 Income Summary ......................
931,765
30 Income Summary........................... 874,015 Purchases.................................. Freight In ................................... Sales Discounts ........................ Sales Returns and Allowances Salaries Expense ...................... Freight Out................................. Depreciation Expense............... Utilities Expense ....................... Property Tax Expense .............. Insurance Expense ................... Interest Expense ....................... Merchandise Inventory (Dec. 1, 2016)
634,700 5,060 8,250 9,845 122,000 8,200 14,000 19,800 3,500 9,000 5,300 34,360
30 Income Summary........................... B. Hachey, Capital.....................
57,750 57,750
30 B. Hachey, Capital ......................... B. Hachey, Drawings.................
12,000
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*PROBLEM 5-13A (Continued) (c)
Date
Merchandise Inventory Explanation Ref. Debit
Dec. 1 Nov. 30 30
Balance Closing entry Closing entry
37,350
34,360 0 37,350
Date
B. Hachey, Capital Explanation Ref. Debit
Credit Balance
Dec. 1 Nov. 30 30
Balance Closing entry Closing entry
Credit Balance
34,360
12,000
104,480 57,750 162,230 150,230
Taking It Further: The list of accounts includes the following accounts that are used in a periodic inventory system: purchases, purchase discounts, purchase returns and allowances, and freight in. The periodic inventory system provides information about purchase returns and allowances, and purchase discounts. The purchase returns and allowances account provides management with similar information as the sales returns and allowances account. This account provides information about the volume of returns to suppliers and information about the quality of the products. The Freight In account allows management to see directly the cost of transportation for its purchased merchandise.
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PROBLEM 590B (a) A company’s operating cycle is the average time it takes to go from cash to cash in producing revenues. The operating cycle for a merchandising company covers the period of time from when you pay for your inventory, sell it, and eventually collect the accounts receivable from a sale. You are having problems paying your bills because the period of time between your sales and your collection of accounts receivable is lengthened because many customers take more than one month to pay. (b) Your inventory system is contributing to the problem because a periodic system does not keep track of inventory as sales occur. Therefore, you do not know what inventory you have on hand at any given time and you often run out of inventory. Taking It Further: You should consider switching to a perpetual inventory system where detailed records of each inventory purchase and sale are maintained. This system continuously—perpetually—shows the quantity and cost of the inventory purchased, sold, and on hand. This will allow you to order inventory on a more timely basis.
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PROBLEM 5-2B (a) GENERAL JOURNAL Date
Account Titles
J1 Debit
Credit
Apr. 2 Merchandise Inventory ....................... 16,000 Accounts Payable...........................
16,000
4 Accounts Payable [5 × ($16,000 ÷ 100)] Merchandise Inventory...................
800 800
5 Accounts Receivable (20 × $265) ....... Sales ................................................
5,300
Cost of Goods Sold (20 × $160) ......... Merchandise Inventory...................
3,200
6 Sales Returns and Allowances .......... Accounts Receivable (8 × $265) ....
2,120
Merchandise Inventory (8 × $160) ...... Cost of Goods Sold ........................
1,280
10 Cash (30 × $265) .................................. Sales ................................................
7,950
Cost of Goods Sold (30 × $160) ......... Merchandise Inventory...................
4,800
12 Sales Returns and Allowances .......... Cash (10 × $265) .............................
2,650
Merchandise Inventory (10 × $160) .... Cost of Goods Sold ........................
1,600
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5,300
3,200
2,120
1,280
7,950
4,800
2,650 1,600
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PROBLEM 5-2B (Continued) (a) (Continued) Apr. 17 Sales Returns and Allowances .......... Cash (10 × $265) .............................
2,650 2,650
25 Accounts Receivable (45 × $265) ....... 11,925 Sales ................................................ Cost of Goods Sold (45 × $160) ......... Merchandise Inventory...................
7,200
29 Sales Returns and Allowances .......... Accounts Receivable (25 × $265) ..
6,625
Merchandise Inventory (25 × $160) .... Cost of Goods Sold ........................
4,000
11,925
7,200
6,625 4,000
(b) Merchandise Inventory Apr. 1 3,200* 2 16,000 4 800 5 3,200 6 1,280 10 4,800 12 1,600 25 7,200 29 4,000 Bal. 10,080
Cost of Goods Sold Apr. 5 3,200 6 1,280 10 4,800 12 1,600 25 7,200 29 4,000
Bal.
8,320
*Balance from April 1, 2017 = 20 clubs x $160 each = $3,200
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PROBLEM 5-2B (Continued) (b) (Continued)
Sales Apr. 5 10 25
5,300 7,950 11,925
Bal.
25,175
Sales Returns and Allowances Apr. 6 2,120 12 2,650 17 2,650 29 6,625 Bal. 14,045
Taking It Further: The sales returns and allowances account can convey important information about inferior quality of the merchandise and the volume of returns. A significant amount of sales returns and allowances can negatively affect customer loyalty and satisfaction. They can also signify inefficiencies in filling orders, billing errors, or mistakes in the delivery of goods. Dealing with sales returns also involves costs of inspecting and restocking the merchandise.
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PROBLEM 5-3B GENERAL JOURNAL Date
Account Titles
Debit
Credit
Oct. 2
Merchandise Inventory........................ 35,000 Accounts Payable .........................
35,000
4 No entry as FOB destination means the seller pays the freight. 5
11
17
6,000 6,000
Accounts Payable ($35,000 − $6,000) 29,000 Merchandise Inventory ($29,000 × 2%) ............................... Cash ($29,000 − $580) ..................
580 28,420
Accounts Receivable......................... 62,500 Sales ..............................................
62,500
Cost of Goods Sold ........................... 28,420 Merchandise Inventory .................
28,420
18
No entry as FOB shipping means purchaser pays freight.
19
Sales Returns and Allowances ......... Accounts Receivable ....................
27
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Accounts Payable.............................. Merchandise Inventory .................
2,500 2,500
Sales Discounts ($60,000 × 2%)........ 1,200 Cash ($60,000 − $1,200)..................... 58,800 Accounts Receivable ($62,500 − $2,500)..........................
60,000
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PROBLEM 5-3B (Continued) Nov. 1
2
5
6
7
29
30
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Merchandise Inventory........................ 60,000 Accounts Payable .........................
60,000
Merchandise Inventory.......................... 4,000 Cash ...............................................
4,000
Accounts Receivable......................... 110,500 Sales ..............................................
110,500
Cost of Goods Sold ($60,000 + $4,000) 64,000 Merchandise Inventory .................
64,000
Freight Out ......................................... Cash ...............................................
2,600 2,600
Sales Returns and Allowances ......... Accounts Receivable ...................
7,000
Merchandise Inventory...................... Cost of Goods Sold.......................
4,050
7,000 4,050
Cash ($110,500 − $7,000) .................. 103,500 Accounts Receivable .................... (No discount as not received within 10 days)
103,500
Accounts Payable ................................ 60,000 Cash .............................................. (No discount as not paid within 15 days)
60,000
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PROBLEM 5-3B (Continued) Taking It Further: Companies should take all available discounts since not taking the discount is equivalent to paying interest for the use of the money owing to the seller. For the Oct. 2 purchase from Gregory Company, the interest rate is calculated as follows: Amount owing to Gregory: ($35,000 − $6,000) = $29,000 Credit terms: 2/10, n/30 Discount taken: $29,000 × 2% = $580. This equals to an annual interest rate of 36.50% (2% x (365 ÷ 20)) For the Nov. 1 purchase from Romeo Company, the interest rate is calculated as follows: Amount owing to Romeo Company = $60,000 Credit terms: 1/15, n/30 Discount not taken: $60,000 × 1% = $600. This equals to an annual interest rate of 24.33% (1% x (365 ÷ 15)). In both cases, Leeland Company should be able to obtain financing from the bank at a lower rate of interest.
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PROBLEM 5-4B (a) GENERAL JOURNAL Date
Account Titles
Debit
Credit
June 1
Merchandise Inventory (170 × $7)......... 1,190 Accounts Payable .........................
1,190
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 3
6
18
20
21
27
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Accounts Receivable (190 × $12) ..... Sales ..............................................
2,280
Cost of Goods Sold (190 × $7) .......... Merchandise Inventory .................
1,330
Accounts Payable.............................. Merchandise Inventory .................
70
Sales Returns and Allowances ......... Accounts Receivable ....................
48
Merchandise Inventory (140 × $6.50) Accounts Payable .........................
910
Merchandise Inventory...................... Cash ...............................................
70
Accounts Receivable (100 × $12) ..... Sales ..............................................
1,200
Cost of Goods Sold (100 × $7) .......... Merchandise Inventory .................
700
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1,330
70
48
910
70
1,200 700
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PROBLEM 5-4B (Continued) (a) (Continued) 28
30
30
Sales Returns and Allowances ......... Accounts Receivable ....................
180
Merchandise Inventory (15 × $7) ...... Cost of Goods Sold.......................
105
Accounts Payable ($1,190 − $70)...... Cash ...............................................
1,120
180
105
Cash ................................................... 2,232 Accounts Receivable ($2,280 − $48)
1,120
2,232
(b) Merchandise Inventory Bal. 1,610* June 1 1,190 June 3 1,330 20 910 6 70 21 70 27 700 28 105 Bal. 1,785 * On May 31, there were 230 books on hand at a cost of $7 per book = $1,610 (c)
There are 255* books on hand on June 30. The average cost per book is: $1,785 ÷ 255 books = $7.00 per book Quantity Beginning inventory 230 Purchased June 1 170 Sold June 3 (190) Returned to supplier June 6 (10) Purchased June 20 140 Sold June 27 (100) Returned by customer June 28 15 Ending Inventory 255* Note that the books returned on June 18 were disposed of and are therefore not included in the ending inventory.
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PROBLEM 5-4B (Continued) Taking It Further: Freight terms indicate when ownership of the goods transfers from the seller to the buyer and who pays for the transportation charges. In the June 1st transaction, the freight terms are FOB destination. The seller, Reader’s World Publishers, pays for the freight charges, resulting in an inventory cost of $7 per item. When the seller pays for the freight costs, this usually results in a higher invoice price to cover the shipping expense In the June 20th transaction, the freight terms are FOB shipping point. The buyer, Phantom Book Warehouse, pays for the freight charges. Invoice cost (140 books × $6.50) $910 Freight 70 Total inventory cost $980 Cost per book ($980 ÷ 140) $7.00 Shipping terms also impact the cost of merchandise by identifying the beginning of the discount period for calculating discounts on purchases. With FOB shipping point, the discount period starts when the goods are shipped. With FOB destination, the discount period starts when the goods are received.
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PROBLEM 5-5B (a) GENERAL JOURNAL
J1
Date
Account Titles
Debit
Credit
Sept. 2
Merchandise Inventory........................ 13,500 Accounts Payable .........................
13,500
4 No entry as FOB destination means the seller pays the freight. 5
6
6
8
10
10
12
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Accounts Receivable......................... 18,000 Sales ..............................................
18,000
Cost of Goods Sold ........................... 11,310 Merchandise Inventory .................
11,310
Sales Returns and Allowances ......... Accounts Receivable ...................
1,400 1,400
Merchandise Inventory...................... Cost of Goods Sold.......................
890
Freight Out ......................................... Cash ...............................................
420
Supplies ............................................. Cash ...............................................
900
Merchandise Inventory...................... Accounts Payable ........................
6,450
Merchandise Inventory...................... Cash ...............................................
150
Accounts Payable.............................. Merchandise Inventory .................
450
5-100
890
420
900
6,450
150 450
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PROBLEM 5-5B (Continued) (a) (Continued) Sept.15
15
19
20
25
30
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Accounts Payable.............................. 13,500 Merchandise Inventory ($13,500 × 1%) ............................... Cash ($13,500 − $135) ................... Cash ( $16,600 − $332) ...................... 16,268 Sales Discount (2% × $16,600).......... 332 Accounts Receivable .................... ($18,000 – $1,400)
135 13,365
16,600
Cash .................................................. 10,875 Sales .............................................
10,875
Cost of Goods Sold .......................... Merchandise Inventory .................
6,855 6,855
Accounts Payable ($6,450 – $450).... Merchandise Inventory ($6,000 × 2%) ................................. Cash ($6,000 − $120) .....................
6,000
Sales Returns and Allowances ......... Cash ..............................................
750
Accounts Receivable......................... Sales ..............................................
6,420
Cost of Goods Sold ........................... Merchandise Inventory .................
4,050
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750
6,420 4,050
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PROBLEM 5-5B (Continued) (b) Date Sept. 1 2 5 6 10 10 12 15 19 20 30
Date
Merchandise Inventory Explanation Ref. Debit
Credit Balance
J1 13,500 J1 J1 890 J1 6,450 J1 150 J1 J1 J1 J1 J1
7,500 21,000 9,690 10,580 17,030 17,180 16,730 16,595 9,740 9,620 5,570
Balance
Explanation
Sales Ref.
Debit
11,310
450 135 6,855 120 4,050
Credit Balance
Sept. 5 19 30
J1 J1 J1
Date
Sales Returns and Allowances Explanation Ref. Debit Credit Balance
Sept. 6 25
J1 J1
Date
.
18,000 28,875 35,295
1,400 750
1,400 2,150
Sales Discounts Explanation Ref. Debit
Credit Balance
Sept.15
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J1
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PROBLEM 5-5B (Continued) (b) (Continued)
Date
Cost of Goods Sold Explanation Ref. Debit
Credit Balance
J1 11,310 J1 J1 6,855 J1 4,050
11,310 10,420 17,275 21,325
Sept. 5 6 19 30
890
(c) STOJANOVIC DISTRIBUTING COMPANY Income Statement (Partial) Month Ended September 30, 2017 Sales revenues Sales ................................................................................ $35,295 Less: Sales returns and allowances ............. $2,150 Sales discounts.................................. 332 2,482 Net sales .......................................................................... 32,813 Cost of goods sold .............................................................. 21,325 Gross profit.......................................................................... $11,488 Taking It Further: Stojanovic would face uncertainty about the amount of sales recorded in September that may be returned in a subsequent accounting period. If Stojanovic experiences significant returns and accepts returns for up to six months after the initial sale, the September gross profit will be overstated. If a company experiences substantial returns, it has to record an estimated amount in the same time period as the related sales in order to properly reflect the gross profit for that period. This topic is usually explored further in an intermediate accounting course.
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PROBLEM 5-6B (a) July 31 Cost of Goods Sold ($41,250 − $40,000).............................. Merchandise Inventory...................
1,250 1,250
(b) WESTERN LIGHTING WAREHOUSE Income Statement Year Ended July 31, 2017 Revenues Net sales ($450,000 – $4,500 – $11,250) ....... $434,250 Interest revenue ............................................ 3,000 $437,250 Expenses Cost of goods sold ($247,500 + $1,250) ........ $248,750 Depreciation expense ...................................... 8,350 Freight out......................................................... 6,055 Insurance expense ........................................... 3,195 Interest expense ............................................... 2,300 Rent expense .................................................... 62,000 Salaries expense .............................................. 45,000 Utilities expense ............................................... 12,600 388,250 Profit................................................................................. $ 49,000
(c) Gross profit = $434,250 - $248,750 = $185,500 Gross profit margin = $185,500 ÷ $434,250 = 42.7% Profit margin = $49,000 ÷ $434,250 = 11.3% The gross profit margin has improved from 40% in 2016 to 42.7% in 2017. The profit margin has also improved slightly from 10% in 2016 to 11.3% in 2017.
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PROBLEM 5-6B (Continued) (d) July 31
Interest Revenue ............................... 3,000 Sales .................................................. 450,000 Income Summary..........................
453,000
31 Income Summary .............................. 404,000 Sales Returns and Allowances .... Sales Discounts ............................ Cost of Goods Sold ...................... Depreciation Expense .................. Freight out..................................... Insurance Expense ....................... Interest Expense ........................... Rent Expense................................ Salaries Expense .......................... Utilities Expense ...........................
11,250 4,500 248,750 8,350 6,055 3,195 2,300 62,000 45,000 12,600
31 Income Summary .............................. A. Jamal, Capital ...........................
49,000 49,000
31 A. Jamal, Capital ............................... A. Jamal, Drawings.......................
39,600 39,600
Income Summary 453,000 404,000 * 49,000 49,000 0 * Check $49,000 = Profit
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PROBLEM 5-6B (Continued) Taking It Further: To most users of financial statements, the gross profit margin is generally considered to be more useful than the gross profit amount because the gross margin shows the relative relationship between net sales and gross profit. Gross profit margin measures the proportion of the selling price remaining after accounting for cost of goods sold. The profit margin measures the proportion of the selling price remaining after accounting for all expenses including cost of goods sold. For a merchant, having a healthy gross margin is critical. Paying attention to negotiating favourable terms with suppliers or taking advantage of discounted purchase prices from buying in bulk have the potential of increasing gross profit by reducing cost of goods sold. Pricing policies are also important as they have an effect on the volume of sales and the gross profit derived from generating those sales. The profit margin measures the percentage of each dollar of sales that results in profit. It is affected by the management of expenses, not just cost of goods sold. A user can understand why, for example, the profit margin of a start-up company is lower than that of a competitor if there is a lot of debt on the balance sheet and so there are large interest costs, reducing the profit.
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PROBLEM 5-7B (a) Dec. 31 Supplies Expense .............................. Supplies ......................................... ($1,650 − $700)
950
31 Depreciation Expense ....................... Accumulated Depreciation —Furniture..................................... Accumulated Depreciation —Equipment ..................................
9,560
31 Interest Expense ................................ Interest Payable ............................
1,750
31 Interest Receivable ............................ Interest Revenue ...........................
720
31 Unearned Revenue ........................... Sales .............................................. ($3,000 − $1,600)
1,400
31 Cost of Goods Sold ........................... Merchandise Inventory .................
755
31 Cost of Goods Sold ........................... Merchandise Inventory ................. [($37,500 − $755) − $35,275]
1,470
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950
5,360 4,200
1,750
720
1,400
755 1,470
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PROBLEM 5-7B (Continued) (b) GLOBAL ENTERPRISES Income Statement Year Ended December 31, 2017 Sales revenues Sales ($245,000 + $1,400) ........................................... $246,400 Less: Sales returns and allowances.............. $6,670 Sales discounts .................................. 2,450 9,120 Net sales...................................................................... 237,280 Cost of goods sold ($132,300 + $755 + $1,470) ............. 134,525 Gross profit...................................................................... 102,755 Operating expenses Insurance expense .................................... 1,800 Rent expense ............................................. 9,300 Salaries expense........................................ 28,400 Supplies expense ...................................... 950 Depreciation expense................................ 9,560 Total operating expenses ......................................... 50,010 Profit from operations..................................................... 52,745 Other revenues and expenses Interest revenue ......................................... 720 Interest expense ........................................ (1,750) (1,030) Profit................................................................................. $ 51,715
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PROBLEM 5-7B (Continued) (c) GLOBAL ENTERPRISES Income Statement Year Ended December 31, 2017 Revenues Net sales ....................................................... $237,280 Interest revenue .......................................... 720 $238,000 Expenses Cost of goods sold ....................................... $134,525 Depreciation expense..................................... 9,560 Insurance expense ......................................... 1,800 Interest expense ............................................. 1,750 Rent expense .................................................. 9,300 Salaries expense............................................. 28,400 Supplies expense ........................................... 950 186,285 Profit................................................................................. $ 51,715
(d) Dec. 31 Sales .................................................... 246,400 Interest Revenue ................................. 720 Income Summary............................
247,120
31 Income Summary ................................ 195,405 Sales Returns and Allowances ...... Sales Discounts .............................. Cost of Goods Sold ........................ Insurance Expense ......................... Rent Expense.................................. Salaries Expense ............................ Supplies Expense ........................... Depreciation Expense .................... Interest Expense .............................
6,670 2,450 134,525 1,800 9,300 28,400 950 9,560 1,750
31 Income Summary .................................. 51,715 I. Rochefort, Capital .......................
51,715
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PROBLEM 5-7B (Continued) (d) (Continued) 31 I. Rochefort, Capital .............................. 35,500 I. Rochefort, Drawings....................
35,500
Taking It Further: A multiple-step income statement separates operating transactions from the non-operating transactions and matches costs and expenses with related revenues. A singlestep format is simpler, and no one type of revenue or expense item is implied to have priority over any other. The multiple-step is considered more useful than a singlestep income statement because the steps give additional information about a company’s profitability. Management wants more information about gross profit as it is the result of the main focus of the business activity as a merchant. In the case of Global Enterprises, non-operating transactions are minimal in relation to the general operations. This is made clearer when reading the multiple-step format. As well, the reader can make comparisons, for example salaries expense, to gross profit. Management may find this relationship key in managing the work force. Finally, because it is more detailed, the multiple-step format provides the reader with the amount of sales returns, allowances, and discounts that they may find out of proportion to the amount of gross sales. In the case of Global Enterprises, these amounts are not disproportionate.
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PROBLEM 5-8B (a) 2014
2013
Gross profit margin
48.08%
Profit margin
-5.4%
0.9%
2.7%
$-7,663 ÷ $141,930
$1,411 ÷ $154,995
$4,003 ÷ $148,219
3.15:1
4.23:1
5.19:1
$33,970 ÷ $10.790
$49,709 ÷ $11,748
$60,965 ÷ $11,748
Current ratio
50.59%
2012 51.75%
($141,930 − $73,697) ($154,995 − $76,579) ÷ ($148,219 − $71,513) ÷ $141,930 $154,995 ÷ $148,219
(b) Danier Leather’s gross profit margin keeps declining. The 2014 sales declined faster than the cost of goods sold, explaining the decline in the gross profit margin. The decline in gross profit has led to a loss for 2014 and a corresponding negative profit margin. The current ratio deteriorated steadily, but still remains very healthy at amounts well beyond 2:1 for all three years.
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PROBLEM 5-8B (Continued) Taking It Further The underlying financial statements, in particular the income statement, would provide additional information to explain the nature of the changes in the ratios, to help an investor assess the cause for the loss in 2014, and to determine whether this may be of a recurring nature. The balance sheet would also help a potential investor assess the overall financial position over the 3-year period, particularly in view of major declines in sales, profit, and the loss of 2014. The financial statements would also allow a potential investor to calculate additional ratios to assess profitability, liquidity, and solvency.
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*PROBLEM 5-9B GENERAL JOURNAL Date
Account Titles
Debit
Credit
Oct. 2
Purchases ............................................ 35,000 Accounts Payable .........................
35,000
4
No entry as FOB destination means the seller pays the freight.
5
Accounts Payable............................. 6,000 Purchase Returns and Allowances
6,000
Accounts Payable ($35,000 − $6,000) 29,000 Purchase Discounts ($29,000 × 2%) Cash ($29,000 − $580) ..................
580 28,420
Accounts Receivable........................... 62,500 Sales ..............................................
62,500
11
17
18
No entry as FOB shipping means purchaser pays freight.
19
Sales Returns and Allowances ........ Accounts Receivable ....................
27
Nov. 1
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2,500 2,500
Sales Discounts ($60,000 × 2%)........ 1,200 Cash ($60,000 − $1,200)..................... 58,800 Accounts Receivable ($62,500 − $2,500)..........................
60,000
Purchases .......................................... 60,000 Accounts Payable .........................
60,000
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*PROBLEM 5-9B (Continued) Nov. 2
5
6
7
29
30
Freight In ............................................ Cash ...............................................
4,000 4,000
Accounts Receivable......................... 110,500 Sales .............................................. Freight Out ......................................... Cash ...............................................
2,600
Sales Returns and Allowances ......... Accounts Receivable ....................
7,000
110,500
2,600 7,000
Cash ($110,500 − $7,000).................... 103,500 Accounts Receivable .................... (No discount as not received within 10 days)
103,500
Accounts Payable ................................ 60,000 Cash .............................................. (No discount as not paid within 15 days)
60,000
Taking It Further Leeland Company has few transactions (1 purchase and 1 sale per month). A periodic inventory system is less costly to implement and maintain than a perpetual system. If the company has relatively low inventory quantities and can maintain control over its inventory visually rather than electronically, then a periodic inventory system may be sufficient to meet their information needs.
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*PROBLEM 5-10B GENERAL JOURNAL Date
Account Titles
Debit
Credit
June 1
Purchases (170 × $7) ............................. 1,190 Accounts Payable .........................
1,190
2
(FOB destination means the seller pays the freight, therefore no entry required here.)
3
Accounts Receivable (190 × $12) ..... Sales ..............................................
2,280
Accounts Payable.............................. Purchase Returns and Allowances
70
Sales Returns and Allowances ......... Accounts Receivable ....................
48
Purchases (140 × $6.50) .................... Accounts Payable .........................
910
Freight In ............................................ Cash ...............................................
70
Accounts Receivable (100 × $12) ..... Sales ..............................................
1,200
Sales Returns and Allowances ......... Accounts Receivable ....................
180
Accounts Payable ($1,190 − $70)...... Cash ...............................................
1,120
Cash ($2,280 − $48) ........................... Accounts Receivable ....................
2,232
6
18
20
21
27
28
30
30
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2,280
70
48
910
70
1,200
180
1,120 2,232
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*PROBLEM 5-10B (Continued) Taking It Further: A perpetual inventory system provides detailed records of inventory. This would allow Phantom Book Warehouse to track the quantity and cost of inventory purchased, sold, and on hand. This would provide the benefit of being able to answer customer questions about merchandise availability and for management to maintain optimum inventory levels and avoid running out of stock. This system also allows the company to prepare financial statements more easily since the cost of goods sold and ending inventory amounts are readily available. For a company such as Phantom Book Warehouse, a perpetual system includes the freight-in costs in the inventory account rather than in a separate account. This would reflect the fact that the cost is the same regardless of whether Phantom Book Warehouse or the supplier pays the freight. When the supplier pays the freight, they typically charge a higher amount for the inventory to compensate for the freight cost.
A perpetual inventory system is more costly to implement and maintain because of the need to enter all merchandise in the accounting system. The accounting system must also be sufficiently sophisticated to track purchases and sales of merchandise, usually through the use of scanners.
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*PROBLEM 5-11B (a) GENERAL JOURNAL
J1
Date
Account Titles
Debit
Credit
Sept. 2
Purchases ............................................ 13,500 Accounts Payable .........................
13,500
4
No entry as FOB destination means the seller pays the freight.
5
Accounts Receivable......................... 18,000 Sales ..............................................
18,000
Sales Returns and Allowances ......... Accounts Receivable ...................
1,400 1,400
Freight Out ......................................... Cash ...............................................
420
Supplies ............................................. Cash ...............................................
900
Purchases .......................................... Accounts Payable ........................
6,450
Freight In ............................................ Cash ...............................................
150
Accounts Payable.............................. Purchase Returns and Allowances
450
6
6
8
10
10
12
15
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420
900
6,450
150 450
Accounts Payable................................ 13,500 Purchase Discounts ($13,500 × 1%) Cash ($13,500 − $135) ...................
135 13,365
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*PROBLEM 5-11B (Continued) (a) (Continued) Sept.15
19
20
25
30
Cash ($16,600 − $332) ....................... 16,268 Sales Discount (2% × $16,600).......... 332 Accounts Receivable .................... ($18,000 - $1,400)
16,600
Cash ................................................... 10,875 Sales ..............................................
10,875
Accounts Payable ($6,450 - $450)..... Purchase Discounts ($6,000 × 2%) Cash ($6,000 − $120) .....................
6,000 120 5,880
Sales Returns and Allowances ......... Cash ..............................................
750
Accounts Receivable......................... Sales ..............................................
6,420
750
6,420
(b) Date
Merchandise Inventory Explanation Ref. Debit
Sept. 1
Balance
Date
Explanation
Sales Ref.
Sept. 5 19 30
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Credit Balance
J1 J1 J1
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7,500
Debit
Credit Balance 18,000 10,875 6,420
18,000 28,875 35,295
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*PROBLEM 5-11B (Continued) (b) (Continued)
Date
Sales Returns and Allowances Explanation Ref. Debit Credit Balance
Sept. 6 25
J1 J1
Date
1,400 750
1,400 2,150
Sales Discounts Explanation Ref. Debit
Credit Balance
Sept.15
J1
332
332
Date Sept. 2 10
Purchases Ref. Debit J1 13,500 J1 6,450
Credit Balance 13,500 19,950
Explanation
Purchase Returns and Allowances Date Explanation Ref. Debit Credit Balance Sept. 12 J1 450 450
Date Sept. 15 20
Purchase Discounts Explanation Ref. Debit J1 J1
Credit Balance 135 135 120 255
Date Explanation Sept. 10
Freight In Ref. J1
Debit 150
Credit Balance 150
Date Sept. 6
Freight Out Ref. Debit J1 420
Credit Balance 420
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Explanation
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PROBLEM 5-11B (Continued) (c) STOJANOVIC DISTRIBUTING COMPANY Income Statement (Partial) Month Ended September 30, 2017 Sales revenues Sales ................................................................................ $35,295 Less: Sales returns and allowances ............. $2,150 Sales discounts.................................. 332 2,482 Net sales .......................................................................... 32,813 Cost of goods sold Merchandise inventory, September 1, 2017.... 7,500 Purchases ........................................ $19,950 Less: Purchase returns and allowances ............... $450 705 Purchase discounts ......... 255 Net purchases .................................. 19,245 Add: Freight in ................................. 150 Cost of goods purchased ................................. 19,395 Cost of goods available for sale ........................ 26,895 Merchandise inventory, September 30, 2017 . 5,570 21,325 Cost of goods sold................................................. Gross profit .......................................................................... $11,488 Taking It Further: The gross profit should be the same under both periodic and perpetual systems since the same transactions are recorded with the same impact on cash outflows, and the company will have the same amount of ending inventory because the balances are arrived at by the inventory count.
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*PROBLEM 5-12B UP NORTH COMPANY Income Statement Year Ended December 31, 2017 Sales................................................................................... $474,000 Less: Sales discounts ................................. $ 3,480 Sales returns and allowances........... 9,000 12,480 Net sales .......................................................................... 461,520 Cost of goods sold Merchandise inventory, January 1, 2017 36,000 Purchases .................................. $278,400 Less: Purchase discounts ... $4,175 Purchase returns and allowances........ 4,800 8,975 Net purchases ............... 269,425 Freight in .................................... 5,400 274,825 Goods available for sale........................... 310,825 Merchandise inventory, December 31, 2017 28,800 Cost of goods sold................................................. 282,025 Gross profit...................................................................... 179,495 Operating expenses Freight out ................................................. 11,400 Insurance expense ................................... 12,600 Rent expense ............................................ 21,600 Salary expense ......................................... 50,400 Depreciation expense............................... 8,400 Total operating expenses ...................................... 104,400 Profit from operations..................................................... 75,095 Other revenues and expenses Interest revenue ....................................... 1,800 (1,200) Interest expense ...................................... (3,000) Profit................................................................................. $ 73,895
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*PROBLEM 5-12B (Continued) UP NORTH COMPANY Statement of Owner’s Equity Year Ended December 31, 2017 J. Prideaux, capital, January 1, 2017 ............................. Add: Investment............................................................. Profit ......................................................................
$ 90,000 4,200 73,895 168,095 Less: Drawings................................................................ 57,600 J. Prideaux, capital, December 31, 2017 ........................ $110,495
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*PROBLEM 5-12B (Continued) UP NORTH COMPANY Balance Sheet December 31, 2017
Assets Current assets Cash................................................................................ $ 20,135 Accounts receivable ................................................... 9,360 Merchandise inventory ................................................... 28,800 Total current assets ............................................... 58,295 Long-term investments Long-term investment ................................................ 60,000 Property, plant, and equipment Equipment ...................................................... $84,000 Less: Accumulated depreciation .................. 25,200 Total property, plant, and equipment ..................... 58,800 Total assets .............................................................. $177,095 Liabilities and Owner’s Equity Current liabilities Unearned revenue ...................................................... $ 6,600 Loan payable, current portion ..................................... 6,000 Total current liabilities ........................................... 12,600 Long-term liabilities Loan payable ($60,000 − $6,000) ................................... 54,000 Total liabilities ........................................................ 66,600 Owner’s Equity J. Prideaux, capital ....................................................... 110,495 Total liabilities and owner’s equity ............................. $177,095
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*PROBLEM 5-12B (Continued) Taking It Further: The balance sheet reports the assets, liabilities, and owner’s equity at December 31, 2017. The beginning inventory is no longer an asset at December 31, 2017 since the merchandise has been sold. It now represents an expense and is related to the sales revenue earned from the sale of the goods. Under both IFRS and ASPE, companies are required to present comparative information on their financial statements, so users would see the beginning inventory as the balance of merchandise unsold at the end of the previous year.
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*PROBLEM 5-13B (a) TSE’S TATOR TOTS Income Statement Year Ended December 31, 2017 Sales revenues Sales .............................................................................. $642,800 Less: Sales discounts ...................................$ 12,700 Sales returns and allowances ............ 11,900 24,600 Net sales .......................................................................... 618,200 Cost of goods sold Merchandise inventory, January 1 .......... 40,500 Purchases ................................ $441,600 Less: Purchase discounts ....$ 8,830 Purchase returns and allowances ................. 20,070 28,900 Net purchases .......................... 412,700 Add: Freight in ......................... 5,600 418,300 Cost of goods purchased......................... Cost of goods available for sale .............. 458,800 Merchandise inventory, December 31 ..... 34,600 Cost of goods sold................................................. 424,200 Gross profit...................................................................... 194,000 Operating expenses Depreciation expense............................... 23,400 Freight out ................................................. 7,500 Insurance expense ................................... 9,600 Property tax expense ............................... 4,800 Salaries expense....................................... 127,500 Utilities expense ....................................... 18,000 Total operating expenses ...................................... 190,800 Profit from operations..................................................... 3,200 Other revenues and expenses Interest revenue ................................................. 1,050 Interest expense .......................................... (11,345) (10,295) Loss ................................................................................. $(7,095)
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*PROBLEM 5-13B (Continued) (a) (Continued) TSE’S TATOR TOTS Statement of Owner’s Equity Year Ended December 31, 2017 H. Tse, capital, January 1, 2017 ........................................ $143,600 Less: Loss ......................................................................... 7,095 136,505 Less: Drawings ................................................................. 14,450 H. Tse, capital, December 31, 2017 .................................. $122,055
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*PROBLEM 5-13B (Continued) (a) (Continued) TSE’S TATOR TOTS Balance Sheet December 31, 2017
Assets Current assets Cash............................................................................... $ 17,000 Accounts receivable ......................................................... 44,200 Merchandise inventory .................................................. 34,600 Total current assets ..................................................... 95,800 Property, plant, and equipment Land ............................................................... $ 75,000 Building ......................................... $190,000 Less: Accumulated depreciation 51,800 138,200 Equipment ....................................... 110,000 Less: Accumulated depreciation 42,900 67,100 280,300 Total assets .............................................................. $376,100 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... $ 86,300 Interest payable .......................................................... 945 Salaries payable.......................................................... 3,500 Unearned revenue ...................................................... 8,300 Current portion of mortgage payable ........................ 17,000 Total current liabilities ........................................... 116,045 Long-term liabilities Mortgage payable ($155,000 − $17,000) ........................... 138,000 Total liabilities ............................................................ 254,045 Owner’s equity H. Tse, capital................................................................ 122,055 Total liabilities and owner’s equity ............................. $376,100
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*PROBLEM 5-13B (Continued) (b) GENERAL JOURNAL
J2
Date
Account Titles and Explanation
Debit
Credit
Dec. 31
Sales ................................................. 642,800 Interest Revenue.............................. 1,050 Inventory (Dec. 31) .......................... 34,600 Purchase Returns and Allowances 20,070 Purchase Discounts ........................ 8,830 Income Summary ........................
707,350
31 Income Summary............................. 714,445 Inventory (Jan. 1) ........................ Purchases.................................... Freight In ..................................... Salaries Expense ........................ Utilities Expense ......................... Depreciation Expense................. Insurance Expense ..................... Property Tax Expense ................ Freight Out................................... Interest Expense ......................... Sales Returns and Allowances .. Sales Discounts ..........................
40,500 441,600 5,600 127,500 18,000 23,400 9,600 4,800 7,500 11,345 11,900 12,700
31 H. Tse, Capital .................................. Income Summary ........................
7,095
31 H. Tse, Capital .................................. H. Tse, Drawings .........................
14,450
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7,095 14,450
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*PROBLEM 5-13B (Continued) (c) Date
Merchandise Inventory Explanation Ref. Debit
Credit Balance
Jan. 1 Dec. 31 Dec. 31
Balance Closing entry Closing entry
J2 34,600 J2
40,500 75,100 34,600
40,500
Check: Merchandise Inventory on Balance Sheet = $34,600 H. Tse, Capital Date Explanation Ref. Debit Credit Balance Jan. 1 Dec. 31 Dec. 31
Balance Closing entry Closing entry
J2 7,095 J2 14,450
143,600 136,505 122,055
Check: H.Tse, Capital on Balance Sheet = $122,055 Taking It Further: The list of accounts includes the following accounts that are used in a periodic inventory system: purchases, purchase discounts, purchase returns and allowances, and freight in. The periodic inventory system provides information about purchase returns and allowances, and purchase discounts. The purchase returns and allowances account provides management with similar information as the sales returns and allowances account. This account provides information about the volume of returns to suppliers and information about the quality of the products. The freight in account allows management to see directly the cost of transportation for its purchased merchandise.
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CUMULATIVE COVERAGE – CHAPTERS 2 TO 5 (a), (b), (d), and (g)
Date Aug.
Explanation 1 1 2 4 5 9 11 15 19 24 30 30 31
1 10 12 19
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Debit
Credit Balance
1,650 6,500 12,260 500 425 12,250 3,100 14,700 525 3,100 8,918 4,800
Accounts Receivable Explanation Ref. Debit
Date Aug.
Balance
Cash Ref.
Credit Balance
15,750 750 15,000
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21,385 19,735 13,235 25,495 24,995 24,570 12,320 9,220 23,920 24,445 21,345 12,427 7,627
0 15,750 15,000 0
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CUMULATIVE COVERAGE (Continued) (a) , (b), (d), and (g) (Continued)
Merchandise Inventory Explanation Ref. Debit
Date Aug.
1 4 5 5 9 10 12 21 23 30 31 31
Date Aug.
1 8 31
1
1 31
Solutions Manual .
24,500 500 265 9,765 465 9,900 800 182 2,325 2,223
Adjusting entry Adjusting entry Supplies Ref.
64,125 56,225 80,725 81,225 81,490 71,725 72,190 82,090 81,290 81,108 78,783 76,560
Debit
Credit Balance
345
3,750 4,095 755
Adjusting entry
3,340
Explanation
Equipment Ref. Debit
Balance
Credit Balance 70,800
Accumulated Depreciation—Equipment Explanation Ref. Debit Credit Balance
Date Aug.
7,900
Explanation
Date Aug.
Balance
Credit Balance
Balance Adjusting entry
8,850
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13,275 22,125
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CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) Accounts Payable Explanation Ref. Debit
Date Aug.
1 2 5 8 11 21 23 30
Date Aug.
1 24 31
Date Aug.
1
Aug.
1 31
1 31 31
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800 9,100
12,650 6,150 30,650 30,995 18,745 28,645 27,845 18,745
Unearned Revenue Explanation Ref. Debit
Credit Balance
6,500 24,500 345 12,250 9,900
Balance
3,750
4,680 5,205 1,455
Explanation
Notes Payable Ref. Debit
Credit Balance
Balance
525 Adjusting entry
42,000
Balance Adjusting entry
Balance Closing entry Closing entry
Credit Balance
175
A. John, Capital Explanation Ref. Debit
Date Aug.
Balance
Interest Payable Explanation Ref. Debit
Date
Credit Balance
Credit Balance
70,442 57,600 5-132
0 175
58,400 128,842 71,242 Chapter 5
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CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) A. John, Drawings Explanation Ref. Debit
Date Aug.
1 31 31
Balance
Credit Balance
4,800
52,800 57,600 0
Closing entry
57,600
Date
Income Summary Explanation Ref. Debit
Credit Balance
Aug. 31 31 31
Closing entry Closing entry Closing entry
Date Aug.
Explanation 1 4 10 31 31
1 9 12 31
Solutions Manual .
448,018 70,442
518,460 70,442 0
Debit
Credit Balance
517,260
485,500 497,760 513,510 517,260 0
Sales Ref.
12,260 15,750 3,750
Adjusting entry Closing entry
Sales Returns and Allowances Explanation Ref. Debit Credit Balance
Date Aug.
Balance
518,460
Balance
425 750
Closing entry
12,595
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CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) Sales Discounts Explanation Ref. Debit
Date Aug.
1 19 31
Date Aug.
1 4 9 10 12 31 31 31
1 15 30 31
Solutions Manual .
Closing entry
300 Rent Revenue Ref. Debit
Balance Closing entry
Balance
1,200
7,900 265 9,765 465
Balance
2,325 2,223 322,493
3,100 3,100 74,400
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301,010 308,910 308,645 318,410 317,945 320,270 322,493 0
Credit Balance
Closing entry
1,200 0
Credit Balance
Adjusting entry Adjusting entry Closing entry
0 300 0
Credit Balance
Salaries Expense Explanation Ref. Debit
Date Aug.
300
Cost of Goods Sold Explanation Ref. Debit
Date Aug.
Balance
Explanation 1 31
Credit Balance
68,200 71,300 74,400 0
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CUMULATIVE COVERAGE (Continued) (a), (b), (d), and (g) (Continued) Supplies Expense Explanation Ref. Debit
Date Aug.
1 31 31
Date Aug.
1 1 31
Date Aug.
1 31
1 31 31
1 31 31
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3,340 3,340
Explanation
Rent Expense Ref. Debit
Balance
0 3,340 0
Credit Balance
1,650
18,150 19,800 0
Closing entry
19,800
Insurance Expense Explanation Ref. Debit
Credit Balance
Balance Closing entry
4,140
Balance Adjusting entry Closing entry
Balance Adjusting entry Closing entry
175 2,100
1,925 2,100 0
Credit Balance
8,850 8,850
5-135
4,140 0
Credit Balance
Depreciation Expense Explanation Ref. Debit
Date Aug.
Interest Expense Explanation Ref. Debit
Date Aug.
Balance Adjusting entry Closing entry
Credit Balance
0 8,850 0
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Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) GENERAL JOURNAL Date
Account Titles
Debit
Aug. 1
Rent Expense..................................... Cash ...............................................
1,650
Accounts Payable.............................. Cash ...............................................
6,500
2
4
4
5
5
8
9
9
10
10
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Credit
1,650
6,500
Cash ................................................... 12,260 Sales ..............................................
12,260
Cost of Goods Sold ........................... Merchandise Inventory .................
7,900
7,900
Merchandise Inventory...................... 24,500 Accounts Payable ......................... Merchandise Inventory...................... Cash ...............................................
500
Supplies ............................................. Accounts Payable .........................
345
Sales Returns and Allowances ......... Cash ...............................................
425
Merchandise Inventory...................... Cost of Goods Sold.......................
265
24,500
500
345
425
265
Accounts Receivable......................... 15,750 Sales ..............................................
15,750
Cost of Goods Sold ........................... Merchandise Inventory .................
9,765
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CUMULATIVE COVERAGE (Continued) (b) (Continued)
Aug. 11
12
12
15 19
21
23
24
30
30
31
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Accounts Payable.............................. 12,250 Cash ............................................... Sales Returns and Allowances ......... Accounts Receivable ....................
750
Merchandise Inventory...................... Cost of Goods Sold.......................
465
Salaries Expense ............................... Cash ...............................................
3,100
12,250
750
465
3,100
Cash ($15,000 − $300) ....................... 14,700 Sales Discounts ($15,000 × 2%)........ 300 Accounts Receivable ($15,750 − $750)
15,000
Merchandise Inventory.......................... 9,900 Accounts Payable .........................
9,900
Accounts Payable.............................. Merchandise Inventory .................
800
Cash ................................................... Unearned Revenue........................
525
800
525
Salaries Expense ................................... 3,100 Cash ...............................................
3,100
Accounts Payable ($9,900 − $800) ......... 9,100 Merchandise Inventory ($9,100 × 2%) Cash ($9,100 − $182) .....................
182 8,918
A. John, Drawings ............................ Cash ..............................................
4,800
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CUMULATIVE COVERAGE (Continued) (c)
THE BOARD SHOP Trial Balance August 31, 2017
Cash .......................................................... Merchandise inventory ............................ Supplies .................................................... Equipment................................................. Accumulated depreciation—equipment . Accounts payable..................................... Unearned revenue .................................... Notes payable ........................................... A. John, capital......................................... A. John, drawings .................................... Sales.......................................................... Sales returns and allowances ................. Sales discounts ........................................ Rent revenue ............................................ Cost of goods sold ................................... Salaries expense ...................................... Rent expense ............................................ Insurance expense ................................... Interest expense ....................................... Totals ....................................................
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Debit $ 7,627 81,108 4,095 70,800
Credit
$ 13,275 18,745 5,205 42,000 58,400 57,600 513,510 12,595 300 1,200 317,945 74,400 19,800 4,140 1,925 $652,335
$652,335
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Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (d)
GENERAL JOURNAL Date
Account Titles
Debit
Credit
Aug. 31
Supplies Expense ($4,095 – $755) ........ 3,340 Supplies .........................................
3,340
Depreciation Expense ($70,800 ÷ 8) Accumulated Depreciation —Equipment ..................................
8,850
31
31
No entry required—reclassification on balance sheet only.
31
Unearned Revenue ............................ Sales ..............................................
3,750
Cost of Goods Sold .......................... Merchandise Inventory .................
2,325
Interest Expense ................................ Interest Payable ............................
175
31
31
31
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8,850
Cost of Goods Sold ($76,560 – [$81,108 – $2,325]) ........... Merchandise Inventory .................
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3,750
2,325
175
2,223 2,223
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CUMULATIVE COVERAGE (Continued) (e)
THE BOARD SHOP Adjusted Trial Balance August 31, 2017 Debit Credit Cash .................................................................. $ 7,627 Merchandise inventory .................................... 76,560 Supplies ............................................................ 755 Equipment......................................................... 70,800 Accumulated depreciation—equipment ......... $ 22,125 Accounts payable............................................. 18,745 Unearned revenue ............................................ 1,455 Notes payable ................................................... 42,000 Interest payable ................................................ 175 A. John, capital................................................. 58,400 A. John, drawings ............................................ 57,600 Sales.................................................................. 517,260 Sales returns and allowances ......................... 12,595 Sales discounts ................................................ 300 Rent revenue .................................................... 1,200 Cost of goods sold ........................................... 322,493 Salaries expense .............................................. 74,400 Rent expense .................................................... 19,800 Interest expense ............................................... 2,100 Insurance expense ........................................... 4,140 Supplies expense ............................................. 3,340 Depreciation expense ..................................... 8,850 Totals ............................................................ $661,360 $661,360
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CUMULATIVE COVERAGE (Continued) (f)
THE BOARD SHOP Income Statement Year Ended August 31, 2017 Sales revenues Sales ............................................................................ $517,260 Less: Sales returns and allowances ............ $12,595 Sales discounts .................................. 300 12,895 Net sales...................................................................... 504,365 Cost of goods sold .......................................................... 322,493 Gross profit...................................................................... 181,872 Operating expenses Salaries expense........................................ 74,400 Rent expense ............................................. 19,800 Insurance expense .................................... 4,140 Supplies expense ...................................... 3,340 Depreciation expense................................ 8,850 Total operating expenses ...................................... 110,530 Profit from operations..................................................... 71,342 Other revenues and expenses Rent revenue .............................................. 1,200 Interest expense ........................................ 2,100 (900) Profit................................................................................. $ 70,442 THE BOARD SHOP Statement of Owner’s Equity Year Ended August 31, 2017 A. John, capital, September 1, 2016............................... $ 58,400 Add: Profit........................................................................ 70,442 128,842 Less: Drawings................................................................ 57,600 A. John, capital, August 31, 2017 ................................... $ 71,242
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CUMULATIVE COVERAGE (Continued) (f) (Continued) THE BOARD SHOP Balance Sheet August 31, 2017 Assets Current assets Cash............................................................................. $ 7,627 Merchandise inventory............................................... 76,560 Supplies....................................................................... 755 Total current assets ............................................... 84,942 Property, plant, and equipment Equipment ...................................................... $70,800 Less: Accumulated depreciation ............. 22,125 . 48,675 Total assets .............................................................. $133,617 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 18,745 Unearned revenue ...................................................... 1,455 Interest payable .......................................................... 175 Current portion of notes payable .............................. 6,000 Total current liabilities ........................................... 26,375 Long-term liabilities Notes payable ................................................................ 36,000 Total liabilities ........................................................ 62,375 Owner's equity A. John, capital ............................................................... 71,242 Total liabilities and owner's equity ......................... $133,617
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CUMULATIVE COVERAGE (Continued) (g) GENERAL JOURNAL Date
Account Titles
Debit
Credit
Aug. 31
Sales ................................................... 517,260 Rent revenue...................................... 1,200 Income Summary ..........................
518,460
Income Summary............................... 448,018 Sales Returns and Allowances .... Sales Discounts ............................ Cost of Goods Sold....................... Salaries Expense .......................... Supplies Expense ......................... Rent Expense ................................ Interest Expense ........................... Insurance Expense ....................... Depreciation Expense...................
12,595 300 322,493 74,400 3,340 19,800 2,100 4,140 8,850
Income Summary............................... 70,442 A. John, Capital .............................
70,442
A. John, Capital ................................. 57,600 A. John, Drawings.........................
57,600
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31
31
31
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CUMULATIVE COVERAGE (Continued) (h) THE BOARD SHOP Post-closing Trial Balance August 31, 2017
Debit $ 7,627 76,560 755 70,800
Credit
Cash .................................................................. Merchandise inventory .................................... Supplies ............................................................ Equipment......................................................... Accumulated depreciation—equipment ......... $ 22,125 Accounts payable............................................. 18,745 Unearned revenue ............................................ 1,455 Notes payable ................................................... 42,000 Interest payable ................................................ 175 A. John, capital................................................. 71,242 Totals ............................................................ $155,742 $155,742
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BYP5-1 FINANCIAL REPORTING PROBLEM
(a) Note 2 to the Indigo financial statements describes the nature of operations and mentions that the business is a retailer and is “focused on the merchandising of products and services.” It considers all sources of revenue as one operating segment. (b) The choice of periodic versus perpetual involves managing the inventory and does not affect the presentation or amounts of inventory on the balance sheet or income statement. Readers do not need to know which system is used because the choice of method does not affect their decision-making ability. A company with many retail stores such as Indigo most likely uses a perpetual inventory system. (c) Indigo uses a multiple-step income statement format. (d) Non-operating revenues and non-operating expenses reported on Indigo’s income statement are investment income and interest expense. Investment income includes: 1) share of earnings from an equity investment and 2) interest income generated from excess cash and cash equivalents. Interest expense is incurred on long-term debt.
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BYP 5-1 (Continued) (e)
Gross profit margin 2015 = 43.8% [$392,317 ÷ $895,376] 2014 = 43.1% [$373,713 ÷ $867,668] Profit margin 2015 = (0.4)% 2014 = (3.6)%
[$(3,534) ÷ $$895,376] [$(30,999) ÷ $867,668]
The negative profit margin indicates that, in spite of generating a reasonable gross profit, Indigo’s operating expenses are so large that they exceed the gross profit, resulting in a negative profit from operations. (f)
The amount reported at March 28, 2015 for inventories is $208,395,000
(g) Supplemental operating and administrative expenses are outlined in Note 15 to the Indigo financial statements. They include employee benefits-related details such as wages, salaries, and bonuses, termination, retirement, and stock compensation-related expenses. (h) Merchandise inventory cost includes freight charges and is decreased for purchase discounts, allowances. and returns. The cost of merchandise inventory is also adjusted for inventory losses, shrinkage, and errors.
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BYP5-2 INTERPRETING FINANCIAL STATEMENTS (a) Gross profit 2015 = $392,317 [$895,376 − $503,059] 2014 = $373,713 [$867,668 − $493,955] 2013 = $383,686 [$878,785 − $495,099] Profit from operations 2015 = $(5,714) [$392,317 − $398,031] 2014 = $(29,980) [$373,713 − $403,693] 2013 = $367 [$383,686 − $383,319] (b) Percentage change in revenue: 2014 to 2015: 3.2% [($895,376 − $867,668) ÷ $867,668] 2013 to 2014: −1.3% [($867,668 − $878,785) ÷ $878,785] Percentage change in profit from operations: 2014 to 2015: [{$(5,714) − $(29,980)} ÷ $(29,980)] = Note 2013 to 2014: [{$(29,980) + $367} ÷ $367] = Note Note: the results are meaningless due to the negative profit from operations amounts. (c) Gross profit margin 2015 = 43.8% [$392,317 ÷ $895,376] 2014 = 43.1% [$373,713 ÷ $867,668] 2013 = 43.7% [$383,319 ÷ $878,785] Gross profit margin is fairly constant over the three years (d) Profit margin 2015 = (0.4)% 2014 = (3.6)% 2013 = 0.5%
[$(3,534) ÷ $895,376] [$(30,999) ÷ $867,668] [$4,288 ÷ $878,785]
The only positive profit margin was generated in 2013. In 2014, a substantial loss was experienced, and 2015 was somewhat of a recovery with essentially breakeven results.
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BYP5-2 (Continued) (e) Profit margin using profit from operations 2015 = (0.6)% [$(5,714) ÷ $895,376] 2014 = (3.5)% [$(29,980) ÷ $867,668] 2013 = 0.04% [$367 ÷ $878,785] Profit margin (using profit from operations) showed essentially the same results as profit margin, except not quite as negative in 2013 and 2015 since non-operating income added to profit or reduced the loss. In 2014 income taxes played a small role in impacting the calculations. (f)
Users may agree or disagree. Profit from operations reflects the company’s normal operating activities. The items shown on the income statement below this subtotal include non-operating activities that are not related to the company’s main operations. These items may or may not be recurring and some are unusual in nature, by their nature or size. The company’s main operations should have the most significant impact on the profit, but occasionally non-operating activities can significantly affect profit. The nature of the non-operating items will determine whether they are meaningful in a comparison. In the case of Indigo, the margin calculations for the threeyear period are essentially the same. The non-operating activities relate to earning investment revenue using the cash generated from a sale in 2012. To the extent cash is not depleted, this source of revenue could continue into the future, although the amount is small in relation to operating revenue. Management may believe these nonoperating items to be non-recurring and therefore not meaningful to a comparison of profitability.
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BYP5-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.
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BYP5-4 COMMUNICATION ACTIVITY (a) and (b) MEMORANDUM TO:
President, Great Canadian Snowboards
FROM: SUBJECT: Revenue and Expense Recognition Criteria DATE:
Revenue is recognized when there is an increase in assets or a decrease in liabilities as the result of a contract with a customer. In general, this simply means that the revenue must be recognized in the period when it is earned. Typically, sales revenues are earned 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. In this situation Dexter has made a down payment before the snowboard is complete and the company should record the amount as unearned revenue. Revenue on the snowboard ordered by Dexter is earned at event No. 6, when Dexter picks up the snowboard. Whether Dexter makes a down payment or pays 100% of the board with his purchase order is irrelevant in recognizing sales revenue because at this time, the company has not done anything to earn the revenue. A payment at the time of the order may be an indication of Dexter’s “good faith.” However, its effect on your financial statements is limited to recognizing the payment as unearned revenue.
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BYP 5-4 (Continued) Expenses, on the other hand, are recognized when there is a decrease in assets or an increase in liabilities, excluding transactions with the owner. Expense recognition is tied to revenue recognition when there is a direct association between costs incurred and the earning of revenue. Thus any costs directly associated with the snowboard, such as cost of goods sold, should be recognized as expenses at the same time the sales revenue is recognized. If you have further questions about the accounting for this sale, please let me know.
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BYP5-5 “ALL ABOUT YOU” ACTIVITY (a) The amount of inventory shrinkage can be determined by comparing the amount of actual inventory on hand to the inventory in the accounting records. This comparison should be done on a retail price basis. The amount of shrinkage is usually expressed as a percentage of total sales. (b) Some technology solutions can be costly. Management will need to determine if the amount of savings will outweigh the amount spent on the technology and on the training for staff to use the technology. They will also need to determine if the technology will be well received by the customers and will not discourage them from shopping and buying at the store. (c) The amount is calculated by multiplying the Sales revenues by the shrinkage percentage: $400,000 × 4% = $16,000. This represents the loss in sales revenue. The actual loss is the cost of the inventory that is missing. (d) Great customer service involves staying with the customer to provide service. At the same time, this reduces the opportunity for customers to shoplift. Great customer service can help prevent shoplifting in the following ways: Schedule an adequate number of employees to work at one time. Greet every customer that enters the store. This lets the customer know you are aware of their presence. Make yourself available to all customers and never leave the store unattended. Don't allow customers to distract the cashier while another person is being checked out. Approach suspicious persons and ask if they are finding everything okay. Mention that you’ll be nearby should they need your help. Make shoplifters feel watched.
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BYP 5-5 (Continued) (e) Controls to reduce employee theft: - have an updated policies and procedures manual - prevent employees from being alone in the store - limit access to store keys - limit markdown availability - control false refunds by collecting customer information and doing follow-up - use a cash register that produces an audit trail - control the back door of the store to prevent merchandise from being taken out the back. - check the garbage and employee parcels. - do new employee reference checks. - provide employee discounts on merchandise. (f)
Since the sales discounts are not authorized, the friend’s behaviour is inappropriate and is employee theft. The sales discounts reduce the amount received as sales revenue and reduce profitability of the store. If you fail to inform management of the unauthorized sales discounts, you are contributing to the lower profitability of the store. Inventory shrinkage, through theft such as unauthorized discounts, leads to higher prices for consumers and affects the store’s ability to be competitive. If management knows that you are aware of the unauthorized discounts given by your friend, they could consider that you participated in the theft and this could lead to the loss of your employment and reputation. Management would also question your integrity and this could affect your future promotion opportunities.
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BYP5-6 Santé Smoothie Saga (a) Responses to Natalie’s questions 1. The mixers should be classified as inventory as they are for resale. 2. A perpetual inventory system will provide better control over inventory. Because you are dealing with highvalue items, you should use the perpetual system. Also because you are dealing with low volumes and not operating a store, the cost of a perpetual system is minimized because it is not necessary to invest in technology such as scanners. 3. You still need to count inventory to ensure that your records are accurate and that the inventory that is supposed to be on hand is actually there. I suggest you should count once a month. (b) GENERAL JOURNAL
J1
Date
Account Titles
Debit
June 6
Merchandise Inventory...................... Accounts Payable .........................
1,575
Merchandise Inventory...................... Cash ...............................................
60
Accounts Payable [($1,575 ÷ 3) + $20] Merchandise Inventory .................
545
Cash ................................................... Accounts Receivable ....................
500
Accounts Receivable......................... Sales ..............................................
2,100
7 8
9
13
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Credit
1,575
60 545
500 2,100
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BYP 5-6 (Continued) (b) (Continued) June 13 Cost of Goods Sold [($1,575 + $60) ÷ 3 × 2] ....................... Merchandise Inventory ................. 14
14
15
20
21
21
21
28 29
31
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1,090 1,090
Freight Out ......................................... Cash ...............................................
75
Merchandise Inventory...................... Accounts Payable .........................
2,100
Cash ................................................... Unearned Revenue........................
125
Cash ................................................... N. Koebel, Capital..........................
1,000
Merchandise Inventory...................... Cash ...............................................
80
Cash ................................................... Sales .............................................
2,100
Cost of Goods Sold .......................... Merchandise Inventory ................. [($2,100 + $80) ÷ 4 × 2]
1,090
Salaries Expense ............................... Cash (20 x $12) ..............................
240
Accounts Payable.............................. Telephone Expense ........................... Cash ...............................................
88 66
Accounts Payable.............................. Cash ...............................................
3,130
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75
2,100
125
1,000
80
2,100
1,090
240
154 3,130
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BYP 5-6 (Continued) (b) and (d) May 31 Bal. June 9 June 15 June 20 June 21 Bal.
Cash 3,060 June 7 500 June 14 125 June 21 1,000 June 28 2,100 June 29 June 30 3,046
May 31 Bal. June 13 Bal.
Accounts Receivable 675 June 9 2,100 2,275
May 31 Bal. June 6 June 7 June 14 June 21 Bal.
Merchandise Inventory June 8 1,575 June 13 60 June 21 2,100 80 1,090
May 31 Bal.
Supplies 95
May 31 Bal.
Equipment 1,550
Accumulated Depreciation-Equipment May 31 Bal. June 31 Bal.
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60 75 80 240 154 3,130
500
545 1,090 1,090
66 43 109
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BYP 5-6 (Continued) (b) and (d)
June 8 June 29 June 30
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Accounts Payable 545 May 31 Bal. 88 June 6 3,130 June 14 Bal.
88 1,575 2,100 -
Interest Payable May 31 Bal. June 30 Bal.
11 8 19
Unearned Revenue May 31 Bal. June 15 Bal.
100 125 225
Notes Payable May 31 Bal.
3,000
N. Koebel, Capital May 31 Bal. June 20 Bal.
2,115 1,000 3,115
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BYP 5-6 (Continued) (b) and (d) Sales June 13 June 21 Bal.
June 13 June 21 Bal.
Cost of Goods Sold 1,090 1,090 2,180
June 28
Salaries Expense 240
June 30
Depreciation Expense 43
June 14
Freight Out 75
June 29
Telephone Expense 66
June 30
Interest Expense 8
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.
2,100 2,100 4,200
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BYP 5-6 (Continued) (c) SANTÉ SMOOTHIES Trial Balance June 30, 2017 Debit Cash .................................................................... $ 3,046 Accounts receivable ......................................... 2,275 Merchandise inventory ..................................... 1,090 Supplies ............................................................. 95 Equipment .......................................................... 1,550 Accumulated depreciation—equipment .......... Unearned revenue ............................................. Interest payable ................................................. Notes payable .................................................... N. Koebel, capital .............................................. Sales ................................................................... Cost of goods sold ............................................ 2,180 Salary expense .................................................. 240 Telephone expense ............................................ 66 Freight out ......................................................... 75 $10,617
Credit
$
66 225 11 3,000 3,115 4,200
$10,617
(d) GENERAL JOURNAL Date
Account Titles
J2 Debit
June 30 Depreciation Expense ....................... Accumulated Depreciation— Equipment ..................................... ($1,550 ÷ 36 months)
43
30 Interest Expense ................................ Interest Payable ............................ ($3,000 × 3% × 1/12)
8
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Credit
43
8
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BYP 5-6 (Continued) (e) SANTÉ SMOOTHIES Adjusted Trial Balance June 30, 2017 Debit Cash .................................................................... $ 3,046 Accounts receivable ......................................... 2,275 Merchandise inventory ..................................... 1,090 Supplies ............................................................. 95 Equipment .......................................................... 1,550 Accumulated depreciation—equipment .......... Unearned revenue ............................................. Interest payable ................................................. Notes payable .................................................... N. Koebel, capital .............................................. Sales ................................................................... Cost of goods sold ............................................ 2,180 Salary expense .................................................. 240 Depreciation expense ........................................ 43 Telephone expense ............................................ 66 Interest expense ................................................. 8 Freight out ......................................................... 75 $10,668
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Credit
$ 109 225 19 3,000 3,115 4,200
$10,668
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BYP 5-6 (Continued) (f) SANTÉ SMOOTHIES Income Statement Month ended June 30, 2017 Sales................................................................................. Cost of goods sold .......................................................... Gross profit...................................................................... Operating expenses Salaries expense............................................ $240 Telephone expense ....................................... 66 Depreciation expense.................................... 43 Freight out ...................................................... 75 Total operating expenses ...................................... Profit from operations..................................................... Other expenses Interest expense ......................................................... Profit.................................................................................
$4,200 2,180 2,020
424 1,596 8 $1,588
(g) Gross profit margin = 48.1% ($2,020 ÷ $4,200) Profit margin = 37.8% ($1,588 ÷ $4,200)
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Accounting Principles, Seventh Canadian Edition
CHAPTER 6 Inventory Costing ASSIGNMENT CLASSIFICATION TABLE Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Describe the steps in determining inventory quantities.
1, 2, 3
1, 2
1, 2
1, 7
1, 7
2.
4, 5, 6
3, 4, 5, 6, 7, 8
3, 4, 5, 6, 7, *15, *16
2, 3, 4, 5, 6, *12, *13
2, 3, 4, 5, 6, *12, *13
3. Determine the financial statement effects of inventory cost determination methods.
7, 8, 9
9, 10
6, 7
4, 5
4, 5
4. Determine the financial statement effects of inventory errors 5. Value inventory at the lower of cost and net realizable value. 6. Demonstrate the presentation and analysis of inventory.
10, 11,
11, 12
8, 9
3, 7, 8
3, 7, 8
12, 13, 14
13, 14
10, 11
6, 9
6, 9
15, 16, 17, 18
15, 16
11, 12
8, 10
8, 10
*7. Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A).
*19, *20, *21
*17, *18
*13, *14, *15, *16
*11, *12, *13
*11, *12, *13
*8. Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B).
*22, *23, *24
*19, *20
*17, *18
*14, *15
*14, *15
Learning Objectives
Calculate cost of goods sold and ending inventory in a perpetual inventory system using specific identification, FIFO, and weighted average methods of cost determination.
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTIC TABLE Problem Number
Description
Time Allotted (min.)
1A
Identify items in inventory.
Moderate
20-25
2A
Apply specific identification.
Simple
15-20
3A
Apply perpetual FIFO. Record sales and inventory adjustment and calculate gross profit, and answer questions.
Moderate
20-25
4A
Apply perpetual weighted average and answer questions.
Moderate
20-25
5A
Apply perpetual FIFO and weighted average. Answer questions about financial statement effects.
Moderate
35-45
6A
Record transactions using perpetual weighted average. Apply LCNRV.
Moderate
35-45
7A
Determine effects of inventory errors.
Complex
25-30
8A
Determine effects of inventory errors. Calculate inventory turnover.
Complex
35-45
9A
Apply LCNRV and prepare adjustment.
Moderate
20-25
10A
Calculate ratios.
Simple
15-20
*11A
Apply periodic FIFO and weighted average.
Simple
20-25
*12A
Apply periodic and perpetual FIFO.
Moderate
20-25
*13A
Apply periodic and perpetual weighted average.
Moderate
20-25
*14A
Determine inventory loss using gross profit method.
Moderate
20-30
*15A
Determine ending inventory using retail method.
Moderate
20-30
1B
Identify items in inventory.
Moderate
20-25
2B
Apply specific identification.
Simple
15-20
3B
Apply perpetual weighted average. Record sales and inventory adjustment and calculate gross profit, and answer questions.
Moderate
20-25
4B
Apply perpetual FIFO and answer questions.
Moderate
20-25
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Time Allotted (min.)
5B
Apply perpetual FIFO and weighted average. Answer questions about financial statement effects.
Moderate
35-45
6B
Record transactions using perpetual FIFO. Apply LCNRV.
Moderate
35-45
7B
Determine effects of inventory errors.
Complex
25-30
8B
Determine effects of inventory errors. Calculate inventory turnover.
Complex
35-45
9B
Apply LCNRV and prepare adjustment.
Moderate
20-25
10B
Calculate ratios.
Simple
15-20
*11B
Apply periodic FIFO and weighted average.
Simple
20-25
*12B
Apply periodic and perpetual weighted average.
Moderate
20-25
*13B
Apply periodic and perpetual FIFO.
Moderate
20-25
*14B
Determine inventory loss using gross profit method.
Moderate
20-30
*15B
Determine ending inventory using retail method.
Moderate
20-30
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material 1.
Learning Objective Describe the steps in determining inventory quantities.
Knowledge BE6-1 E6-1
2.
Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and weighted average methods of cost determination.
3.
Determine the financial statement effects of inventory cost determination methods.
Q6-9
Determine the financial statement effects of inventory errors.
Q6-11
4.
Solutions Manual .
Comprehension Q6-1 Q6-2 Q6-3
Application BE6-2 E6-2 P6-1A P6-1B
Q6-4 Q6-5 Q6-6
BE6-3 BE6-4 BE6-5 BE6-6 BE6-7 BE6-8 *BE6-18 E6-3 E6-4 E6-5 E6-6 E6-7 *E6-15 *E6-16 P6-2A P6-3A P6-4A P6-5A P6-6A P6-2B P6-3B P6-4B P6-5B P6-6B *P6-12A *P6-13A *P6-12B *P6-13B E6-6 E6-7 P6-4A P6-5A P6-4B P6-5B
Q6-7 Q6-8 BE6-9 BE6-10
Q6-10
P6-3A P6-3B
6-4
Analysis P6-7A P6-7B
Synthesis
Evaluation
BE6-11 BE6-12 E6-8 E6-9 P6-7A P6-8A P6-7B P6-8B
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued) 5.
Learning Objective Value inventory at the lower of cost and net realizable value.
Knowledge Q6-13
Comprehension Q6-12 Q6-14
Application BE6-13 BE6-14 E6-10 E6-11 P6-6A P6-6B P6-9A P6-9B
Analysis
Q6-17 P6-8A P6-10A P6-8B P6-10B
6.
Demonstrate the presentation and analysis of inventory.
Q6-15 Q6-16
Q6-18 BE6-16
BE6-15 E6-11 E6-12
*7
Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and weighted average inventory cost formulas (Appendix 6A).
*Q6-20
*Q6-19 *Q6-21
*8.
Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B)
*Q6-22
*Q6-23 *Q6-24
*BE6-17 *BE6-18 *E6-13 *E6-14 *E6-15 *E6-16 *P6-11A *P6-12A *P6-13A *P6-11B *P6-12B *P6-13B *BE6-19 *BE6-20 *E6-17 *E6-18 *P6-14A *P6-15A *P6-14B *P6-15B
Broadening Your Perspective
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BYP6-3 BYP6-4 BYP6-5
6-5
BYP6-1 BYP6-2 BYP6-6
Synthesis
Evaluation
Santé Smoothie Saga
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Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. This is normally done when the store is closed. Tom will probably count items, and mark the quantity, description, location, and inventory number on pre-numbered inventory tags. Retailers, such as a hardware store, generally have thousands of different items to count. Later, unit costs will likely be applied to the inventory quantities using either specific identification or a cost formula. Many businesses also use electronic devices, such as hand-held scanners. Information on the scanners can be uploaded to the perpetual inventory system to partially automate taking an inventory.
2.
Goods in transit should be included in the inventory of the company (buyer or seller) that has ownership of the goods. This is determined by the terms of sale and is evidenced by the free on board (FOB) terms. When the terms are FOB shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. When the terms are FOB destination, ownership of the goods remains with the seller until the goods reach the buyer.
3.
Consigned goods are goods held on a company’s premises (the consignee), but belong to someone else (the consignor). The consignee agrees to sell the goods for a fee but never takes ownership of the goods even though the goods are physically located on the consignee’s premises. Therefore, the consignor, not the consignee, owns the goods and should include them in inventory.
4.
Specific identification is appropriate when goods are uniquely identifiable or produced for a specific purpose, for example, automobiles. GAAP does not allow companies to use specific identification when goods are interchangeable.
5.
Specific identification tracks the actual physical flow of goods in the system and matches the cost of a particular item of inventory against its sale price. Each good is uniquely identifiable and can be traced back to its purchase cost, for example, automobiles. This gives the specific identification method the advantage of producing financial results that are more accurate. Specific identification may be more expensive to operate since each item must be tracked individually in the accounting system.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 5. (Continued) The FIFO cost formula assumes that the first goods purchased are the first goods sold. The weighted average cost formula determines the cost using a weighted average of the cost of the items purchased. Both the FIFO and the weighted average cost formulas assume a flow of goods that may not exactly match the actual flow of physical goods. These cost formulas can be used in both a periodic and perpetual inventory system; whereas, the specific identification method can only be used in a perpetual system. An example of merchandise that would be valued using the FIFO basis is electronic products; whereas, merchandise such as clothing might be valued on a weighted average basis. 6.
Disagree. The weighted average cost per unit is calculated by dividing the cost of goods available for sale by the units available for sale at the date of each purchase. This means that every purchase of product will change the weighted average cost per unit. Sales of product mean that items of inventory are removed from the cost “pool” at the weighted average cost. This does not change the weighted average cost (unless by rounding).
7.
(a) Cash: No effect. The cash impact of the purchase and sale is the same regardless of which inventory cost formula is chosen. The inventory cost formula simply allocates the cost of goods available for sale between cost of goods sold and ending inventory. (b) Ending inventory: In a period of rising prices, FIFO will produce a higher ending inventory as inventory is costed using the most recent (higher) prices; Weighted average will produce a lower ending inventory as ending inventory is costed at an average of all the inventory available for sale during the accounting period. (c) Cost of goods sold: The cost of goods sold effect is opposite to that of ending inventory. Hence, cost of goods sold will be lower under FIFO and higher under weighted average cost. (d) Profit: Because of the effect on the cost of goods sold, profit will be higher under FIFO and lower under weighted average cost.
8.
The weighted average cost formula results in more recent costs being reflected in cost of goods sold. This better matches current costs with current revenues and provides a better income statement valuation. The FIFO cost formula provides the better inventory valuation because the cost of older items is transferred to cost of goods sold. This leaves the more recently purchased items in ending inventory, which better reflects replacement cost.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 9.
(a) Choose a method that corresponds as closely as possible to the physical flow of goods. (b) Report an inventory cost on the balance sheet that is close to the inventory’s recent costs. (c) Use the same method for all inventories having a similar nature and use in the company.
10.
(a) Mila Company's 2016 profit will be overstated (O) $5,000. Beginning inventory + Purchases = Cost of goods available for sale – Ending inventory = Cost of goods sold
Sales – Cost of goods sold = Gross profit/Profit
U $5,000 O $5,000
O $5,000 U $5,000
(b) Mila’s 2017 profit will be understated (U) $5,000 since the ending inventory of 2016 becomes the beginning inventory of 2017. Beginning inventory + Purchases = Cost of goods available for sale – Ending inventory = Cost of goods sold
O $5,000
Sales – Cost of goods sold O $5,000 = Gross profit/Profit U $5,000
O $5,000 O $5,000
(c) The combined profit for the two years will be correct because the errors offset each other (O $5,000 in 2016 and U $5,000 in 2017). 11.
Common errors that occur related to inventory include: Recording errors Errors in taking the physical count Errors caused by not properly investigating goods in transit or goods on consignment Pricing errors for the ending inventory Errors in the compilation or summarizing of the inventory count. Errors in arriving at the proper value for the lower of cost and net realizable value
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QUESTIONS (Continued) 12.
Lucy should know the following: (a) A departure from the cost basis of accounting for inventories is justified when the utility (revenue-producing ability) of the goods is no longer as great as its cost. The writedown to net realizable value should be recognized in the period in which the decline in utility occurs. (b) Net realizable value means the estimated selling price less any estimated costs required to complete the sale.
13.
Net realizable value is the selling price of an inventory item, less any estimated costs required to make the item saleable.
14.
No. Net realizable value is usually higher than cost because this is the nature of selling merchandise inventory for a profit. The recognition of the gain occurs when the inventory is sold, in accordance with revenue recognition criteria.
15.
In order to be classified as inventory, an asset must be owned by the business and must be in a form ready for sale.
16.
The additional disclosures on the financial statements concerning inventory include (a) Details of inventory categories such as raw materials and finished goods. (b) The cost determination method used (specific identification, FIFO, or weighted average). (c) A statement that the inventory is reported at the lower of cost and net realizable value. (d) The amount of cost of goods sold. (e) The amount of any writedown to net realizable value. (f) The amount of any reversals of previous writedowns, including the reason why the writedown was reversed.
17.
A decrease in the days sales in inventory ratio from one year to the next would usually be seen as an improvement in the company’s efficiency in managing inventory. It means that less inventory is being held relative to sales.
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QUESTIONS (Continued) 18.
The inventory turnover ratio measures the number of times, on average, inventory is sold (turned over) during the period. Although there is no right number of times, there would be an optimum number of times depending on which industry the business belongs. Having too high an inventory turnover ratio can result in too few items left in inventory causing a stockout or shortages, which may upset customers. Having too low a turnover may add risks to the business that the inventory will go out of date, deteriorate, or become obsolete and lose its resale value. In addition, too slow an inventory turnover brings on additional costs to the business such as warehousing and financing. Inventory ties up the firm’s cash and can compromise working capital.
*19. It is necessary to calculate cost of goods available for sale in a periodic inventory system because we wait until the end of the period to allocate the amount to ending inventory (unsold) and cost of goods sold (sold). *20. The cost flow relationships for inventory can be translated into the following equations: (1) Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale, (2) Cost of Goods Available for Sale – Cost of Goods Sold = Ending Inventory. *21. In a periodic system, the average is a weighted average calculated at the end of the period based on total goods available for sale for the entire period. In a perpetual system, the weighted average is calculated after each purchase (goods available for sale in dollars ÷ goods available for sale in units). A new weighted average must be calculated with each purchase and thus the weighted average becomes a moving average. *22. Inventories must be estimated when (1) a company uses the periodic inventory system and management wants interim (monthly or quarterly) financial statements but a physical inventory is only taken annually, or (2) a fire or other type of casualty makes it impossible to take a physical inventory. An estimate of the inventory can also help to test the reasonableness of the inventory balance that was determined when a physical count is done. *23. Disagree. A company’s gross profit margin does not necessarily remain constant from year to year. Gross profit can change due to changes in merchandising policies or in market conditions. The accuracy of the method is also affected by the mix of products sold during the year and whether the method is applied to a product line, a department, or the company as a whole. The year-end inventory count also serves internal control purposes. It helps management examine the presence of merchandise and its physical condition.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) *24. The retail inventory method is an averaging technique and may produce an incorrect inventory valuation if the blend of inventory items in ending inventory is not the same as in cost of goods available for sale. It produces an estimate of ending inventory based on the weighted average cost formula and would not be appropriate if the company is using a FIFO approach.
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Chapter 6
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 6-1 (a)
Ownership of the goods belongs to the consignor (Helgeson). Thus, these goods should be included in Helgeson’s inventory.
(b)
The goods in transit should not be included in inventory as title remains with the seller until the goods reach the buyer (Helgeson).
(c)
The goods being held belong to the customer. They should not be included in Helgeson’s inventory.
(d) Ownership of these goods rests with the other company (the consignor). These goods should not be included in Helgeson’s inventory. (e)
The goods in transit to a customer should not be included in inventory as title passes to the buyer when the public carrier accepts the goods from the seller.
BRIEF EXERCISE 6-2 The correct cost of inventory is: Total cost per inventory count $55,500 (a) Inventory held for alterations (1,500) (b) Inventory held on consignment (4,250) (c) Goods shipped FOB shipping point prior to Dec. 31 2,875 Freight on inventory purchase 310 (d) Goods shipped FOB destination prior to Dec. 31 0 Freight on inventory purchase 0 Correct inventory cost at December 31 $52,935
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-3 Cost of Goods Sold Painting 3 4 Total
Total Cost $2,900 3,900 $6,800
Ending Inventory Painting 1 2 Total
Total Cost $ 500 2,500 $3,000
BRIEF EXERCISE 6-4 (a) (b) (c) (d) (e) (f) (g)
2 1 3 3 3 1 1
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FIFO Specific identification Weighted Average Weighted Average Weighted Average Specific identification Specific identification
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-5 Date
Units
Purchases Cost Total
Cost Of Goods Sold Units Cost Total
June 1
200
$25.00
$5,000.00
200
$25.00
$5,000.00
7
400
$22.00
$8,800.00
(a) 200 400
(b) $25.00 $22.00
(c) 5,000.00 8,800.00 13,800.00
(f) 250
(g) $22.00
(h) 5,500.00
(j) $22.00 $20.00
(k) 5,500.00 7,000.00 12,500.00
18 200 150 26
350
$20.00
Solutions Manual © 2016John Wiley & Sons Canada, Ltd.
(d) $25.00 $22.00
$7,000.00
(e) $5,000.00 $3,300.00 $8,300.00
Units
(i) 250 350
6-14
Inventory Balance Cost Total
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-6 Weighted Average Calculations Date
Purchases Units
01-Jun
07-Jun
Cost
Total
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)
Inventory Balance
Units
Units
Cost
Total
Beginning inventory 400 $25.00 $10,000.00 600
22.00
13,200.00
18-Jun
26-Jun
Cost of goods sold
550
450
20.00
Cost
Total
400
$25.00
$10,000.00
(a) 1,000
(b) 23.20
(c) 23,200.00
(d)
(e)
(f)
(g)
(h)
$23.20
$12,760.00
450
23.20
10,440.00
(i) 900
9,000.00
(j) 21.60
(k) 19,440.00
Total
WA Cost
Units
Cost
per unit
A
B
B÷A
400
$10,000.00
600
13,200.00
1,000
23,200.00
1,000
23,200.00
-550
-12,760.00
450
10,440.00
450
10,440.00
450
9,000.00
900
19,440.00
1,000 = 400 + 600 ($10,000.00 + $13,200.00) ÷ (400 + 600) = $23.20 $13,800.00 = $5,000.00 + $8,800.00 see (b) above $12,760.00 = 550 × $23.20 450 = 1,000 – 550 see (b) above $10,440.00 = 450 × $23.20 (or $23,200.00 - $12,760.00) 900 = 450 + 450 $21.60 = ($10,440.00 + $9,000.00) ÷ (450 + 450) $19,440.00 = 600 × $21.25 (or $10,440.00 + $9,000.00)
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$23.20
$23.20
$ 21.60
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-7 (a)
FIFO Purchases Date Units Cost Total Nov. 1 Beginning inventory 10 $5.00 $50 4 20 5.50 110
7
20
6.00
Cost of Goods Sold Units Cost Total
120
10
10
$5.00
$50
12
20 10
5.50 6.00
110 60 170 $220
Total
50
$280
Cost of goods available for sale
40 Cost of goods sold
Cost of goods available for sale Less: cost of goods sold Ending inventory
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6-16 .
10 10 20
$5.00 5.00 5.50
10 20 20
5.00 5.50 6.00
20 20
5.50 6.00
10
6.00
10 Ending inventory
Check: Cost $280.00 220.00 $ 60.00
Inventory Balance Units Cost Total
Units 50 40 10
Chapter 6
$50 50 110 160 50 110 120 280 110 120 230 60 $60
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-7 (Continued) (b) Weighted Average Weighted Average Calculations Date
Purchases Units
Nov 1
Cost
Total
Cost of goods sold
Inventory Balance
Units
Units
Cost
Cost
Total
Beginning inventory
4
7
10
$5.00
$50.00
10
$5.00
$50.00
20
5.50
110.00
30
5.33
170.00
20
6.00
120.00
10
50
10
12
$5.60
30
Total
Total
50 $280.00 Cost of goods available for sale-
40
5.60
$56.00
168.00
$224.00 Cost of goods sold
40
10
10
5.60
5.60
5.60
Cost of goods available for sale Less: cost of goods sold Ending inventory
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6-17 .
224.00
56.00
$ 56.00 Ending inventory
Check: Cost $280.00 224.00 $ 56.00
280.00
Units 50 40 10
Chapter 6
Total
WA Cost
Units
Cost
per unit
A
B
B÷A
10 20
$50.00 110.00
30
160.00
30 20
160.00 120.00
50
280.00
50
280.00
-10
-56.00
40
224.00
40 -30
224.00 -168.00
10
56.00
$5.33
$5.60
$ 5.60
$5.60
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-8 (a)
FIFO
Date
Account Titles and Explanation
Nov. 4
Merchandise Inventory (20 × $5.50) .. Accounts Payable .........................
110
Accounts Receivable ......................... Sales (30 × $8.00)...........................
240
Cost of Goods Sold ............................ Merchandise Inventory……………
170
Nov. 12
Debit
Credit
110
240 170
([20 × $5.50] + [10 × $6.00]) (b)
Weighted Average
Date
Account Titles and Explanation
Nov. 4
Merchandise Inventory (20 × $5.50) .. Accounts Payable .........................
110
Accounts Receivable ......................... Sales (30 × $8.00)...........................
240
Cost of Goods Sold ............................ Merchandise Inventory (30 × $5.60)
168
Nov. 12
Debit
Credit
110
240 168
BRIEF EXERCISE 6-9 (a) (b) (c) (d)
FIFO Weighted average cost Weighted average cost FIFO
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BRIEF EXERCISE 6-10 (a)
Weighted average cost gives the higher inventory valuation when prices are falling. This is because the cost of the units are a blend of older and newer items. Under the FIFO system, ending inventory is composed of newer items purchased at a lower cost.
(b) FIFO gives the higher cost of goods sold amount. This is because the cost of the units purchased earlier, at a higher cost, are assumed to have been sold first and are allocated to cost of goods sold. (c)
The selection of a cost formula does not affect cash flow. The cost formula is a method of allocating costs to cost of goods sold and ending inventory. It does not involve the inflow or outflow of cash.
(d) In selecting a cost formula, the company should consider their type of inventory and its actual physical flow. While it is not essential to match the actual physical flow to the cost formula, it does give the company an indication as to its flow of costs throughout the period. The company should also consider the method that will report inventory on the balance sheet that is close to the inventory’s recent costs.
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BRIEF EXERCISE 6-11
2016 2017
Assets =
Liabilities +
Owner’s Equity
No Effect No Effect
No Effect No Effect
No Effect No Effect
2016 Beginning inventory O $23,000 + Purchases Cost of goods available for sale O $23,000 - Ending inventory Cost of goods sold O $23,000
Sales - Cost of goods sold O $23,000 Gross profit/Profit
U $23,000
Note that the inventory error first occurred on December 31, 2015 and that 2015 profit and owner’s equity would be overstated by $23,000. The 2016 profit is understated by $23,000. This error is added to the prior year’s overstatement of $23,000, and the two errors cancel out. Owner’s equity at the end of 2016 is correct. The ending inventory is also correct at the end of 2016. 2017 Since the 2016 error reverses the impact of an error originally occurring in 2015, there would be no impact on the 2017 financial statements. Profit, owner’s equity, and ending inventory would all be correctly stated (assuming no new errors have occurred).
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-12 (a) The understatement of ending inventory caused cost of goods sold to be overstated by $7,000 and profit to be understated by $7,000. The correct profit for 2016 is $97,000 ($90,000 + $7,000). Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold
Sales - Cost of goods sold
O $7,000
Gross profit / Profit
U $7,000
U $7,000 O $7,000
(b) Total assets and owner’s equity in the balance sheet will both be understated by the amount that ending inventory is understated, $7,000. If profit is understated, then owner’s equity is also understated as profit is a component of owner’s equity. Using the accounting equation: A = L + OE U$7,000 = U$7,000 (c) The error arising in 2016, if left uncorrected, will flow through into 2017. The 2016 error will affect the 2017 beginning inventory by an understatement of $7,000. This causes cost of goods sold to be understated $7,000 and profit to be overstated $7,000. Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold
U $7,000 Sales - Cost of goods sold Gross profit / Profit
U $7,000 O $7,000
U $7,000
Total assets and owner’s equity in the balance sheet will both be correct since 2017 ending inventory is correct. The 2016 error causes an understatement of 2016 profit of $7,000 and an overstatement of 2017 profit of $7,000, causing the total profit for the two-year period to self correct. This causes owner’s capital in 2017 to be correctly stated. Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-13 (a) Inventory Categories
Cost
NRV
LCNRV
Adj.
Personal computers Servers Total Solution Printers Total
$27,000 18,000 10,000 $55,000
$21,500 19,500 8,500 $49,500
$21,500 18,000 8,500 $48,000
$5,500 N/A 1,500 $7,000*
(b)
*The entry to record the adjustment would be: Cost of goods sold.............................. 7,000 Merchandise inventory ............. 7,000
BRIEF EXERCISE 6-14 The correct ending inventory should be $48,000. The correct cost of goods sold should be $425,500 ($418,500 + $7,000).
BRIEF EXERCISE 6-15 Inventory turnover = $1,150,000 ÷ [($132,000 + $143,000) ÷ 2] = 8.4 times Days sales in inventory = 365 ÷ 8.4 = 43.5 days
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 6-16 The company’s inventory management has deteriorated in 2017. The inventory turnover ratio went from 9.1 in 2016 to 8.4 in 2017. The decrease in this ratio means that the company is selling its inventory fewer times in 2017 than in 2016. The days sales in inventory shows this deterioration by interpreting the turnover ratio in days that inventory is on hand. We can see that the number of days that inventory is on hand has increased from 40.1 days in 2016 to 43.5 days in 2017. *BRIEF EXERCISE 6-17 Goods Available for Sale st
1 purchase 2nd purchase 3rd purchase Goods available for sale Ending inventory in units Number of units sold (a)
Units Unit Cost 200 $8 250 7 300 6 750 400 350
Total Cost $1,600 1,750 1,800 $5,150
FIFO Ending Inventory: Purchase Units rd 300 3 nd 100 2 400 Total
Unit Cost $6 7
Total Cost $1,800 700 $2,500
Cost of goods sold: $5,150 – $2,500 = $2,650 Check of cost of goods sold: Purchase Units Unit Cost st 200 $8 1 nd 150 7 2 350 Total
Solutions Manual .
6-23
Total Cost $1,600 1,050 $2,650
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 6-17 (Continued) (b) Weighted Average Weighted Average unit cost: $5,150 750 units = $6.87 per unit Ending Inventory: 400 units × $6.87 per unit = $2,748 Cost of Goods Sold: $5,150 – $2,748 = $2,402 Check of cost of goods sold: 350 units × $6.87 per unit = $2,405 (rounding the weighted average cost per unit to the nearest penny introduces a slight rounding difference).
* BE6-18 Date
Account Titles and Explanation
Debit
Jan. 3 Accounts Receivable ........................ Sales (550 × $10)...........................
5,500
9 Purchases (1,000 × $4.50) ................. Accounts Payable ........................
4,500
15 Cash ................................................... Sales (850 × $10)...........................
8,500
Solutions Manual .
6-24
Credit
5,500
4,500 8,500
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 6-19 Net sales ............................................................................ $275,000 Less: Estimated gross profit (45% × $275,000) .............. 123,750 Estimated cost of goods sold........................................... $151,250 Cost of goods available for sale ($40,000 + $160,000).. $200,000 Less: Estimated cost of goods sold ............................... 151,250 Estimated cost of ending inventory ............................... $ 48,750
*BRIEF EXERCISE 6-20 Goods available for sale Net sales Ending inventory at retail
At Cost
At Retail
$35,000
$50,000 40,000 $10,000
Cost-to-retail ratio = $35,000 ÷ $50,000 = 70% Estimated cost of ending inventory = $10,000 × 70% = $7,000
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 6-1 1.
Do not include in inventory – Sam’s does not own items held on consignment for another company.
2.
Include in inventory – Because the shipping terms are FOB destination, Sam’s owns the goods until they arrive at the customer’s premises.
3.
Do not include in inventory – Shipping terms FOB destination means that Sam’s does not own the items until delivered to their premises.
4.
Include in inventory – Because the shipping terms are FOB shipping point, Sam’s owns the goods in transit.
5.
Include in inventory – Because the shipping terms are FOB shipping point, ownership has transferred to Sam’s and Sam’s pays the freight charges.
6.
Do not include in inventory – Because freight costs paid by the seller are freight-out or delivery expense they are included in operating expenses, not as part of the cost of inventory.
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-2 Ending inventory—physical count ................................... $281,000 Adjustments: 1. Add to inventory: Title passed to Moghul when goods were shipped .................................................. 95,000 2. Add to inventory: Title remains with Moghul until buyer receives goods................................................ 35,000 3. Add to inventory: Consignor (Moghul) own goods. 30,500 4. Add to inventory: Title passed to Moghul when goods were shipped .................................................. 28,000 $469,500
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-3 (a) Carrie’s Car Emporium should use the specific identification instead of one of the cost formulas. Specific identification is used when a company sells items that are not interchangeable. In the case of cars, these items are not interchangeable. Each car has a unique identifiable VIN (vehicle identification number), along with its cost. (b) Cost of Description Cost Goods Sold 2014 Red Jeep $15,000 $15,000 2015 Blue Honda 12,000 $12,000 2016 Black Audi 25,000 2013 Grey Toyota 18,000 2013 Green Range Rover 10,000 $80,000 $27,000 (c)
Ending Inventory
$25,000 18,000 10,000 $53,000
Date
Account Titles and Explanation
Debit
Dec. 22
Cash or Accounts Receivable .......... Sales ($16,500 × 2)........................
33,000
Cost of Goods Sold ........................... Merchandise Inventory ................ ($15,000 + $12,000)
27,000
Solutions Manual .
6-28
Credit
33,000
27,000
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-4 (a)
FIFO Date May 1 3 4
14
Purchases Units Cost Total Beginning inventory 400 $4.00 $1,600
Cost of Goods Sold Units Cost Total
300 1,300 $4.10
700
$4.40
$4.00
5,330
3,080
16
100 900
4.00 4.10
18 29
400
4.10
Total
500
4.75
$1,200
400 3,690 4,090 1,640
2,375
2,900 $12,385 Cost of goods available for sale
1,700 $6,930 Cost of goods sold
6-29
Units
Balance Cost
400 100 100 1,300
$4.00 4.00 4.00 4.10
100 1,300 700
4.00 4.10 4.40
400 700
4.10 4.40
700 700 500 1,200
4.40 4.40 4.75
Total
Ending inventory
$1,600 400 400 5,330 5,730 400 5,330 3,080 8,810 1,640 3,080 4,720 3,080 3,080 2,375 $5,455
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-4 (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Cost $12,385 6,930 $ 5,455
Units 2,900 1,700 1,200
(b) Date
Account Titles and Explanation
Debit
May 3
Accounts Receivable ......................... Sales (300 × $7.00).........................
2,100
4
16
Credit
2,100
Cost of Goods Sold ............................ 1,200 Merchandise Inventory (300 × $4.00)
1,200
Merchandise Inventory (1,300 × $4.10) 5,330 Accounts Payable .........................
5,330
Accounts Receivable ......................... Sales (1,000 × $7.00)......................
7,000 7,000
Cost of Goods Sold ............................ Merchandise Inventory ................. [(100 × $4.00) + (900 × $4.10)]
4,090 4,090
(c) Sales ($2,100 + $7,000 + [400 × $7.50]) Cost of goods sold Gross profit
$12,100 6,930 $5,170
Solutions Manual .
Chapter 6
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-5 (a)
Weighted Average Weighted Average Calculations
Date
Purchases Units
Jan. 1 Feb. 15
Cost
Cost of goods sold Total
Cost
Total
Units
Cost
Total
Beginning inventory 1,000
$12.00
$12,000
1,000
$12.00
$12,000
2,000
18.00
36,000
3,000
16.00
48,000
Apr. 24
June 6
Units
Inventory Balance
2,500
3,500
23.00
Totals
7,900
26.00
22.13
44,260
36,400
$164,900
Cost of goods available for sale
500
4,000
2,000
1,400
40,000
80,500
Oct. 18
Dec. 4
16.00
4,500
$84,260 Cost of goods sold
6-31
16.00
22.13
8,000
88,500
2,000
22.12
44,240
3,400
23.72
80,640
3,400
$80,640 Ending inventory
Total
WA Cost
Units
Cost
per unit
A
B
B÷A
1,000
12,000
2,000
36,000
3,000
48,000
3,000 -2,500
48,000 -40,000
500
8,000
500
8,000
3,500
80,500
4,000
88,500
4,000 -2,000
88,500 -44,260
2,000 2,000 1,400 3,400
44,240 44,240 36,400 80,640
$16.00
$16.00
$ 22.13
$22.12
$23.72
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-5 (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Cost $164,900 84,260 $ 80,640
Units 7,900 4,500 3,400
(b) Date
Account Titles and Explanation
Debit
Credit
June 6
Merchandise Inventory (3,500 × $23) 80,500 Accounts Payable .........................
80,500
Accounts Receivable ......................... 66,000 Sales (2,000 × $33).........................
66,000
Cost of Goods Sold ............................ 44,260 Merchandise Inventory (2,000 × $22.13)
44,260
Oct. 18
(c) Sales ([2,500 × $30] + $66,000) Cost of goods sold Gross profit
Solutions Manual .
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$141,000 84,260 $56,740
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-6 (a)
(1) FIFO
Date July 1
Purchases Units Cost Total
Cost of Goods Sold Unit Cost Total s
Units
Beginning inventory 150 $5.00 $750.00
July 12 230
6.75
150 100
$5.00 6.75
750.00 675.00 1,425.00
July 28 490 7.00 3,430.00 Total 870 $5,732.50 250 $1,425 Cost of goods available Cost of goods sold for sale Check: Cost Units Cost of goods available for sale $5,732.50 870 Less: cost of goods sold 1,425.00 250 Ending inventory $4,307.50 620
6-33 .
Chapter 6
Total
150 150 230
$5.00 5.00 6.75
$ 750.00 750.00 1,552.50 2,302.50
130
6.75
877.50
130 490
6.75 7.00
1,552.50
July 20
Solutions Manual
Balance Cost
620
877.50 3,430.00 4,307.50 $4,307.50 Ending inventory
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-6 (Continued) (2) Weighted Average Weighted Average Calculations Date
Purchases Units
01-Jul
Cost of goods sold Cost
Total
Units
Cost
Inventory balance Total
Units
Cost
Total
Beginning inventory
12-Jul
150
$5.00
$750.00
150
$5.00
$750.00
230
6.75
1,552.50
380
6.06
2,302.50
20-Jul
250
28-Jul
490
Total
7.00
870
$6.06
$1,515.00
3,430.00
$5,732.50
Cost of goods available
130
620
250
$1,515.00
Cost of goods sold
6.06
6.80
620
Ending inventory
Check: Units
Cost of goods available for sale
$5,732.50
870
Less: Cost of goods sold
1,515.00
250
Ending Inventory
$4,217.50
620
Solutions Manual
6-34 .
4,217.50
$4,217.50
sale
Cost
787.50
Chapter 6
Total
WA Cost
Units
Cost
per unit
A
B
B÷A
150
$750.00
230
1,552.50
380
2,302.50
380
2,302.50
-250
-1,515.00
130
787.50
130
787.50
490 620
3,430.00 4,217.50
$
6.06
$
6.06
$
6.80
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-6 (Continued) (b)
FIFO—Perpetual
Cost of Goods Sold $1,425.00
Ending Inventory $4,307.50
$1,515.00
$4,217.50
Weighted Average— Perpetual
The FIFO cost formula will produce the higher ending inventory because costs have been rising. Under this formula, the earliest costs are assigned to cost of goods sold, and the latest costs remain in ending inventory. For Dene Company, the ending inventory under FIFO is $4,307.50 compared to $4,217.50 under weighted average cost. (c) The weighted average cost formula will produce the higher cost of goods sold for Dene Company. Under the weighted average cost formula some of the most recent costs are averaged into cost of goods sold, and the earliest costs are averaged into the ending inventory. The cost of goods sold is $1,515.00 for the weighted average compared to $1,425.00 under FIFO.
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-7 (a) (1) FIFO $17,700 8,060 $ 9,640
Sales ($15 × 1,180) Cost of goods sold Gross profit
(2) Weighted Average $17,700 7,787 $ 9,913
Gross profit is different under the two methods because a different flow of goods is assumed. Under the FIFO method, the earliest costs are assigned to cost of goods sold. Since product costs are decreasing, this means that older, higher costs are flowing to cost of goods sold. Under the weighted average method, the older, higher costs are averaged into cost of goods sold with newer, lower costs, producing a lower amount than the FIFO method. (b)
The choice of inventory cost formula does not affect cash flow. It affects the allocation of costs between inventory and cost of goods sold.
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-8 (a) Ending inventory, incorrect Error Ending inventory, correct Cost of goods sold, incorrect Error – beginning inventory 2016 Error – ending inventory 2016 Error – ending inventory 2017 Cost of goods sold, correct
2017 $30,000 $4,000 $34,000
2016 $30,000 $5,500 O $24,500
$170,000 5,500
$175,000 5,500 U
4,000 $160,500
$180,500
(b) In 2016 profit is overstated by $5,500, the amount of the error in ending inventory. This error flows through to owner’s equity in 2016 to produce an overstatement of $5,500. In 2017 both errors have an impact. The net effect is an understatement of profit by $9,500. This is a result of the $5,500 overstatement of the beginning inventory plus $4,000 understatement of ending inventory. Owner’s equity in 2017 would show only an understatement of $4,000. The $5,500 overstatement of 2016 would be offset by the $5,500 understatement in profit caused by the impact on beginning inventory in 2017. (c)
It is important that Glacier Fishing Gear correct these errors because users of the financial statements look at the results for individual years and also look at any trends.
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-9 (a) MARRAKESH COMPANY Income Statement (Partial) December 31 2017 2016 Sales .................................................................. $500,000 $500,000 Cost of goods sold* ........................................... 430,000 390,000 Gross profit ........................................................ $ 70,000 $110,000 * Cost of goods sold (2016) = $410,000 – $20,000 = $390,000 Cost of goods sold (2017) = $410,000 + $20,000 = $430,000 (b) The cumulative effect on total gross profit for the two years is zero, as shown below: 2017 2016 Incorrect gross profits: $90,000 + $90,000 = $180,000 Correct gross profits: $70,000 + $110,000 = 180,000 Difference $ 0
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-10 (a) Clothing Jewellery Greeting cards Stuffed toys Total inventory (b)
Cost $ 665 1,440 47 672 $2,824
NRV $ 570 2,016 94 2,184 $4,864
Cost of Goods Sold .................................. Merchandise Inventory ($2,824 – $2,729)
LCNRV $ 570 1,440 47 672 $2,729 95 95
EXERCISE 6-11 (a) Cameras Nikon Canon Total Lenses Sony Sigma Total Total inventory (b)
(c)
NRV
LCNRV
$10,125 6,800 16,925
$ 9,000 7,225 16,225
$16,225
2,970 4,300 7,270
2,728 4,400 7,128
7,128
$24,195
$23,353
$23,353
Cost of Goods Sold .................................. 842 Merchandise Inventory ($24,195 – $23,353)
842
In the notes to the financial statements, the following information should be reported: (1) the major inventory classifications; (2) the cost determination method; (3) the value of inventory reported at net realizable value ($23,353); (4) the cost of goods sold; and (5) the amount of the writedown to net realizable value ($842).
Solutions Manual .
Cost
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 6-12 (a) Inventory turnover
2017 2.00 times =
2016 1.60 times =
$50,000 $51,200 [($20,000 + $30,000) ÷ 2] [($30,000 + $34,000) ÷ 2] Days sales in inventory Gross profit margin
183 days = 365 ÷ 2.00
228 days = 365 ÷ 1.60
60.0% =
60.0% =
($125,000 – $50,000) $125,000
($128,000 – $51,200) $128,000
(b) Inventory turnover has increased from 1.60 (2016) to 2.00 (2017). As well, days sales in inventory has decreased from 228 days (2016) to 183 days (2017). Both of these ratios indicate that it is taking less time to sell inventory. The gross profit margin has remained at the same level of 60%. The sales volume and cost of goods sold have also remained relatively constant from 2016 to 2017. The improvement in inventory turnover and days sales in inventory seem to come from decreasing the level of merchandise on hand. Whereas the gross profit margin has remained constant, lowering the quantity of merchandise on hand usually lowers carrying costs and increases overall profitability. The increase in inventory turnover (and decrease in days sales in inventory) indicate an improving liquidity.
Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-13 (a) FIFO Ending Inventory: Date
Units
Unit Cost
Total Cost
Apr. 16 Apr. 12
15 10 25
$12 11
$180 110 $290
Cost of Goods Sold: $915 – $290 = $625 Weighted Average Weighted Average unit cost: $915 ÷ 90 units = $10.17 (rounded) per unit Ending Inventory: 25 units × $10.17 per unit = $254 (rounded) Cost of Goods Sold: $915 – $254 = $661 (b) FIFO Check of Cost of Goods Sold: Date
Units
Unit Cost
Total Cost
Apr. 1 Apr. 12
30 35 65
$8 11
$240 385 $625
Weighted Average Check of Cost of Goods Sold: 65 units × $10.17 per unit = $661 (rounded) Solutions Manual .
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-14 (a) Cost of Goods Available for Sale Unit Total Date Units Cost Cost July 1 150 $5.00 $ 750.00 12 230 6.75 1,552.50 28 490 7.00 3,430.00 Total 870 $5,732.50 1.
FIFO Ending Inventory: Date
Units
Unit Cost
June 28 12
490 130 620
$7.00 6.75
Total Cost $3,430.00 877.50 $4,307.50
Cost of Goods Sold: $5,732.50-$4,307.50 = $1,425.00 Check of Cost of Goods Sold:
2.
Date
Units
Unit Cost
Total Cost
June 1 12
150 100 250
$ 5.00 6.75
$ 750 675 $1,425
Weighted Average Weighted Average unit cost: $5,732.50 ÷ 870 units = $6.59 per unit Ending inventory: 620 units x $6.59 per unit = $4,085.80 Cost of goods sold: $$5,732.50 – $4,085.80 = $1,646.70
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Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-14 (Continued) (b) The weighted average cost is not $6.25 because the weighted average cost method uses a weighted average unit cost, not a simple average of unit costs ($5 + $6.75 + $7 = $18.75 ÷ 3 = $6.25). (c) FIFO—Periodic FIFO—Perpetual
Cost of Goods Sold $1,425.00 1,425.00
Ending Inventory $4,307.50 4,307.50
1,646.70
4,085.80
1,515.00
4,217.50
Weighted Average— Periodic Weighted Average— Perpetual
FIFO: The results are identical using either the periodic or the perpetual inventory systems. Weighted Average: Cost of goods sold is $131.70 lower and ending inventory $131.70 higher using a perpetual system. This is because in the perpetual system the higher priced purchases on July 28 are not considered in the last sale; in the periodic system the weighted average is based on all of the purchases and is applied to all of the sales.
Solutions Manual .
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Chapter 6
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Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-15 (a) FIFO Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Oct.1 Beginning inventory 25 $295 $7,375 25 $295 $7,375 Oct. 10 30 300 9,000 25 295 7,375 30 300 9,000 16,375 Oct. 12 25 $295 $7,375 17 300 5,100 13 300 3,900 12,475 Oct. 13 35 305 10,675 13 300 3,900 35 305 10,675 14,575 Oct. 25 13 300 3,900 32 305 9,760 3 305 915 13,660 Oct. 27 20 310 6,200 3 305 915 20 310 6,200 7,115 Total
110
$33,250 87 $26,135 Cost of goods Cost of goods sold available for sale
23 $7,115 Ending inventory
Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Solutions Manual .
6-44
Cost $33,250 26,135 $ 7,115
Units 110 87 23
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-15 (Continued) Weighted Average Date
Oct 1
Purchases
Cost of goods sold
Unit s Cost Total Beginning inventory
Units
25 30
10
$295.00 300.00
42
35
305.00
45
Total
20
$297.73
$12,504.66
10,675.00
25
27
Total
$7,375.00 9,000.00
12
13
Cost
310.00
303.03
13,636.35
6,200.00
110 $33,250.00 Cost of goods available for sale
87 Cost of goods sold
$26,141.01
Cost $33,250.00 26,141.01 $7,108.99
Units 110 87 23
Units
Cost
Total
25 55
$295.00 297.73
$7,375.00 16,375.00
13
297.72
3,870.34
48
303.03
14,545.34
3
303.00
908.99
23
309.09
7,108.99
23 $7,108.99 Ending inventory
Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory
Solutions Manual
6-45 .
Weighted Average Calculations Total WA Cost
Inventory balance
Chapter 6
Units A
Cost B
25 30
$7,375.00 9,000.00
55 55 -42 13
16,375.00 16,375.00 -12,504.66 3,870.34
13 35
3,870.34 10,675.00
48 48 -45 3 3 20 23
14,545.34 14,545.34 -13,636.35 908.99 908.99 6,200.00 7,108.99
per unit B÷A
$297.73
$297.72
$303.03
$303.00
$309.09
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-15 (Continued) (b) Cost of Goods Available for Sale Unit Total Date Units Cost Cost Oct 1 25 $295 $ 7,375 Oct. 10 30 300 9,000 Oct. 13 35 305 10,675 Oct. 27 20 310 6,200 Total 110 $33,250 FIFO Ending Inventory: Date
Units
Unit Cost
Total Cost
Oct. 27 13
20 3 23
$310 305
$6,200 915 $7,115
Cost of Goods Sold: $33,250 – $7,115 = $26,135
Weighted Average Weighted Average cost per unit: $33,250 ÷ 110 units = $302.27 per unit Ending inventory: 23 × $302.27 = $6,952.21 Cost of goods sold: $33,250 – $6,952.21 = $26,297.79
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Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-16 (a)
Perpetual
FIFO Dr. 9,000
Oct. 10 Merchandise Inventory Accounts Payable
Cr. 9,000
12 Cash Sales
18,900
Weighted Average Dr. Cr. 9,000 9,000 18,900
18,900
Cost of Goods Sold Merchandise Inventory
12,475
18,900 12,504.66
12,475
12,504.66
(b) Periodic FIFO Oct. 13 Purchases Accounts Payable 25 Cash Sales
Solutions Manual .
Dr. 10,675
Cr. 10,675
20,700
20,700 20,700
6-47
Weighted Average Dr. Cr. 10,675 10,675
20,700
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*EXERCISE 6-17 Net sales ($90,000 – $1,500 – $700) ............................... Less: Estimated gross profit (40% × $87,800) ............. Estimated cost of goods sold ........................................
$87,800 35,120 $52,680
Beginning inventory ....................................................... Cost of goods purchased ($51,200 – $2,400 – $1,300 + $2,200) ..................... Cost of goods available for sale .................................... Less: Estimated cost of goods sold ............................. Estimated cost of merchandise inventory ....................
$25,000 49,700 74,700 52,680 $22,020
*EXERCISE 6-18 Men’s Shoes
Women’s Shoes
Cost Retail Cost Retail Beginning inventory $ 36,000 $ 58,050 $ 45,000 $ 95,750 Goods purchased 216,000 348,400 315,000 670,200 Goods available for sale $252,000 406,450 $360,000 765,950 Net sales 365,000 635,000 Ending inventory at retail $ 41,450 $130,950 Cost to retail ratio: Estimated cost of ending inventory
Solutions Manual .
$252,000 = 62% $406,450
$360,000 = 47% $765,950
$41,450 × 62% = $25,699
$130,950 × 47% = $61,547
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 6-1A (a) 1.
Include the unsold portion of $510 ($875 – $365) in Carberry’s inventory. Title passes to the buyer on sale.
2.
Exclude the items from Carberry’s inventory. These goods have been sold.
3.
Exclude the items from Carberry’s inventory. These goods are owned by Craft Producers.
4.
Title to the goods does not transfer to the customer until March 3. Include the $950 in ending inventory.
5.
Carberry owns the goods once they are shipped on February 26. Include inventory of $405 ($375 + $30).
6.
Include $630 in inventory. These goods have not yet been sold.
7.
Title of the goods does not transfer to Carberry until March 2. Exclude this amount from the February 28 inventory.
8.
The sale will be recorded on February 26. The goods should be excluded from Carberry’s inventory at the end of February.
(b)
$65,000 +510 +950 +405 +630 $67,495
Solutions Manual .
Original Feb. 28 inventory valuation 1. 4. 5. 6. Revised Feb. 28 inventory valuation
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-1A (Continued) Taking It Further The accountant would consider overlooking item 4. A sale to a customer has taken place but the legal ownership of the merchandise is transferred after year end. Recording this transaction in February will increase profit and increase the accountant’s bonus. Intentionally not correcting this error would be unethical.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-2A
Nov.
Model 8 Corolla Camry 18 Camry Venza Tundra
Cost of goods sold Cost/ Sales price/ Serial # Unit Unit C81362 $20,000 $22,000 G62313 26,000 28,000 G71891 25,000 27,000 X3892 27,000 31,000 F1921 25,000 29,000 $123,000 $137,000
Ending inventory Model Corolla Tundra Camry Venza Venza Tundra Camry
Serial # C63825 F1883 G71811 X4212 X4214 F2182 G72166
Cost/ Unit $15,000 22,000 27,000 28,000 31,000 23,000 30,000 $176,000
Taking It Further: EastPoint Toyota should use the specific identification method because the vehicles are large dollar value items that are specifically identifiable and they are not interchangeable.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-3A (a) Purchases Total Date Units Cost Nov. 1 Beginning inventory 60 $50 $3,000 9 100 46 4,600
15
Cost of Goods Sold Balance Units Cost Total Units Cost Total
60 60
22
150
44
40 120 45
Total
355
42
$3,000 2,760 5,760
6,600
29
30
$50 46
46 44
1,840 5,280 7,120
1,890 $16,090
280
$12,880
60 60 100
$50 $3,000 50 3,000 46 4,600 7,600
40
46
1,840
40 150
46 44
1,840 6,600 8,440
30
44 1,320
30 45
44 42
75
1,320 1,890 3,210 $3,210
Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Solutions Manual .
6-52
Cost $16,090 12,880 $ 3,210
Units 355 280 75
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-3A (Continued) (b) Nov. 22 Merchandise Inventory........................... 6,600 Accounts Payable (150 × $44) ...... 29
Accounts Receivable ............................. 9,600 Sales (160 × $60)............................
9,600
Cost of Goods Sold ................................ 7,120 Merchandise Inventory [(40 × $46) + (120 × $44)] ..............
7,120
(c) Sales ([120 × $66] + $9,600) Cost of goods sold Gross profit (d)
6,600
$17,520 12,880 $ 4,640
The entry to record the adjustment would be: Cost of Goods Sold (2 × $44)............. Merchandise Inventory .................
88 88
Revised gross profit would be: $4,640 – $88 = $4,552 (e) The merchandise inventory on the balance sheet would be overstated by $88, as well as the owner’s capital account by the same amount. On the income statement, the cost of goods sold would be understated by $88. This would lead to an overstatement of gross profit by $88 and of profit by $88. Taking It Further: The FIFO cost formula produces more meaningful inventory amounts for the balance sheet because the units are costed at the most recent purchase prices. These prices approximate replacement cost, which is the most relevant value for decision making. The FIFO cost formula is more likely to approximate actual physical flow because the oldest goods are usually sold first to minimize spoilage and obsolescence.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-4A (a)
Date
Purchases Units
Nov. 1
Cost
Total
Cost of goods sold
Inventory Balance
Units
Unit s
Cost
Total
Cost
Total
Beginning inventory
9
60
$50.00
$3,000.00
60
$50.00
$3,000.00
100
46.00
4,600.00
160
47.50
7,600.00
15
120
22
150
44.00
42.00
40
190
160
45
5,700.00
6,600.00
29
30
47.50
44.74
7,158.40
1,890.00
47.50
44.74
1,900.00
8,500.00
30
44.72
1,341.60
75
43.09
3,231.60
_ Totals
355
$16,090.00
Cost of goods available for sale
Solutions Manual
$12,858.40
75
Cost of goods sold
6-54 .
280
$3,231.60 Ending inventory
Chapter 6
Weighted Average Calculations Total
WA Cost
Units
Cost
per unit
A
B
B÷A
60 100
3,000.00 4,600.00
160
7,600.00
$47.50
160
7,600.00
-120
-5,700.00
40
1,900.00
40 150
1,900.00 6,600.00
190
8,500.00
190 -160
8,500.00 -7,158.40
30
1,341.60
$44.72
30 45 75
1,341.60 1,890.00 3,231.60
$43.09
$47.50
$ 44.74
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-4A (Continued) Check: Cost $16,090.00 12,858.40 $ 3,231.60
Units 355 280 75
Accounts Receivable ............................. 7,920 Sales (120 × $66)............................
7,920
Cost of Goods Sold ................................ 5,700 Merchandise Inventory (120 × $47.50)
5,700
Cost of goods available for sale Less: cost of goods sold Ending inventory (b) Nov. 15
(c) Before making the change to the FIFO cost formula, the company must consider if the FIFO formula would result in more relevant information in the financial statements. Or has the physical flow of inventory changed from average flow to FIFO? Comparison FIFO Ending Cost of Inventory Goods Sold $3,210 $12,880
Weighted Average Ending Cost of Inventory Goods Sold $3,231.60 $12,858.40
If prices continue to fall, the FIFO cost formula will continue to yield lower ending inventory and higher cost of goods sold than the weighted average cost formula.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-4A (Continued) Taking It Further: In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management should also consider their financial reporting objectives. In the final determination; however, management should select the cost formula that will provide the most relevant financial information for decision-making.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-5A (a)
(1) FIFO
Purchases Date Units Cost Total June 1 Beginning inventory 5 $105 $525 4 18 5 $115 $575
30
July 5
5
120
Cost of Goods Sold Units Cost Total
2 $105
$210
3 3
315 345 660
600
12
2 1
25 Total 15 Check:
$1,700
2 13
Cost of goods available for sale Less: cost of goods sold Ending inventory
Solutions Manual .
105 115
6-57
115 120
230 120 350 120 240 $1,460 Cost $1,700 1,460 $240
Balance Units Cost Total 5 $105 3 105 3 105 5 115
$525 315 315 575 890
2
115
230
2 5
115 120
230 600 830
4
120
480
2 2
120
240 $240
Units 15 13 2
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-5A (Continued) (2) Date
Weighted Average
Purchases Units
June 1
Cost
Total
Cost of goods sold
Inventory Balance
Weighted Average Calculations Total
Units
Units
Units
Cost
per unit
A
B
B÷A
Cost
Total
Cost
Total
Beginning inventory 5
$105.00
$525.00
4
2
18
5
115.00
120.00
$105.00
$525.00
3
105.00
315.00
8
6
5
$210.00
575.00
30
July 5
$105.00
5
111.25
667.50
600.00
2
7
111.25
111.25
117.50
890.00
222.50
822.50
12
3
117.50
352.50
4
117.50
470.00
25
2
117.50
235.00
2
117.50
235.00
$1,465.00
2
Totals
15
$1,700.00
13
Cost of goods available for sale
Solutions Manual
Cost of goods sold
6-58 .
$235.00 Ending inventory
Chapter 6
5 -2
$525.00 -210.00
3
315.00
3 5
315.00 575.00
8
890.00
8 -6
890.00 667.50
2
222.50
2
222.50
5
600.00
7
822.50
7 -3
822.50 -352.50
4 4 -2 2
470.00 470.00 235.00 235.00
WA Cost
$105.00
$111.25
$111.25
$117.50
$117.50
$117.50
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-5A (Continued) (a) (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Cost $1,700 1,465 $235
Units 15 13 2
(b)
Sales* ............................................................... Cost of goods sold .......................................... Gross profit......................................................
FIFO
Weighted Average
$3,105 1,460 $1,645
$3,105 1,465 $1,640
* Sales = (2 × $210) + (6 × $235) + (3 × $255) + (2 × $255)
Taking It Further: In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. In the final determination; however, management should select the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-6A (a) Date
Purchases Units
July 1 5
Cost of goods sold
Cost
Total
Units
Totals
Total
Units
Cost
Total
25
$10.00
$250.00
25
$10.00
$250.00
55
9.00
495.00
80
9.31
475.00
70
55
8.00
7
145
125
Cost of goods available for sale
10
451.00
$1,102.70
9.33
8.20
93.30
533.30
10
8.23
82.30
20
7.62
152.30
20
Cost of goods sold
6-60 .
8.20
70.00
$1,255.00
Solutions Manual
$651.70
65
55
10
$9.31
440.00
20
25
Inventory Balance
Beginning inventory
8
15
Cost
Weighted Average Calculations Total
$152.30 Ending inventory
Chapter 6
Units
Cost
WA Cost per unit
A
B
B÷A
25
$250.00
55
495.00
80
745.00
80 -70
745.00 -651.70
10
93.30
10
93.30
55
440.00
65
533.30
65 -55
533.30 -451.00
10
82.30
10
82.30
10
70.00
20
152.30
$9.31
$9.33
$8.20
$8.23
$7.62
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-6A (Continued) (a) (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Cost $1,255.00 1,102.70 $ 152.30
Units 145 125 20
GENERAL JOURNAL Date
Account Titles
July 5
8
15
20
25
Solutions Manual .
Debit
Merchandise Inventory (55 × $9).. Cash ..........................................
Credit
495.00 495.00
Cash (70 × $15) ............................. 1,050.00 Sales.......................................... 1,050.00 Cost of Goods Sold (70 × $9.31) .. Merchandise Inventory ............
651.70
Merchandise Inventory (55 × $8).. Cash .........................................
440.00
Cash (55 × $12) ............................. Sales ........................................
660.00
Cost of Goods Sold (55 × $8.20) .. Merchandise Inventory ...........
451.00
Merchandise Inventory (10 × $7).. Cash .........................................
70.00
6-61
651.70
440.00
660.00
451.00 70.00
Chapter 6
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-6A (Continued) (b) The total cost of ending inventory is $152.30 and consists of 20 units. (c)
Since the weighted average cost per unit of $7.62 is less than net realizable value, no entry is required to adjust the amount to lower of cost and net realizable value. Cost:$152.30 Calculated net realizable value: $160 (20 × $8)
(d) The ending inventory should be valued at $152.30, the lower of cost and net realizable value. The cost of goods sold is $1,102.70. Taking It Further: If Amelia had used FIFO instead of weighted average, the cost of the ending inventory on July 31 would be calculated as follows: (10 units × $7) + (10 units × $8) = $150 The FIFO cost is lower than net realizable value, so no adjustment is required. The inventory will be presented on the balance sheet at its cost basis of $150.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-7A (a)
As reported Impact of Dec.31/2015 inventory overstatement Correct amount
As reported Impact of Dec.31/2015 inventory overstatement Impact of Dec.31/2016 inventory understatement Correct amount
As reported Impact of Dec.31/2016 inventory understatement Correct amount
Solutions Manual .
Year Ended December 31, 2015 Total Owner's Cost of Assets Equity Goods Sold $ 850,000 $ 650,000 $ 500,000
Profit $ 70,000
O 20,000 $ 830,000
U 20,000 $ 520,000
O 20,000 $ 50,000
Year Ended December 31, 2016 Total Owner's Cost of Assets Equity Goods Sold $ 900,000 $ 700,000 $ 550,000
Profit $80,000
O 20,000 $ 630,000
NE
NE
U 32,000 $ 932,000
U 32,000 $ 732,000
O 20,000
O 32,000 U 32,000 $ 498,000 $ 132,000
Year Ended December 31, 2017 Total Owner's Cost of Assets Equity Goods Sold $ 925,000 $ 750,000 $ 550,000
$
NE 925,000
6-63
$
NE 750,000
U 20,000
U 32,000 $ 582,000
Profit $90,000
O 32,000 $ 58,000
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-7A (Continued) (b) The errors in calculating the company’s ending inventory will not have an impact on the company’s cash account. The cash balances will be correctly stated at December 31, 2015, 2016, and 2017. Taking It Further: Part (a) shows that even though 2017 year end inventory and owner’s equity are correct, the income statement shows the impact of the 2016 error on cost of goods sold and profit. In addition, comparative amounts for 2016 and 2015 would show incorrect amounts for inventory, owner’s equity, cost of goods sold, and profit. These errors impact trend and profitability analyses and would need to be corrected.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-8A (a)
(Incorrect) HARRISON COMPANY Income Statement Year Ended July 31 2017 2016 2015 $350,000 $330,000 $310,000 245,000 235,000 225,000 105,000 95,000 85,000 76,000 76,000 76,000 $ 29,000 $ 19,000 $ 9,000
Sales Cost of goods sold Gross profit Operating expenses Profit (Corrected)
HARRISON COMPANY Income Statement Year Ended July 31 2017 2016 2015 $350,000 $330,000 $310,000 240,000** 240,000* 225,000 110,000 90,000 85,000 76,000 76,000 76,000 $ 34,000 $ 14,000 $ 9,000
Sales Cost of goods sold Gross profit Operating expenses Profit
** $240,000 = $245,000 + $10,000 – $15,000 * $240,000 = $235,000 – $10,000 + $15,000
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PROBLEM 6-8A (Continued) (b) The impact of these errors on owner’s equity at July 31, 2017 is zero because the total of the profit over the three-year period is the same with the incorrect statements as it is with the correct statements. However, using the incorrect numbers it appears the company’s profit is increasing at a steady rate over the three-year period when in fact it increased slightly in 2016 and increased substantially in 2017. (c)
Inventory turnover = Cost of goods sold ÷ Weighted average inventory Incorrect 2016: $235,000 ÷ [($45,000 + $35,000) ÷ 2] = 5.88 2017: $245,000 ÷ [($55,000 + $45,000) ÷ 2] = 4.90 Corrected 2016: $240,000 ÷ [($40,000 + $35,000) ÷ 2] = 6.40 2017: $240,000 ÷ [($55,000 + $40,000) ÷ 2] = 5.05
Taking it Further: The incorrect annual profits show an increasing trend of profitability with profits increasing at a steady rate from $9,000 in 2015 to $19,000 in 2016 and then to $29,000 in 2017. The corrected profit also shows an increase in profitability but with a slow rate of increase from 2015 to 2016 and a much sharper increase from 2016 to 2017. Profits increased from $9,000 to $14,000 in 2016 and subsequently increased to $34,000 in 2017. It is not possible to determine if the errors were deliberate or not. Certain factors can indicate a higher likelihood that the errors are deliberate. For example, if management bonuses are tied to trends in profitability or income smoothing, then it may be possible the errors were deliberate.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-9A (a)
(1) Sept. 30 (2) Oct. 31
Tonnes
Total Cost
Total NRV
LCNRV
2,500 2,000
$1,262,500 1,070,000
$1,350,000 1,040,000
$1,262,500 1,040,000
(b) (1) Sept. 30 No entry (2) Oct. 31 Cost of Goods Sold .................... 30,000 Merchandise Inventory ....... (c)
An adjusting entry is required at November 30 because the inventory, on which a previous writedown had been recorded, is still on hand and the net realizable value has partly recovered. If the inventory on hand at October 31 had been sold then an adjusting entry would not be required. The adjustment is: Nov. 30
(d)
30,000
Merchandise Inventory .............. 20,000 Cost of Goods Sold............. [($530 – $520) × 2,000]
20,000
The notes should disclose the cost determination method, the value of inventory reported at net realizable value, the amount of any writedown to net realizable value (for the month of October) and reversals of previous writedowns (for the month of November), including the reason why the writedown was reversed. This type of disclosure would be required if the company prepares monthly financial statements.
Taking It Further: Essentially all companies are required to report inventory at LCNRV on the balance sheet. A few exceptions apply such as inventory items that will be used in production of finished goods where the sales price of the finished good is stable. Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-10A (a) PepsiCo. Inc.
2014
Inventory turnover
$30,884 ($3,143 + $3,409) 2
=
9.43
times
Days sales in inventory
365
=
39
days
Gross profit margin
($66,683 - $30,884) $66,683
=
53.69%
÷
9.43
PepsiCo. Inc.
2013
Inventory turnover
$31,243 ($3,409 + $3,581) 2
=
8.94
times
Days sales in inventory
365
=
41
days
Gross profit margin
($66,415 - $31,243) $66,415
=
52.96%
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÷
8.94
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PROBLEM 6-10A (Continued) (a) (Continued) Coca-Cola Company
2014
Inventory turnover
$17,889 ($3,100 + $3,277) 2
=
5.61
times
Days sales in inventory
365
=
65
days
=
61.11%
÷
5.61
($45,998 $17,889) $45,998
Gross profit margin Coca-Cola Company
2013
Inventory turnover
$18,421 ($3,277 + $3,264) 2
=
5.63
times
Days sales in inventory
365
=
65
days
=
60.68%
Gross profit margin
Solutions Manual .
÷
5.63
($46,854 $18,421) $46,854
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PROBLEM 6-10A (Continued) (b) PepsiCo’s inventory turnover improved and days sales in inventory showed an improvement of 2 days from 2013 to 2014. PepsiCo’s gross profit margin showed a slight improvement from 52.96% to 53.69%. Coca-Cola’s inventory turnover and days sales in inventory are practically identical for 2013 and 2014. Coca-Cola’s gross profit margin also showed a slight improvement from 60.68% to 61.10%. In spite of the positive performance on inventory turnover and gross profit margin, both companies’ profit declined in 2014. It is meaningful to compare these two companies in terms of their ratios because the companies operate in the same industry. They are different in terms of their size and a ratio analysis eliminates this difference and makes for a meaningful comparison. Although PepsiCo has a better inventory turnover than Coca-Cola, it earns substantially less gross profit as a percentage of sales. It would be useful to know if their accounting polices differ in any significant ways.
Taking It Further: In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management selects the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet. Both Pepsi and Coca-Cola have different types of inventories such as ingredients for raw materials, and finished goods such as concentrates, syrups, beverages, and snack and other foods. A cost formula such as weighted average is better suited for products such as concentrates or syrups. Other products such as snack foods, where freshness is important, would be better tracked with a cost method such as FIFO.
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*PROBLEM 6-11A (a)
Cost of Goods Available for Sale Date Jan. 1 Mar. 15 July 20 Sept. 4 Dec. 2 Total
Explanation Units Unit Cost Total Cost Beginning inventory 200 $110 $22,000 Purchase 80 111 8,880 Purchase 60 110 6,600 Purchase 25 108 2,700 Purchase 10 103 1,030 375 $41,210
(b) Number of units sold = 375 units available for sale – 35 units on hand at the end of the year = 340 units sold Sales = 340 units × $290 = $98,600 (c)
(1) FIFO Ending Inventory: Date Units Dec. 2 10 Sep. 4 25 35
Unit Cost $ 103 108
Total Cost $1,030 2,700 $3,730
Cost of goods sold: $41,210 – $3,730 = $37,480 Check of cost of goods sold: Date Units Unit Cost Total Cost Jan. 1 200 $110 $22,000 Mar. 15 80 111 8,880 July 20 60 110 6,600 340* $37,480 *340 = 375 – 35
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*PROBLEM 6-11A (Continued) (c) (Continued) (2) Weighted Average Weighted Average unit cost: $41,210 375 units = $109.89 per unit Ending Inventory: 35 units × $109.89 per unit = $3,846 Cost of Goods Sold: $41,210 – $3,846 = $37,364 (d) Sales revenue (340 × $290) Cost of goods sold Gross profit
FIFO $98,600 37,480 $61,120
Weighted Average $98,600 37,364 $61,236
Taking It Further: The Baby Store should continue to use the weighted average cost method. GAAP requires that a cost determination method be applied consistently from year to year. Changes in cost determination methods are allowed only if the physical flow of inventory has changed and the new method results in more relevant information. The company cannot change methods simply because they wish to achieve a particular outcome for profit. One user, or set of users, should not be considered above other users.
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*PROBLEM 6-12A
(a)
Cost of goods available for sale Date Explanation Units July 1 Beginning inventory 400 10 Purchase 1,300 13 Purchase 700 27 Purchase 600 Total 3,000
Unit Cost Total Cost $3.00 $1,200 3.10 4,030 3.40 2,380 3.75 2,250 $9,860
Number of units of ending inventory = 3,000 units available for sale – 1,700* units sold = 1,300 units of ending inventory. *1,700 units sold = 300 + 1,000 + 400 (b) FIFO — periodic: Ending Inventory: Date Units July 27 600 July 13 700 1,300
Unit Cost $ 3.75 3.40
Total Cost $2,250 2,380 $4,630
Cost of goods sold: $9,860 – $4,630 = $5,230 Sales revenue Cost of goods sold Gross profit
$10,400 * 5,230 $ 5,170
*(300 × $6.00) + (1,000 × $6.00) + (400 × $6.50)
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*PROBLEM 6-12A (Continued) (c) FIFO—Perpetual Purchases Date Units Cost Total July 1 Beginning inventory 400 $3.00 $1,200 2 10 1,300 3.10 4,030
11
Accounting Principles, Seventh Canadian Edition
Cost of Goods Sold Units Cost Total
300
$3.00
$ 900
100 900
3.00 3.10
300 2,790 3,090
Balance Units Cost 400 100 100 1,300
$3.00 3.00 3.00 3.10
$1,200 300 300 4,030 4,330
400
3.10
1,240 1,240 2,380 3,620 1,240 2,380 2,250 5,870 2,380 2,250 4,630 $4,630
13
700
3.40
2,380
400 700
3.10 3.40
27
600
3.75
2,250
400 700 600
3.10 3.40 3.75
700 600
3.40 3.75
28 Total
400
3.10
1,240
3,000 $9,860 1,700 $5,230 1,300 Cost of goods available Cost of goods sold Ending inventory for sale
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Total
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Accounting Principles, Seventh Canadian Edition
*PROBLEM 6-12A (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Cost $9,860 5,230 $4,630
Sales revenue Cost of goods sold Gross profit
Units 3,000 1,700 1,300 $10,400 5,230 $ 5,170
(d) (1) FIFO periodic GENERAL JOURNAL Date
Account Titles
July 10
11
Debit
Purchases ..................................... Cash (1,300 × $3.10) .................
4,030
Cash (1,000 × $6.00)...................... Sales..........................................
6,000
Credit
4,030 6,000
(2) FIFO perpetual GENERAL JOURNAL Date
Account Titles
July 10
11
Debit
Merchandise Inventory ................. Cash (1,300 × $3.10) .................
4,030
Cash (1,000 × $6.00)...................... Sales..........................................
6,000
Cost of Goods Sold ...................... Merchandise Inventory ............ [(100 × $3.00) + (900 × $3.10)]
3,090
Credit
4,030
6,000 3,090
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*PROBLEM 6-12A (Continued) (e)
Comparison:
Ending inventory Cost of goods sold Gross profit
Periodic $4,630 5,230 5,170
Perpetual $4,630 5,230 5,170
The numbers are the same because regardless of the system (perpetual or periodic), the first costs are assigned to the cost of goods sold.
Taking It Further: Companies are required to disclose their inventory cost determination method (FIFO, weighted average, or specific identification), but not whether a periodic or perpetual system is used. This additional level of information does not provide information that is relevant to users of financial information. The differences between FIFO and weighted average, for example, would inform users of how costs flow to the income statement when increases or decreases in costs occur. This pattern is not affected by the choice between periodic and perpetual systems.
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*PROBLEM 6-13A (a) Goods Available for Sale Date Units Unit Cost Total Cost Jan. 5 10 $1,000 $10,000 Jun. 11 10 1,200 12,000 Oct. 18 15 1,300 19,500 Dec. 20 20 1,500 30,000 Total 55 $71,500 Number of units of ending inventory = 55 units available for sale – 50* units sold = 5 units of ending inventory. *50 units sold = 15 + 35 (b) Weighted Average cost per unit: $71,500 ÷ 55 = $1,300 Ending inventory = 5 × $1,300 = $6,500 Cost of goods sold = $71,500 – $6,500 = $65,000
Sales revenue Cost of goods sold Gross profit *(15 × $2,000) + (35 × $2,000)
$100,000 * 65,000 $ 35,000
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*PROBLEM 6-13A (Continued) (c) Weighted Average—perpetual Weighted Average Calculations Date
Purchases Units
Jan. 1
Cost
Total
Cost of goods sold
Inventory Balance
Units
Units
Cost
Total
Cost
Total
Beginning inventory 0
$0
$0
0
$0
$0
5
10
1,000
10,000
10
1,000
10,000
June 11
10
1,200
12,000
20
1,100
22,000
July 4
Oct. 18
Dec. 20
15
15
1,300
20
1,500
30,000
40
$71,500
Cost of goods sold
6-78 .
1,375
50
Cost of goods available for sale
Solutions Manual
5
1,100
20
35
55
16,500
19,500
29
Totals
1,100
48,125
5
$64,625
5
1,250
1,375
1,375
Ending inventory
Chapter 6
Total
WA Cost
Units
Cost
per unit
A
B
B÷A
10 10
10,000 12,000
20
22,000
5,500
20
22,000
25,000
-15 5 5
16,500 5,500 5,500
15
19,500
20
25,000
20 20
25,000 30,000
40 40 -35 5
55,000 55,000 -48,125 6,875
55,000
6,875
$6,875
$1,100
$1,100
$1,250
$1,375
$1,375
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*PROBLEM 6-13A (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Cost $ 71,500 64,625 $ 6,875
Sales revenue Cost of goods sold Gross profit
Units 55 50 5 $100,000 64,625 $ 35,375
(d) (1) Weighted Average periodic GENERAL JOURNAL Date
Account Titles
Dec. 20
29
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Debit
Purchases ..................................... Cash (20 × $1,500) ....................
30,000
Cash (35 × $2,000)......................... Sales..........................................
70,000
6-79
Credit
30,000 70,000
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Accounting Principles, Seventh Canadian Edition
*PROBLEM 6-13A (Continued) (d) (Continued) (2) Weighted Average perpetual GENERAL JOURNAL Date
Account Titles
Dec. 20
29
Debit
Credit
Merchandise Inventory ................. Cash (20 × $1,500) ....................
30,000
Cash (35 × $2,000)......................... Sales..........................................
70,000
Cost of Goods Sold (35 × $1,375) Merchandise Inventory ............
48,125
30,000
70,000 48,125
(e) Comparison: Perpetual $6,875 64,625 35,375
Ending inventory Cost of goods sold Gross profit
Periodic $6,500 65,000 35,000
The numbers are different. Using the perpetual system, the weighted average cost is recalculated after every purchase. Because the prices are rising, this results in a lower cost of goods sold.
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*PROBLEM 6-13A (Continued) Taking It Further: Under the periodic system, the weighted average cost is calculated at the end of the period and involves a weighted average of beginning inventory and all purchases during the period. This weighted average cost is applied to the total volume of items sold throughout the period to calculate cost of goods sold, even though some sales have occurred before some of the purchases. This pattern of cost flows yields a higher cost of goods sold in a period of rising prices and a lower ending inventory than applying a perpetual weighted average method. In a period of increasing prices, the perpetual weighted average method will yield higher ending inventory, but lower cost of goods sold and higher gross profit than the periodic weighted average method. Although applying the perpetual weighted average method yields a higher profit in a period of rising prices, this does not represent a real benefit in most circumstances. The differences in the information that is available to manage inventory under the perpetual system, the cost of implementing a perpetual system, and the type of inventory involved will usually outweigh the differences caused by the flow of costs to the income statement.
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*PROBLEM 6-14A November Net sales ($674,000 – $14,000).......................................... $660,000 Cost of goods sold Beginning inventory ................................. $34,050 Purchases................................... $441,190 Less: Purchase returns and allowances ......................... 17,550 Net purchases .............................. 423,640 Add: Freight in ........................ 6,860 Cost of goods purchased ......................... 430,500 Cost of goods available for sale .............. 464,550 Ending inventory....................................... 39,405 Cost of goods sold........................................................ 425,145 Gross profit........................................................................ $234,855 Gross profit margin = $234,855 = 35.6% $660,000 December Net sales ($965,390 – $26,600) ....................................... $938,790 Less: Estimated gross profit (35.6% × $938,790) .......... 334,209 Estimated cost of goods sold ........................................ $604,581 Beginning inventory........................................................ $ 39,405 Purchases ........................................................ $621,660 Less: Purchase returns and allowances ................................ 22,575 Net purchases ................................................. 599,085 Freight in.......................................................... 12,300 Cost of goods purchased ............................................... 611,385 Cost of goods available for sale..................................... 650,790 Less: Estimated cost of goods sold .............................. 604,581 Estimated inventory lost in fire ...................................... $ 46,209
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*PROBLEM 6-14A (Continued) Taking It Further: The gross profit method is based on the assumption that the gross profit ratio remains constant from November to December. The gross profit ratio will be affected by merchandising policies or market conditions. In addition, the gross profit ratio may be affected by the product mix included in the sales amount. This method is more accurate when applied to a department or product line, rather than to operations as a whole.
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*PROBLEM 6-15A Women’s Shoes Men’s Shoes Cost Retail Cost Retail Beginning inventory $ 276,000 $424,000 $ 191,000 $ 323,000 Purchases 1,181,000 1,801,000 1,046,000 1,772,000 Purchase returns (24,600) (37,000) (21,900) (36,400) Freight in 6,000 7,200 Goods available for sale$1,438,400 2,188,000 $1,222,300 2,058,600 Net sales (1,798,000) (1,626,000) Ending inventory at retail $ 390,000 $ 432,600 Cost-to-retail ratio: Women’s Shoes—$1,438,400 ÷ $2,188,000 = 65.7% Men’s Shoes—$1,222,300 ÷ $2,058,600 = 59.4% Estimated ending inventory at cost: $390,000 × 65.7% = $256,230—Women’s Shoes $432,600 × 59.4% = $256,964—Men’s Shoes
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*PROBLEM 6-15A (Continued) Taking It Further: Women’s Shoes—$381,250 × 65.7% =
$250,481 256,230 $ 5,749
per count estimated loss at cost
Loss at retail = $390,000 – $381,250 = $8,750 Men’s Shoes—$426,100 × 59.4% =
$253,103 256,964 $ 3,861
per count estimated loss at cost
Loss at retail = $432,600 – $426,100 = $6,500
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PROBLEM 6-1B (a) 1. The unsold portion of these goods $510 ($875 – $365) is owned by Carberry Company, not Morden Company and should not be included in Morden Company’s count. Therefore, no adjustment is required because it was correct to not include them. 2. $750 should be included in inventory as the goods were shipped FOB shipping point on February 27. Title passes to Morden on February 27, the date of shipping. 3. The goods should not be included in inventory as they were shipped FOB shipping point on February 26. Title to the goods transfers to the customer on February 26, the date of shipping. Since these items were not on the premises, they were not counted in inventory. No correction is required. 4. 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. Since these items were not on the premises, they were not counted in the ending inventory valuation. No correction is required. 5. The sale will be recorded on March 2. The goods should be included in inventory at the end of February at their cost of $360. Since they were in the shipping department, they were not included in the inventory count. 6. The damaged goods should not be included in inventory because they are not saleable and have no value. Therefore, no adjustment is required because it was correct not to include them.
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PROBLEM 6-1B (Continued) (a) (Continued) 7. As these items have been sold, they should be excluded from Morden’s inventory. Therefore, no adjustment is required because it was correct to not include them. 8. Include $620 in inventory. These goods have not yet been sold.
(b)
$56,000 +750 +360 +620 $57,730
Original Feb. 28 inventory valuation 2. 5. 8. Revised Feb. 28 inventory valuation
Taking It Further The owner might tell the accountant not to correct item 8. This transaction relates to the timing of when inventory is transferred to cost of goods sold. Not correcting this item would cause a discrepancy between the inventory records and the count and trigger an adjusting entry. Since the items are not yet sold to customers, no sale would be recorded in the same accounting period as the charge to cost of goods sold. This would decrease gross profit and minimize income taxes. This would; however, cause the business to pay more taxes in the following year when the merchandise is sold and the sale is recorded on the income statement. The sale would have no offsetting cost of goods sold and the full sales price would be taxable, rather than the gross profit. The owner might consider telling the accountant not to correct item 5 as well if the sale is not recorded in the February year end. Recording the sale in the same period as the cost of goods sold increases gross profit and increases the income taxes. Intentionally not correcting these items is unethical behaviour for the owner and the accountant.
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PROBLEM 6-2B Cost of Goods Sold Cost/ Sales Supplier Serial # Unit price/ Unit July 10 Civic SZ5828 $26,600 $29,800 13 Fit
Ending Inventory Supplier Accord
Serial # ST8411
Cost/ Unit $27,600
YH4418
26,300
28,900
Fit
YH5632
26,600
Accord
ST0944
27,200
28,700
Civic
SZ6148
26,600
Civic
SZ5824
26,700
29,850
27 Civic
SZ6132
26,800
28,800
Accord
ST0815
26,200
27,000
Fit
YH6318
26,500
29,500
$186,300
$202,550
$80,800
Taking It Further: EastPoint Honda should use the specific identification method because it sells items that are specifically identifiable and not interchangeable.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-3B (a) Weighted Average Calculations Date
Purchases Units
June 1
Cost
Total
Cost of goods sold
Inventory Balance
Units
Units
Cost
Total
Cost
Total
Beginning inventory
4
20
$50.00
$1,000.00
20
$50.00
$1,000.00
85
55.00
4,675.00
105
54.05
5,675.00
10
90
18
35
58.00
Totals
155
60.00
$8,605.00
Solutions Manual
120
1,704.30
$6,568.80
Cost of goods sold
6-89 .
56.81
900.00
Cost of goods available for sale
15
50
30
15
$4,864.50
2,030.00
25
28
$54.05
54.03
56.81
810.50
2,840.50
20
56.81
1,136.20
35
58.18
2,036.20
35 Ending inventory
Chapter 6
$2,036.20
Total
WA Cost
Units
Cost
per unit
A
B
B÷A
20
$1,000.00
85
4,675.00
105
5,675.00
105 90
5,675.00 4,864.50
15
810.50
15
810.50
35
2,030.00
50
2,840.50
50 -30
2,840.50 -1,704.30
20 20 15 35
1,136.20 1,136.20 900.00 2,036.20
$54.05
$54.03
$ 56.81
$56.81
$58.18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-3B (Continued) Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
Cost $8,605.00 6,568.80 $2,036.20
Units 155 120 35
(b) June 10 Accounts Receivable ......................... 8,100.00 Sales (90 × $90) ............................. 8,100.00 Cost of Goods Sold ............................ 4,864.50 Merchandise Inventory (90 × $54.05) 4,864.50 18
(c)
Merchandise Inventory....................... 2,030.00 Accounts Payable (35 × $58) ........ 2,030.00
The entry to record the adjustment would be: Cost of Goods Sold ($58.18 × 3) .......... 174.54 Merchandise Inventory .................
174.54
(d) The merchandise inventory on the balance sheet would be overstated by $174.54, as well as the owner’s capital account by the same amount. On the income statement, the cost of goods sold would be understated by $174.54. This would lead to an overstatement of gross profit by $174.54 and of profit by $174.54. Taking It Further: The weighted average cost formula produces the more meaningful profit because weighted average costs are matched against current revenues (sales).
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PROBLEM 6-4B (a) Purchases Cost of Goods Sold Balance Units Cost Total Units Cost Total Units Cost Total
Date June 1 Beginning inventory
4
20
$50 $1,000
85
55
20 $50 $1,000 20 50 1,000 85 55 4,675 5,675
4,675 20 70
10
18
35
58
2,030 15 15
25 28 30
15 155
60
$50 $1,000 55 3,850 4,850
55 58
825 870 1,695
900 $8,605
120
$6,545
15
55
825
15 35
55 58
825 2,030 2,855
20
58 1,160
20 15
58 60
35
Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
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Cost $8,605 6,545 $2,060
Units 155 120 35
Chapter 6
1,160 900 2,060 $2,060
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-4B (Continued) (b) June 25 Accounts Receivable ......................... Sales (30 × $95) .............................
2,850
Cost of Goods Sold ............................ Merchandise Inventory ................. ([15 × $55] + [15 × $58])
1,695
2,850
1,695
(c) Comparison FIFO Ending Cost of Inventory Goods Sold $2,060 $6,545
Weighted Average Ending Cost of Inventory Goods Sold $2,036.20 $6,568.80
If prices continue to rise, the FIFO cost formula will continue to yield higher ending inventory and lower cost of goods sold than the weighted average cost formula.
Taking It Further: Before making the change to the weighted average cost formula, the company must consider if the weighted average formula would result in more relevant information in the financial statements. For example, has the physical flow of inventory changed from FIFO to weighted average? In selecting a cost formula, management should consider their circumstances—the type of inventory and the flow of costs throughout the period. Management should also consider their financial reporting objectives. In the final determination; however, management should select the cost formula that will provide the most relevant financial information for decision-making.
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PROBLEM 6-5B (a)
(1) FIFO
Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Feb. 1 Beginning inventory 36 $21 $756 36 $21 $756 7 18 $21 $ 378 18 21 378 23 50 20 1,000 18 21 378 50 20 1,000 1,378 26 18 21 378 18 20 360 32 20 640 1,018 Mar. 10 24 19 456 18 20 360 24 19 456 816 23 18 20 360 10 19 190 14 19 266 626 110 $2,212 100 $2,022 10 $190 Cost of goods available for sale Cost of goods sold Ending inventory Check: Cost of goods available for sale Less: cost of goods sold Ending inventory
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Cost $2,212 2,022 $ 190
Units 110 100 10
Chapter 6
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-5B (Continued) (2) Weighted Average
Date
Purchases Units
Feb. 1
Cost
Total
$21.00
Units
Units
Cost
per unit
A
B
B÷A
18
50
20.00
Cost
Total
50
24
19.00
Cost
Total
$2,212.00
Cost of goods available for sale
6-94 .
20.26
1,013.00
36
$21.00
$756.00
18
21.00
378.00
68
20.26
365.00
18
20.28
365.00
42
32
Solutions Manual
$378.00
456.00
23
110
$21.00
1,000.00
26
Totals
Units
$756.00
7
Mar. 10
Inventory Balance
Beginning inventory 36
23
Cost of goods sold
Weighted Average Calculations Total
100
19.55
625.60
$2,016.60
10
10
Cost of goods sold
19.55
19.54
821.00
195.40
$195.40 Ending inventory
Chapter 6
36 -18
$756.00 -378.00
18
378.00
18 50
378.00 1,000.00
68
1,378.00
68
1,378.00
-50
-1,013.00
18
365.00
18 24
365.00 456.00
42
821.00
42 -32
821.00 -625.60
10
195.40
WA Cost
$21.00
$20.26
$20.28
$19.55
$19.54
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-5B (Continued) Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory
Cost $2,212.00 2,016.60 $195.40
Units 110 100 10
(b) Weighted FIFO Average Sales................................................................. Cost of goods sold .......................................... Gross profit......................................................
$3,004 $3,004.00 2,022 2,016.60 982 987.40
* Sales = (18 × $32) + (50 × $30) + (32 × $29) Taking It Further: In selecting a cost formula, Bennett Basketball should consider their circumstances—the type of inventory and the flow of costs throughout the period. In the final determination; however, Bennett Basketball should select the cost formula that best approximates the physical flow of goods or represents recent costs on the balance sheet.
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PROBLEM 6-6B (a) GENERAL JOURNAL Date
Account Titles
Oct. 5 8
15 20
25
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Debit
Merchandise Inventory ............... Cash (110 × $13) .....................
1,430
Cash (140 × $20) .......................... Sales .......................................
2,800
Cost of Goods Sold..................... Merchandise Inventory .......... (60 × $14) + (80 × $13)
1,880
Merchandise Inventory (52 × $12) Cash ........................................
624
Cash (70 × $16) ............................ Sales .......................................
1,120
Cost of Goods Sold..................... Merchandise Inventory .......... (30 × $13) + (40 × $12)
870
Merchandise Inventory (15 × $11) Cash ........................................
165
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Credit
1,430 2,800 1,880
624 1,120 870
165
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Accounting Principles, Seventh Canadian Edition
PROBLEM 6-6B (Continued) (b) Ending Inventory (FIFO): Date Units Unit Cost Oct. 25 15 $ 11 15 12 12 27*
Total Cost $165 144 $309
*27 = 60 + 110 – 140 + 52 – 70 + 15 (c)
Cost: $309 Net realizable value: 27 × $10 = $270 The inventory should be valued at its net realizable value of $270. This is the lower of cost and net realizable value. Cost of Goods Sold ($309 – $270) .... Merchandise Inventory .................
39 39
(d) The cost of goods sold is $2,495: Cost of goods sold per (a)* Plus: write down to NRV ($309 – $270) Cost of goods sold reported on the income statement
$2,750 39 $2,789
*$2,750 = $1,880 + $870
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PROBLEM 6-6B (Continued) Taking It Further: Weighted Average Calculations Date
Purchases Units
Oct. 1
Cost
Total
Cost of goods sold
Inventory Balance
Units
Units
Cost
Total
Cost
Total
Beginning inventory
5
60
$14.00
$840.00
60
$14.00
$840.00
110
13.00
1,430.00
170
13.35
2,270.00
8
140
15
52
12.00
Totals
237
11.00
12.50
875.00
165.00
210
Cost of goods available for sale
$2,744.00 Cost of goods sold
6-98 .
12
27
$3,059.00
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30
82
70
15
1,869.00
624.00
20
25
13.35
13.37
12.50
12.50
11.67
27
401.00
1,025.00
150.00
315.00
$315.00 Ending inventory
Chapter 6
Total
WA Cost
Units
Cost
per unit
A
B
B÷A
60
840.00
110
1,430.00
170
2,270.00
170 -140
2,270.00 -1,869.00
30
401.00
30 52
401.00 624.00
82
1,025.00
82 -70
1,025.00 -875.00
12 12 15 27
150.00 150.00 165.00 315.00
$13.35
$13.37
$12.50
$12.50
$11.67
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 6-6B (Continued) Check: Cost of goods available for sale Less:Cost of goods sold Ending Inventory
Cost $3,059.00 2,744.00 $315.00
Units 237.00 210.00 27.00
The ending inventory cost under the weighted average cost formula is $315. The October 31 balance sheet amount would be $270, the lower of cost and net realizable value. The balance sheet amount is the same under both methods, because net realizable value is lower than cost under both cost formulae.
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PROBLEM 6-7B (a) Year Ended December 31, 2015
As reported
Total Assets $525,000
Owner's Cost of Equity Goods Sold $250,000 $ 300,000
Profit $ 40,000
Impact of Dec. 31/15 Inventory overstatement Correct amount
O 20,000 $505,000
O 20,000 $230,000
U 20,000 $ 320,000
O 20,000 $ 20,000
Year Ended December 31, 2016 Total Owner's Cost of Assets Equity Goods Sold $575,000 $275,000 $335,000
Profit $ 50,000
As reported
Impact of Dec. 31/15 Inventory overstatement
NE
NE
O 20,000
U 20,000
Impact of Dec. 31/16 Inventory understatement Correct amount
U 30,000 $605,000
U 30,000 $305,000
O 30,000 $285,000
U 30,000 $100,000
Year Ended December 31, 2017
As reported
Total Assets $600,000
Owner's Cost of Equity Goods Sold $280,000 $315,000
Profit $ 60,000
Impact of Dec. 31/16 Inventory understatement Correct amount
NE $600,000
NE $280,000
O 30,000 $ 30,000
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U 30,000 $345,000
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PROBLEM 6-7B (Continued) (b) The errors in calculating the company’s ending inventory will not have an impact on the company’s cash account. The cash balances will be correctly stated at December 31, 2015, 2016 and 2017. Taking It Further: Part (a) shows that even though inventory and owner’s equity are correct, the income statement shows the impact of the 2016 error on cost of goods sold and profit. In addition, comparative amounts for 2016 and 2015 would show incorrect amounts for inventory, owner’s equity, cost of goods sold and profit. These errors impact trend and profitability analyses and should be corrected.
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PROBLEM 6-8B (a)
(Incorrect) JAMES COMPANY Income Statement Year Ended July 31 2017 2016 2015 $648,000 $624,000 $600,000 540,000 510,000 480,000 108,000 114,000 120,000 100,000 100,000 100,000 $ 8,000 $14,000 $20,000
Sales Cost of goods sold Gross profit Operating expenses Profit (Corrected)
JAMES COMPANY Income Statement Year Ended July 31 2017 2016 2015 $648,000 $624,000 $600,000 520,000* 500,000** 510,000*** 128,000 124,000 90,000 100,000 100,000 100,000 $ 28,000 $24,000 $(10,000)
Sales Cost of goods sold Gross profit Operating expenses Profit (loss)
* $520,000 = $540,000 – $20,000 ** $500,000 = $510,000 + $20,000 – $30,000 *** $510,000 = $480,000 + $30,000 (b) The combined effect of the errors at July 31, 2017 before correction is nil. The error in 2016 closing inventory is offset by the error in 2017 opening inventory and the error in the 2015 purchases is offset by the error in 2016 purchases. The trend over the three years is completely opposite using the incorrect numbers as compared to the correct numbers. Solutions Manual .
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PROBLEM 6-8B (Continued)
(c)
Inventory turnover ratio = Cost of goods sold ÷ Weighted average inventory Incorrect 2016: $510,000 ÷ [($60,000 + $70,000) ÷ 2] = 7.85 2017: $540,000 ÷ [($40,000 + $60,000) ÷ 2] = 10.80 Corrected 2016: $500,000 ÷ [($70,000 + $40,000) ÷ 2] = 9.09 2017: $520,000 ÷ [($40,000 + $40,000) ÷ 2] = 13.0
Taking it Further: The incorrect annual profits show a decreasing trend of profitability with profits decreasing from $20,000 in 2015 to $14,000 in 2016 and then to $8,000 in 2017. The corrected profit (loss) show an increasing trend in profitability with profits increasing from a loss of $10,000 to profits of $24,000 in 2016 and then to a profit of $28,000 in 2017. It is not possible to determine if the errors were deliberate or not. Certain factors can indicate a higher likelihood that the errors are deliberate. Management bonuses tied to trends in profitabilityor a desire to maintain profitability every year, could encourage deliberate misstatement. In addition, the magnitude of the errors is unlikely not to be noticed by management. If management were deliberately recording the errors it could indicate that they had a motivation to minimize profits for purposes of paying less income tax.
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PROBLEM 6-9B (a) (1) (2)
June 30 July 31
Total Cost $2,520,000 4,216,000
Total NRV $2,925,000 3,813,000
LCNRV $2,520,000 3,813,000
(b) (1) June 30 No entry (2) July 31 Cost of Goods Sold................... 403,000 Merchandise Inventory........ ($4,216,000 – $3,813,000) (c)
403,000
An adjusting entry is required at August 31 because some of the inventory, on which a previous writedown had been recorded, is still on hand and the net realizable value has partly recovered. If the inventory on hand at July 31 had been sold then an adjusting entry would not be required. The adjustment is: Aug. 31
(d)
Merchandise Inventory .............325,000 Cost of Goods Sold ............. [($680 – $615) × 5,000]
325,000
The notes should disclose the cost determination method, the value of inventory reported at net realizable value, the amount of any writedown to net realizable value (for the month of July) and reversals of previous writedowns (for the month of August), including the reason why the writedown was reversed. This type of disclosure would be required if the company prepares monthly financial statements.
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PROBLEM 6-9B (Continued) Taking It Further: Reporting inventory at the LCNRV is important in order to not overstate the value of inventory on the balance sheet. It would be misleading to report inventory, an asset, at an amount higher than what it could be sold for because inventory is held for resale purposes. If assets are overstated, this would mean that expenses are understated which will cause profit and owner’s equity to be overstated.
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PROBLEM 6-10B (a) Home Depot, Inc.
2015
Inventory turnover
$54,222 ($11,079 + $11,057) 2
=
4.90
times
Days sales in inventory
365
=
74
days
Gross profit margin
($83,176 - $54,222) $83,176
=
34.81%
÷
4.90
Home Depot, Inc.
2014
Inventory turnover
$51,422 ($11,057 + $10,710) 2
=
4.72
times
Days sales in inventory
365
=
77
days
Gross profit margin
($78,812 - $51,422) $78,812
=
34.75%
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4.72
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PROBLEM 6-10B (Continued) (a) (Continued) Lowe’s Companies, Inc.
2015
Inventory turnover
$36,665 ($8,911 + $9,127) 2
=
4.07
times
Days sales in inventory
365
4.07
=
90
days
Gross profit margin
($56,223 - $36,665) $56,223
=
34.79%
÷
Lowe’s Companies, Inc.
2014
Inventory turnover
$34,941 ($9,127 + $8,600) 2
=
3.94
times
Days sales in inventory
365
3.94
=
93
days
Gross profit margin
($53,417 - $34,941) $53,417
=
34.59%
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PROBLEM 6-10B (Continued) Both Home Depot’s and Lowe’s inventory turnover improved and days sales in inventory showed an improvement of 3 days from 2014 to 2015. In addition, Home Depot’s and Lowe’s gross profit margins are essentially the same in the two years.
(b)
The inventory turnover improvement helped profit increase for both companies in 2015. It is meaningful to compare these two companies in terms of their ratios because the companies operate in the same industry. They are different in terms of their size and a ratio analysis eliminates this difference and makes for a meaningful comparison. Although Home Depot has a better inventory turnover than Lowe’s, it earns practically identical gross profit as a percentage of sales. It would be useful to know if their accounting polices differ in any significant ways. Taking It Further: In order to use the retail inventory method to value 74% of its inventory, Home Depot has to have demonstrated that the use of this technique does not have a material effect on the ultimate measurement of the cost of inventory shown on the financial statements. Consequently, there is no impact on the comparison between Home Depot and Lowe’s.
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*PROBLEM 6-11B (a)
Cost of Goods Available for Sale Date Jan. 1 Feb. 17 Apr. 12 Jul. 10 Oct. 26 Total
Explanation Units Unit Cost Total Cost Beginning inventory 150 $65 $ 9,750 Purchase 70 65 4,550 Purchase 40 66 2,640 Purchase 30 68 2,040 Purchase 25 70 1,750 315 $20,730
(b) Number of units sold = 315 units available for sale – 20 units on hand at the end of the year = 295 units sold Sales = 295 units × $135 = $39,825 (c)
(1) FIFO Ending Inventory: Date Units Oct. 26 20 20
Unit Cost $70
Total Cost $1,400 $1,400
Cost of goods sold: $20,730 – $1,400 = $19,330 Check of cost of goods sold: Date Units Unit Cost Jan. 1 150 $65 Feb. 17 70 65 Apr. 12 40 66 Jul. 10 30 68 Oct. 26 5 70 295*
Total Cost $ 9,750 4,550 2,640 2,040 350 $19,330
*295 = 315 – 20
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*PROBLEM 6-11B (Continued) (c) (Continued) (2) WEIGHTED AVERAGE Weighted average unit cost: $20,730 315 units = $65.81 per unit Ending Inventory: 20 units × $65.81 per unit = $1,316 Cost of Goods Sold: $20,730 – $1,316 = $19,414 (d)
Sales revenue (295 × $135) Cost of goods sold Gross profit
FIFO $39,825 19,330 $20,495
Weighted Average $39,825 19,414 $20,411
Taking It Further: Big Kids Store should continue to use the FIFO cost formula. GAAP requires that cost determination methods be applied consistently from year to year. Changes in cost determination methods are allowed only if the physical flow of inventory has changed and the new method results in more relevant information. The company cannot change methods simply because they wish to achieve a particular outcome for profit. One user, or set of users, should not be considered above other users.
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*PROBLEM 6-12B (a) Cost of Goods Available for Sale Date Units Unit Cost Total Cost Apr. 1 400 $4.00 $1,600 10 1,300 4.10 5,330 25 1,200 4.50 5,400 27 600 4.75 2,850 Total 3,500 $15,180 Number of units of ending inventory = 3,500 units available for sale – 2,700* units sold = 800 units of ending inventory. *2,700 units sold = 300 + 1,000 + 1,400 (b) Weighted Average cost per unit: $15,180 ÷ 3,500 = $4.34 Ending inventory = 800 × $4.34 = $3,472 Cost of goods sold = $15,180 – $3,472 = $11,708 Sales revenue Cost of goods sold Gross profit
$19,600 * 11,708 $ 7,892
*(300 × $7.00) + (1,000 × $7.00) + (1,400 × $7.50)
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*PROBLEM 6-12B (Continued)
(c) Weighted Average—perpetual Weighted Average Calculations Date
Purchases Units
Apr. 1
400
Cost $4.00
Total
Cost of goods sold
Inventory Balance
Units
Units
300
1,300
4.10
27
600
4.50
4.75
4,090.00
2,850.00
$15,180.00
2,700
4.50
$4.00
$1,600.00
100
4.00
400.00
400
6,300.00
800
$11,590.00
800
Cost of goods sold
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400
2,200.00
Cost of goods available for sale
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Total
1,600
1,400
3,500
4.09
5,400.00
29
Totals
$1,200.00
Cost
1,400
1000
1,200
$4.00
5,330.00
11
25
Total
$1,600.00
2
10
Cost
4.09
4.10
4.40
4.50
4.49
5,730.00
1,640.00
7,040.00
9,890.00
3,590.00
$3,590.00 Ending inventory
Chapter 6
Total
WA Cost
Units
Cost
per unit
400 -300
$1,600.00 -1,200.00
100
400.00
100
400.00
1,300
5,330.00
1,400
5,730.00
1,400 -1,000
5,730.00 -4,090.00
400
1,640.00
$4.10
400 1,200 1,600
1,640.00 5,400.00 7,040.00
$4.40
1,600
7,040.00
600
2,850.00
2,200
9,890.00
$4.50
2,200 -1,400 800
9,890.00 -6,300.00 3,590.00
$4.49
$4.00
$4.09
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
*PROBLEM 6-12B (Continued) Check: Cost $15,180 11,590 $3,590
Cost of goods available for sale Less: Cost of goods sold Ending Inventory Sales revenue Cost of goods sold Gross profit
Units 3,500 2700 800
$19,600 11,590 $ 8,010
(d) (1) Weighted Average periodic GENERAL JOURNAL Date
Account Titles
April 25
Debit
Purchases ...................................... Cash (1,200 × $4.50)..................
29
Credit
5,400 5,400
Cash (1,400 × $7.50) ...................... 10,500 Sales ..........................................
10,500
(d) (2) Weighted Average perpetual GENERAL JOURNAL Date
Account Titles
April 25
29
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Debit
Merchandise Inventory ................. Cash (1,200 × $4.50)..................
Credit
5,400 5,400
Cash (1,400 × $7.50) ...................... 10,500 Sales ..........................................
10,500
Cost of Goods Sold (1,400 × $4.50) 6,300 Merchandise Inventory .............
6,300
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*PROBLEM 6-12B (Continued) (e) Comparison: Perpetual $3,590 11,590 8,010
Ending inventory Cost of goods sold Gross profit
Periodic $3,472 11,708 7,892
The numbers are different. Using the perpetual system, the weighted average cost is recalculated after every purchase. Because the prices are rising this results in a lower cost of goods sold. Taking It Further: Companies are required to disclose their inventory cost determination method (FIFO, weighted average, or specific identification), but not whether a periodic or perpetual system is used. This additional level of information does not provide information that is relevant to users of financial information. The differences between FIFO and weighted average, for example, would inform users of how costs flow to the income statement when increases or decreases in costs occur. This pattern is not affected by the choice between periodic and perpetual systems.
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*PROBLEM 6-13B (a)
Cost of goods available for sale Date Explanation Units Feb. 7 Purchase 20 Apr. 12 Purchase 20 Jul. 18 Purchase 25 Oct. 26 Purchase 40 Total 105
Unit Cost Total Cost $100 $ 2,000 120 2,400 130 3,250 150 6,000 $13,650
Number of units of ending inventory = 105 units available for sale – 85* units sold = 20 units of ending inventory. *85 units sold = 35 + 50 (b) Ending Inventory at Dec. 31: Date Units Unit Cost Oct. 26 20 $150 Total 20
Total Cost $3,000 $3,000
Cost of goods sold: $13,650 – $3,000 = $10,650 Sales revenue Cost of goods sold Gross profit
$12,200 * 10,650 $ 1,550
*(35 × $120) + (50 × $160)
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*PROBLEM 6-13B (Continued) (c) FIFO—Perpetual Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Feb. 1 Beginning inventory 0 $0 $0 0 $0 $0 7 20 100 2,000 20 100 2,000 Apr. 12 20 120 2,400 20 100 2,000 20 120 2,400 4,400 30 20 $100 $2,000 15 120 1,800 5 120 600 3,800 Jul. 18 25 130 3,250 5 120 600 25 130 3,250 3,850 Oct. 26 40 150 6,000 5 120 600 25 130 3,250 40 150 6,000 9,850 Nov. 12 5 120 600 25 130 3,250 20 150 3,000 20 150 3,000 6,850 Total 105 $13,650 85 $10,650 20 $3,000 Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory Sales revenue Cost of goods sold Gross profit
Cost $13,650 10,650 $3,000
Units 105 85 20
$12,200 10,650 $ 1,550
Sales revenue is 35 x $120 + 50 x $160 = $12,200
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*PROBLEM 6-13B (Continued) (d) (1) FIFO periodic GENERAL JOURNAL Date
Account Titles
Apr. 12
30
Debit
Credit
Purchases ...................................... Accounts Payable (20 × $120)..
2,400
Accounts Receivable (35 × $120) . Sales ..........................................
4,200
2,400 4,200
(2) FIFO perpetual GENERAL JOURNAL Date
Account Titles
Apr. 12
30
Debit
Credit
Merchandise Inventory ................. Accounts Payable (20 × $120)..
2,400
Accounts Receivable (35 × $120) . Sales ..........................................
4,200
Cost of Goods Sold ....................... Merchandise Inventory ............. [(20 × $100) + (15 × $120)]
3,800
2,400
4,200
3,800
(e) Comparison: Perpetual $3,000 10,650 1,550
Ending inventory Cost of goods sold Gross profit
Periodic $3,000 10,650 1,550
The numbers are the same because regardless of the system (perpetual or periodic), the first costs are assigned to the cost of goods sold.
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*PROBLEM 6-13B (Continued) Taking It Further: When using FIFO, the periodic and perpetual systems produce the same results. The benefits from using perpetual versus periodic will depend on the differences in the information that is available to manage inventory under the perpetual system versus the cost of implementing a perpetual system. This also depends on the type of inventory involved.
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*PROBLEM 6-14B February Net sales ($310,000 – $7,000) ............................................ $303,000 Cost of goods sold Beginning inventory ............................. $ 18,500 Net purchases ($204,000 – $5,300)............... $198,700 Add: Freight in ........................ 4,000 Cost of goods purchased ..................... 202,700 Cost of goods available for sale .......... 221,200 Less: Ending inventory ........................ 26,200 Cost of goods sold..................................................... 195,000 Gross profit ........................................................................ $108,000 Gross profit margin = $108,000 = 35.6% $303,000 March Net sales ($293,500 – $6,800) ......................................... Less: Estimated gross profit (35.6% × $286,700) ......... Estimated cost of goods sold ........................................
$286,700 102,065 $184,635
Beginning inventory ....................................................... $ 26,200 Net Purchases ($197,000 – $4,940) .................. $192,060 Add: Freight in .................................................. 3,940 196,000 Cost of goods purchased............................................... Cost of goods available for sale .................................... 222,200 Less: Estimated cost of goods sold .............................. 184,635 Estimated total cost of ending inventory ...................... 37,565 Less: Inventory not lost (20% × $37,565) ...................... 7,513 Estimated inventory lost in fire (80% × $37,565) .......... $ 30,052
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*PROBLEM 6-14B (Continued) Taking It Further: The gross profit method is based on the assumption that the gross profit ratio remains constant from February to March. The gross profit ratio can be affected by merchandising policies or market conditions. In addition, the gross profit ratio may be affected by the product mix included in the sales amount. This method is more accurate when applied to a department or product line, rather than to operations as a whole.
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*PROBLEM 6-15B
Clothing Jewellery Cost Retail Cost Retail Beginning inventory $ 55,600 $ 98,000 $ 34,000 $ 54,000 Purchases 775,000 1,445,000 565,000 923,000 Purchase returns (41,000) (71,500) (17,200) (25,700) Freight in 8,900 6,700 Goods avail. for sale $798,500 1,471,500 $588,500 951,300 Net sales (1,268,000) (839,600) Ending inventory at retail $ 203,500 $ 111,700 Cost-to-retail ratio: Clothing—$798,500 ÷ $1,471,500 = 54.3% Jewellery—$588,500 ÷ $951,300 = 61.9% Estimated ending inventory at cost: $203,500 × 54.3% = $110,501—Clothing $111,700 × 61.9% = $69,142—Jewellery
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*PROBLEM 6-15B (Continued) Taking It Further: Clothing—$100,750 × 54.3% =
$54,707 per count 110,501 estimated $ 55,794 loss at cost
Loss at retail = $203,500 – $100,750 = $102,750 Jewellery—$40,300 × 61.9% =
$24,946 per count 69,142 estimated $ 44,196 loss at cost
Loss at retail = $111,700 – $40,300 = $71,400
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Accounting Principles, Seventh Canadian Edition
BYP6-1 FINANCIAL REPORTING PROBLEM (a)
Inventories are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price determined on an item by item basis less estimated selling costs.
(b) Hudson’s Bay Company uses the weighted average cost formula to determine cost with the exception of inventories for Saks. Saks costs their inventory using the retail inventory method that approximates cost. (c) The specific identification method would not be appropriate. Most of the goods sold by Hudson’s Bay Company are not individually distinguishable. (d) Amounts are reported in millions of Canadian dollars. Inventory as a percentage of current assets 2015: $2,349 ÷ $4,606 = 51.0% 2014: $2,048 ÷ $4,110 = 49.8% Cost of sales as a percentage of total revenue (Sales) 2015: $4,893 ÷ $8,169 = 59.9% 2014: $3,217 ÷ $5,223 = 61.6% Inventory as a percentage of current assets increased slightly from 2014 to 2015 and cost of sales as a percentage of total revenue decreased slightly indicating that gross profit and inventory management have been stable over the last two years.
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BYP 6-1 (Continued) (e) Hudson’s Bay Co Inventory turnover Days sales in inventory
2015 $4,893 ($2,349+$2,048) 2 365
÷
2.2
Hudson’s Bay Co. Inventory turnover Days sales in inventory
=
2.2
times
=
166
days
=
2.1
times
=
174
days
2014 $3,217 ($2,048 + $994) 2 365
÷
2.1
Hudson’s Bay’s inventory management appears to have improved in 2015. The inventory turnover and day’s sales in inventory has remained stable over the past two years, although in 2015 inventory is turning over (being sold or moved) better.
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Accounting Principles, Seventh Canadian Edition
BYP6-2 INTERPRETING FINANCIAL STATEMENTS (a) Inventory Turnover
Days Sales in Inventory 365 2015 $503,059 = 155 days ($208,395 + $218,979) ÷ 2 2.35 times = 2.35 times 2014
$493,955 ($218,979 + $216,533) ÷ 2 = 2.27 times
365
= 161 days
2.27 times
The ratios have improved. This means that the inventory is being sold more quickly in 2015 than in 2014. (b)
Indigo applies the lower of cost and net realizable value rule. The amount of inventory write-downs as a result of net realizable value being lower than cost was $9.4 million in fiscal 2015. At March 28, 2015 there was $1.8 million of inventory on hand that had net realizable value equal to cost.
(c)
Amazon.com Inc. would have a better balance sheet valuation because FIFO results in an ending inventory value that approximates replacement cost. This will cause difficulties in comparing the two companies because it is impossible to know what the inventory valuation of Amazon.com would have been had it used moving weighted average. However, if inventory costs are relatively stable, both inventory methods would yield similar results.
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Accounting Principles, Seventh Canadian Edition
BYP6-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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Accounting Principles, Seventh Canadian Edition
BYP6-4 COMMUNICATION ACTIVITY
Subject:
2016 Ending Inventory Error
From:
controller.small toys@hotmail.com
Sent:
February 10, 2018
To:
Mutahir Kazmi, President
Hello Mr. Kazmi, I wanted to clarify the situation with respect to the ending inventory error of 2016 and its impact on the financial statements of 2016 and 2017. The combined gross profit and profit for 2016 and 2017 are correct. However, the gross profit and profit for each individual year are incorrect. As you know, the 2016 ending inventory was understated by $1 million. This error will cause the 2016 profit to be incorrect because the ending inventory is used to calculate the 2016 cost of goods sold. An understatement of ending inventory results in an overstatement of cost of goods sold. Therefore, gross profit (sales – cost of goods sold) is understated, as is profit. Unless corrected, this error will also affect 2017 profit. The 2016 ending inventory is also the 2017 beginning inventory. Therefore, the 2017 beginning inventory is also understated, which causes an understatement of cost of goods sold. The 2017 gross profit and profit are subsequently overstated. If the error is not corrected, the gross profit and profit for 2016 and 2017 will be incorrect. Although the combined profits will be correct, (because the understatement in 2016 cancels the overstatement in 2017), the profit trend may be misleading. Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
BYP6-5 “ALL ABOUT YOU” ACTIVITY
(a)
Selling on consignment means that the supplier of the inventory (in this case you the student) retains ownership of the merchandise and becomes the consignor. The store (the consignee) sells the merchandise on your behalf but does not own it. The store usually takes a commission as its fee for selling the merchandise and remits the remainder to the consignor.
(b) The advantage for the student is that ownership of the books is retained. If the student changes his/her mind about selling the books, the student still owns them and can take them back. In some arrangements, the consignor may be able to state the price he/she wants to receive for the books. The disadvantage is that the seller (consignor) does not get paid until the books have been sold. (c)
The consignment arrangement may specify various aspects of the transaction to protect both parties. For example: commission to be kept by the seller (consignee); who determines the selling price (in the case of the used textbooks, the second-hand bookstore may be in a better position to determine the likely selling price); how long the goods will be kept, or when the arrangement is terminated; who assumes the risks of loss and damage to merchandise for sale.
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Accounting Principles, Seventh Canadian Edition
BYP6-5 (Continued)
(d)
Your books may be lost or stolen from the store, the seller may not pay you when the books are sold, or you may wait a very long time for the books to sell in the store. You may get substantially less money than you hoped to receive.
(e)
Any textbook’s contents will become out of date and inaccurate at some point. The ability to sell any used textbook is highly dependent on the edition currently in print. If the goal is to recoup money by selling a textbook, then the textbook should be sold as soon as it is no longer needed for the student’s use. Many students keep their accounting textbooks during their studies as a reference tool as they progress to more advanced levels.
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Accounting Principles, Seventh Canadian Edition
BYP6-6 Santé Smoothie Saga
(a)
Natalie has been using the specific identification method to track her inventory of juicers. She has been able to do this because each juicer has a unique serial number. This allows her to match the exact cost of the juicer to the sales revenue when the juicer is sold. But it also allows Natalie to manipulate profit by choosing the specific juicer to sell. To prevent this, Accounting Standards for Private Enterprises (ASPE) and International accounting standards (IFRS) do not allow companies to use specific identification when goods are interchangeable. Instead, Natalie will need to choose either the weighted average cost or FIFO cost formulas. In this situation, I recommend the weighted average cost formula because the juicers are identical. Since she is selling juicers and the inventory items are not subject to spoilage or obsolescence, the FIFO cost formula would not be advantageous.
(b) Natalie has purchased juicers #3, #4, #5, #6, and #7. She has sold juicers #2, #4, and #5 and has returned juicer #6. At the end of August, her ending inventory would consist of juicers #1, #3, and #7 using the specific identification method: Ending Inventory:
Juicer #1 - #12459 Juicer #3 - #49295 Juicer #7 - #72531 Total
$545 550 571 $1,666
Cost of Goods Sold:
Juicer #2 - #23568 Juicer #4 - #56204 Juicer #5 - #62897 Total
$545 550 550 $1,645
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Accounting Principles, Seventh Canadian Edition
BYP6-6 (Continued) (c)
Moving Weighted Average–Perpetual
Date
Purchases Units
July 1 14
Cost of goods sold
Cost
Total
Units
18
Units
Units
Cost
per unit
A
B
B÷A
Cost
Total
2
$545.00
$1,090.00
2
$545.00
$1,090.00
3
550.00
1,650.00
5
548.00
2,740.00
1
2
-1
571.00
571.00
-571.00
$3,311.00
Cost of goods available for sale
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$548.00
4
6
2
6
$548.00
1,142.00
27
Totals
Total
WA Cost
Beginning inventory
19
Aug. 17
Cost
Inventory Balance
Weighted Average Calculations Total
3
552.60
548.00
555.67
2,192.00
3,334.00
5
552.60
2,763.00
1,105.20
3
552.60
1,657.80
$1,653.20
3
Cost of goods sold
Chapter 6
$1,657.80 Ending inventory
2 3
$1,090.00 1,650.00
5
2,740.00
5 -1
2,740.00 -548.00
4
2,192.00
4
2,192.00
2
1,142.00
6
3,334.00
6 -1
3,334.00 -571.00
5 5 -2 3
2,763.00 2,763.00 -1,105.20 1,657.80
$548.00
$548.00
$555.67
$552.60
$552.60
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BYP6-6 (Continued) Check: Cost of goods available for sale Less: Cost of goods sold Ending Inventory
(d)
Cost $3,311.00 1,653.20 $1,657.80
Units 6 3 3
Comparison
Cost of Goods Sold Ending Inventory
From (c) From (b) Moving Specific Weighted Identification Average $1,645.00 $1,653.20 1,666.00 1,657.80
Difference $8.20 8.20
GENERAL JOURNAL Date
Account Titles
Debit
Aug. 31 Cost of Goods Sold ........................... Merchandise Inventory ................
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Credit
8.20 8.20
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
BYP6-6 (Continued) (e) GENERAL JOURNAL Date
Account Titles
July 3
No entry.
Credit
14
Merchandise Inventory ..................... 1,650.00 Accounts Payable......................... 1,650.00
19
Cash ................................................... 1,050.00 Sales ............................................. 1,050.00
19
Cost of Goods Sold .............................. 548.00 Merchandise Inventory.................
Aug. 3
548.00
No entry.
17
Merchandise Inventory ..................... 1,142.00 Accounts Payable......................... 1,142.00
18
Accounts Payable ................................ 571.00 Merchandise Inventory.................
571.00
27
Cash ................................................... 2,100.00 Sales ............................................. 2,100.00
27
Cost of Goods Sold ($552.60 × 2)..... 1,105.20 Merchandise Inventory................. 1,105.20
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Accounting Principles, Seventh Canadian Edition
CHAPTER 7 Internal Control and Cash ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Brief Problems Problems Questions Exercises Exercises Set A Set B
1. Define cash and internal control.
1, 2, 3, 4, 5, 6
2. Apply control activities to cash receipts and cash payments. 3. Describe the operation of a petty cash fund.
1, 2
1, 2, 4
1, 2, 3, 4, 1, 2, 3, 4, 5 5
7, 8, 9, 10, 3, 4, 5, 6 11, 12
2, 3, 4
1, 2, 3, 4, 1, 2, 3, 4, 5 5
13, 14, 15 7, 8
5, 6, 7
4, 5, 6,
4, 5, 6,
4. Describe the control features 16, 17, 18, 9, 10, 11, 8, 9, 10, 6, 7, 8, 9, 6, 7, 8, 9, 19, 20, 21 12, 13, 14, 11, 12, 10, 11, 10, 11, 12 of a bank account and 15, 16, 17, 13, 14, 15 12 prepare a bank reconciliation. 18, 19, 20 5. Report cash on the balance 22, 23 21, 22 16, 17 13 13 sheet.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Description Number 1A Identify internal control activities related to cash payments.
Difficulty Level
Time Allotted (min.)
Moderate
25-35
2A
Identify internal controls weaknesses for cash receipts and cash payments.
Moderate
25-35
3A
Identify internal controls for cash receipts and cash payments and suggest improvements.
Simple
25-35
4A
Record petty cash transactions and identify internal controls.
Simple
25-35
5A
Record debit and bank credit card and petty cash transactions, and identify internal controls.
Moderate
25-35
6A
Record petty cash transactions and identify impact on financial statements.
Moderate
20-30
8A
Prepare back reconciliation and related entries.
Moderate
25-35
9A
Prepare back reconciliation and related entries.
Moderate
25-35
10A
Prepare bank reconciliation and related entries.
Moderate
40-50
11A
Prepare bank reconciliation and related entries.
Moderate
40-50
12A
Prepare bank reconciliation and adjusting entries.
Moderate
30-40
13A
Calculate cash balance and report other items.
Moderate
20-30
1B
Identify internal control weaknesses over cash receipts and suggest improvements. Identify internal control weaknesses over cash receipts and suggest improvements.
Moderate
25-35
Moderate
25-35
3B
Identify internal controls for cash receipts and cash payments.
Simple
25-35
4B
Record petty cash transactions and identify internal controls.
Moderate
25-35
5B
Record petty cash transactions and identify internal controls.
Moderate
20-30
6B
Moderate
20-30
7B
Record petty cash transactions and identify impact on financial statements. Prepare bank reconciliation and related entries.
Moderate
25-35
8B
Prepare bank reconciliation and related entries.
Moderate
40-50
9B
Prepare bank reconciliation and related entries.
Moderate
40-50
2B
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Description Number 10B Prepare bank reconciliation and related entries.
Difficulty Level
Time Allotted (min.)
Complex
40-50
11B
Prepare bank reconciliation and related entries.
Moderate
40-50
12B
Prepare bank reconciliation and adjusting entries.
Moderate
30-40
13B
Calculate cash balance and report other items.
Moderate
20-30
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material 1.
Learning Objective Explain the activities that help achieve internal control.
Knowledge Comprehension Application Q7-1 Q7-2 P7-1A E7-4 Q7-3 Q7-4 P7-2A P7-4A Q7-5 P7-3A P7-5A Q7-6 P7-1B P7-4B BE7-1 P7-2B P7-5B BE7-2 P7-3B E7-1 E7-2
2.
Apply control activities to cash receipts.
Q7-7 Q7-8 Q7-9 Q7-10 Q7-11 Q7-12 Q7-13 BE7-3
3.
Apply control activities to cash payments including petty cash.
BE7-4
4.
Describe the control features of a bank account and prepare a bank reconciliation.
Q7-16 Q7-18 Q7-19 Q7-20 BE7-9 BE7-10
5.
Report cash on the balance sheet.
BE7-4 E7-2 P7-1A P7-2A P7-3A P7-1B P7-2B P7-3B
BE7-5 BE7-6 E7-3 E7-4
P7-4A P7-5A P7-4B P7-5B
Q7-14 Q7-15
BE7-7 BE7-8 E7-5 E7-6 E7-7 P7-4A
P7-5A P7-4B P7-5B P7-6A P7-6B
Q7-17 Q7-21 BE7-11 BE7-12
BE7-13 BE7-14 BE7-15 BE7-16 BE7-17 BE7-18 BE7-19 BE7-20 E7-8 E7-9 E7-10 E7-11 E7-12 E7-13 E7-14 BE7-21 E7-16 E7-17 BYP7-1 BYP7-2 BYP7-3 BYP7-4
E7-15 P7-6A P7-7A P7-8A P7-9A P7-10A P7-11A P7-12A P7-6B P7-7B P7-8B P7-9B P7-10B P7-11B P7-12B P7-13A P7-13B
Q7-22 Q7-23 BE7-22
Broadening Your Perspective
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Analysis
Synthesis Evaluation
Santé Saga BYP7-5
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Cash is cash on hand and in bank accounts. It includes coins, currency, cheques, money orders and travellers cheques. Cash equivalents are short-term highly liquid (easily sold) investments that are not subject to significant changes in value and with maturities of three months or less when purchased. Cash would include cash and coins kept on hand to make change at cash registers and cash equivalents would include a term deposit for 60 days.
2.
Agree. Internal control is the process designed and implemented by management to help an organization achieve (1) reliable financial reporting, (2) effective and efficient operations, and (3) compliance with relevant laws and regulations. Through the implementation of internal control, the efficiency of the operations will be improved.
3.
This is a violation of internal control. An essential control activity is to make specific employees responsible for specific tasks. When all clerks make change out of the same cash register drawer, this is a violation of establishing responsibility. In this case, each sales clerk should have a separate cash register, cash drawer, or password with pre- and post-shift counts.
4.
Independent checks of performance are necessary even if proper segregation of duties is in place. This procedure is used to ensure that the segregation of duties, and other, control procedures are being correctly followed and working effectively. For example, the accounting records are compared with existing assets or with external sources of information. Problems or changes can be addressed immediately to restore the proper controls and ensure the compliance with the business’ policies and procedures.
5.
Documentation procedures provide evidence of the occurrence of transactions and events. Many documents used in an organization require pre-numbering and accounting for the numerical sequence of these documents. An example is the use of pre-numbered cheques used for payments. Checking the numerical sequence of used and recorded prenumbered documents helps to ensure that a transaction is not recorded more than once or not at all.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 6.
A company’s system of internal control can only give reasonable assurance that assets are properly safeguarded and that accounting records are reliable. The concept of reasonable assurance is based on the belief that the cost of control activities should not be more than their expected benefit. Ordinarily, a system of internal control provides reasonable but not absolute, assurance. Absolute assurance would be too costly. The human element is an important factor in a system of internal control. A good system may become ineffective through employee fatigue, carelessness, and indifference. Moreover, internal control may become ineffective as a result of collusion.
7.
Sales using debit cards and bank credit cards are similar in that they are both considered cash transactions to retailers. Banks usually charge the retailer a transaction fee for each debit card transaction and a fee that is a percentage of the credit card sale. In both types of transactions, the retailer’s bank will wait until the end of the day and make a deposit for the full day’s transactions. Fees for bank credit cards are generally higher than debit card fees. Debit cards allow customers to spend only what is in their bank account whereas a bank credit card gives the customer access to money made available by a bank or other financial institution (similar to a short-term loan).
8.
Exact procedures will be different in every company, but the basic principles should be the same. At the end of a day (or shift) the cashier should count the cash in the cash register, record the amount, and turn over the cash and the record of the amount to either a supervisor or the person responsible for making the bank deposit. The person or persons who handle the cash and make the bank deposit should not have access to the cash register tapes or the accounting records. The cash register tapes should be used in creating the journal entries in the accounting records. An independent person who does not handle the cash should make sure that the amount deposited at the bank agrees with the cash register tapes and the accounting records.
9.
Cash registers with scanners are readily visible to the customer. Thus, they prevent the sales clerk from ringing up or scanning in a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the store’s cash register tape is locked into the register for further verification.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 10.
Mail-in receipts in the form of cheques are generally accompanied by a remittance slip. The envelopes should be opened in the presence of two mail clerks. The amount of the remittance slip and the amount of the cheque should be compared to establish any discrepancies. Each cheque should be promptly stamped “For Deposit Only”. The remittance slips are sent to the accounting department for recording and the cheques are sent to the person responsible for making the bank deposits. Persons handling the cheques must not be able to alter the accounting records. An independent person should compare the deposit recorded by the bank with the amount recorded in the accounting records. In a small company, where it is not possible to have the necessary segregation of duties, the owner should be responsible for cash receipts.
11.
Sanjeet is incorrect. Although internal controls for handling electronic funds transfers (EFTs) are different from those for handling cash and cheques, they nevertheless include proper authorization and segregation of duties to ensure an employee cannot divert a customer payment to a personal bank account and then cover it up through fraudulent accounting entries.
12.
Incorrect. Payment by cheque or electronic funds transfer contributes to effective internal control over cash payments. Pre-numbered cheques help to ensure that all payments are accounted for. In addition, the bank provides another record of the cash payments, and safekeeping of the cash. However, effective control is also possible when small payments are made from a petty cash fund.
13.
Wanda could potentially commit a fraud by: (1) shipping merchandise to herself and creating a false sale on account; therefore, the inventory account will balance. She can then omit to record a cash sale, and take the cash from the cash sale and use it to settle the false accounts receivable that was created as a result of the false sale. (2) when invoicing customers, Wanda could charge significantly lower prices for sales to friends. Instructor’s note: These are only two examples. Students may develop other valid examples.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 14.
The three activities that pertain to a petty cash fund and the related internal control principles are: (1) Establishing the fund.
(2) Making payments from the fund.
(3) Replenishing the fund.
* Establishment of responsibility for custody of fund. * Documentation procedures by having the custodian cash the cheque used to establish the fund. * Documentation procedures because the custodian must obtain receipts from cash registers or invoices before the cash is paid out of the petty cash fund. * Segregation of duties because individuals responsible for the fund do not write or sign cheques. * Documentation procedures. Receipts or invoices must be provided in order to justify the payment of the funds. * Independent checks of performance from the internal verification because the request for replenishment must be approved before the cheque is issued.
15.
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. Replenishment usually takes place before the financial statements are prepared.
16.
A company’s internal control is improved with the use of a bank account in the following ways: (a) Physical control and restricted access over cash is more easily maintained through the security and access controls provided by the banking system. (b) The banking system provides a duplicate record of the transactions affecting cash that are recorded in the company accounting records. (c) Endorsements of cheques by the payees provide proof of payment that is invaluable in the case of disputes. (d) Most banks offer overnight deposit facilities that secure cash until the deposits are processed; thereby, discouraging robberies at the company locations and providing for better security for company employees. (e) Fast and efficient updates of cash transactions provide management with real time information that avoid mistakes and clear up inquiries through on-line access to banking activity.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) (f) Based on the company policies, the bank will enforce company policy by allowing only authorized employees to sign cheques or have access to banking information. 17.
The purpose of the bank reconciliation is to establish the accuracy of the amount reported as cash in the accounting records and to provide effective internal control over cash. The employee that is assigned to prepare the bank reconciliation should be someone who has no other responsibilities that relate to cash. If a person had responsibility for handling cash and also prepared the bank reconciliation, they could use the bank reconciliation to hide fraud with cash receipts or cash payments. If the divisions of the duties does not allow this segregation, (handling of cash and record keeping) then the owner of the business should prepare the bank reconciliation.
18.
The four steps are: (1) determine deposits in transit, (2) determine outstanding cheques, (3) discover any errors made, (by the bank or by the business) and (4) trace bank memoranda and other receipts and payments.
19.
(a) An NSF cheque occurs when the cheque writer’s bank balance is less
than the amount of the cheque issued in payment. (b) In a bank reconciliation, a customer’s NSF cheque is deducted from the balance per books. The bank has record of the NSF, but the business does not. (c) An NSF cheque results in an adjusting entry in the company’s books, as a debit to Accounts Receivable and a credit to Cash. 20.
Paul should not rely on on-line banking to give him an accurate balance in his bank account. On-line banking can provide an up-to-date balance but the balance will not be accurate if there are any deposits in transit or outstanding cheques. The balance will also not be accurate if the bank has made an error. Paul might also have made an EFT payment to a supplier and post-dated the payment date to the due date of an invoice. When looking at the balance on-line, he may have lost track of this pending payment that does not yet appear on his bank account. Paul should keep his own records and reconcile his calculation of the bank balance with what the bank has reported. This is the only way to know if there are any deposits in transit, outstanding cheques or bank errors. This is the only way to have accurate information on his bank account balance.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 21.
Jayne should include the monthly interest of $32 in the book section of her bank reconciliation and not the bank section as is being suggested. The bank has correctly reflected this transaction on the bank statement, while the accounting records have not yet been updated for this transaction. The bank has charged Jane $32 in interest and she needs to update the books to capture this. If the interest is not included, Jayne will be unable to reconcile the bank and book balances. Including the amount on the book section will lead to someone else preparing a journal entry to record the transaction in the accounting records.
22.
Disagree. The credit balance in the cash account does not mean there is an error in the account. It is possible for the cash account to have a credit balance to reflect a cash deficit or negative position. This situation can occur assuming the business’ bank allows an overdraft position which is, in effect, a temporary bank loan.
23.
A company may have cash that is not available for general use because it is restricted for a special purpose. If the restricted cash is expected to be used within the next year, the amount should be reported as a current asset. When restricted funds will not be used in that time, they should be reported as a noncurrent asset.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 Cash in bank savings account Cash on hand Chequing account balance Cash
$8,000 850 14,000 $22,850
BRIEF EXERCISE 7-2 The six control activities include: 1.
Establishment of responsibility: This control activity involves assigning a task to one employee and making that employee accountable for the task assigned. An example would be assigning the responsibility to a cashier who is in charge of taking in cash, using a cash register and making change when collecting parking fees.
2.
Segregation of duties: This activity involves assigning task to different individuals to prevent fraud or errors. An example would be to separate the responsibility of handling the cash from the record keeping of the parking fee revenue.
3.
Documentation procedures: This control activity provides evidence of the transactions and events that have taken place. This is particularly important when an employee is handling cash. For Liberty Parking, when parking tickets are issued giving customers parking access, the tickets should be pre-numbered and time and date stamped.
4.
Physical and IT controls: These include mechanical and electronic controls to safeguard (protect) assets and improve the accuracy and reliability of the accounting records. An example for the parking garage would be barriers or gates for entering and exiting the parking lot.
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Chapter 7
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-2 (Continued) 5.
Independent checks of performance: This control involves the verification by an independent person that the control activities are being followed. An example would be to have a supervisor observe how the cashier is handling the collection and recording of the cash using the cash register.
6.
Human resource controls: These controls involve protection against employee fraudulent behaviour. The parking garage should conduct thorough background checks before hiring the parking lot cashier. Back ground checks may include: criminal records and reference checks, verification of credentials and credit checks.
BRIEF EXERCISE 7-3 1. 2. 3. 4. 5. 6.
Human resource controls Physical and IT controls Independent checks of performance Segregation of duties Documentation procedures Establishment of responsibility
BRIEF EXERCISE 7-4 1. 2. 3. 4. 5. 6.
Documentation procedures Physical and IT controls Human resource controls Independent checks of performance Establishment of responsibility Segregation of duties
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Chapter 7
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-5 Sept. 12 Cash .................................................... Debit Card Expense (5 X $0.70) ......... Sales .............................................
496.50 3.50 500.00
BRIEF EXERCISE 7-6 April 16 Cash ........................................................ 12,626 Credit Card Expense ($12,950 × 2.5%) 324 Sales .............................................
12,950
BRIEF EXERCISE 7-7 March 2
Petty Cash ........................................ Cash .............................................
100
March 27 Supplies ........................................... Postage Expense ............................. Repairs Expense .............................. Cash .............................................
20 27 35
100
82
BRIEF EXERCISE 7-8 Nov. 30
Solutions Manual .
Postage Expense ............................. Supplies ............................................ Travel Expense................................. Cash Over and Short ....................... Cash ($100 − $10) ........................
7-13
31 42 16 1 90
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-9 (a)
A cheque is a written order to the bank to pay a specific amount to a specific person. Control benefits of a cheque include: 1) proper support for the payment is provided before the cheque is issued and as subsequent evidence of the payment 2) pre-numbering, which avoids unrecorded transactions 3) dual signatures, to ensure proper authorization of payments.
(b) A bank statement shows a company’s bank transactions and balance. Control benefits of a bank statement: The bank statement is a document prepared by an entity, external to the business and it could highlight unauthorized payments. It is used in the bank reconciliation process, which is a key internal control procedure for the business.
BRIEF EXERCISE 7-10 1. (c) EFT payment made by a customer 2. (d) Bank debit memorandum for service charge 3. (b) Outstanding cheques from the current month 4. (b) Bank error in recording a $1,779 deposit as $1,977 5. (b) Outstanding cheques from the previous month that are still outstanding 6. (e) Outstanding cheques from the previous month that are no longer outstanding 7. (a) Bank error in recording a company cheque made out for $160 as $610 8. (c) Bank credit memorandum for interest revenue 9. (d) Company error in recording a deposit of $160 as $1,600 10. (d) Bank debit memorandum for a customer’s NSF cheque 11. (a) A deposit in transit from the current month 12. (d) Company error in recording a cheque made out for $630 as $360
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-11 (a)
Items that will result in an adjustment to the companies records: 1. EFT payment made by a customer 2. Bank debit memorandum for service charges 8. Bank credit memorandum for interest revenue 9. Company error in recording a deposit of $160 as $1,600 10. Bank debit memorandum for a customer’s NSF cheque 12. Company error in recording cheque made out for $630 as $360
(b) Why the other items do not require an adjustment: 3. Outstanding cheques from the current month need to be deducted from the bank balance to determine the adjusted bank balance. Since the company has already recorded the cheques, the company does not need to record an adjustment. 4. A bank error in recording a $1,779 deposit as $1,977 creates a $198 ($1,779 − $1,977) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment. 5. Outstanding cheques from the previous month that are still outstanding need to be deducted from the bank balance because they are still outstanding. No adjusting entry is required for this. 6. Outstanding cheques from the previous month that are no longer outstanding will not appear on the bank reconciliation. These cheques have now been deducted from both the company’s cash balance and the bank account and so neither balance needs adjusting. 7. A bank error in recording a company cheque made out for $160 as $1,600 creates a $1,440 ($160 − $1,600) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment.
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-11 (Continued) 11. A deposit in transit from the current month will be added to the bank balance to calculate the adjusted bank balance. It has already been recorded by the company so no adjustment is required.
BRIEF EXERCISE 7-12 (a) (b) (c) (d)
Outstanding cheques of $1,200 – Deducted from the unadjusted bank balance. Deposits in transit of $5,250 – Added to the unadjusted bank balance. Debit memorandum for bank service charge of $25.00 – Deducted from the unadjusted cash balance per books. EFT of $1,970 from a customer for goods received – Added to the unadjusted cash balance per books.
BRIEF EXERCISE 7-13 Randolph Electric Bank Reconciliation December 31 Cash balance per bank ................................................... Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: EFT collection on account from customer .......... Less: Service charge ..................................................... Adjusted cash balance per books..................................
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$6,653 5,250 11,903 1,200 $10,703 $8,758 1,970 10,728 25 $10,703
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-14 Dec. 31
31
Cash .................................................. Accounts Receivable ..................
1,970
Bank Charges Expense ................... Cash .............................................
25
1,970 25
BRIEF EXERCISE 7-15 Cash balance per bank ................................................... Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank ....................................
$7,420 1,620 9,040 762 $8,278
BRIEF EXERCISE 7-16 Cash balance per books ................................................. Add: Interest earned ...................................................... Less: Charge for printing company cheques ............... Adjusted cash balance per books..................................
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$9,500 40 9,540 35 $9,505
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-17 Howel Company Bank Reconciliation August 31 Cash balance per bank ................................................... Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: Interest earned ..................................................... Less: NSF cheque .......................................................... Service charge ..................................................... Adjusted cash balance per books..................................
$8,370 3,005 11,375 1,623 $9,752 $10,050 22 10,072 280 40 $9,752
BRIEF EXERCISE 7-18 Aug. 31
31
31
Solutions Manual .
Accounts Receivable ....................... Cash .............................................
280
Bank Charges Expense ................... Cash .............................................
40
Cash .................................................. Interest Revenue..........................
22
7-18
280
40 22
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-19 1.
(a)
The amount of the payment of an account payable has been recorded in the books as $2,270 when the correct amount is $1,270. The reconciling item of $1,000 ($2,270 − $1,270) will appear as an increase to the book cash balance.
(b) March 31 Cash ...................................................... 1,000 Accounts Payable........................ 2.
(a) The amount of the collection on account has been recorded in the books as $2,450 when the correct amount is $4,250. This is a transposition error. The reconciling item of $1,800 ($2,450 − $4,250) will appear as an increase to the book cash balance.
(b) March 31 Cash ...................................................... 1,800 Accounts Receivable .................. 3.
1,000
1,800
(a)
The amount of the deposit was recorded by the bank as $5,750 when the correct amount is $2,720. The reconciling item of $3,030 ($5,750 − $2,720) will appear as a decrease to the bank cash balance.
(b)
No entry needed, as this is a bank error.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-20 1.
(a)
(b) June 30
The amount of the payment of an account payable has been recorded in the books as $2,810 when the correct amount is $1,810. The reconciling item of $1,000 ($2,810 − $1,810) will appear as an increase to the book cash balance.
Cash ...................................................... 1,000 Accounts Payable........................
1,000
2. (a) The amount of the collection on account has been recorded in the books as $2,222 when the correct amount is $3,333. The reconciling item of $1,111 ($2,222 − $3,333) will appear as an increase to the book cash balance. (b) June 30
Cash ...................................................... 1,111 Accounts Receivable ..................
1,111
3. (a) The amount of the incorrect charge for the cheque clearing was recorded by the bank as $825 when no charge should have been recorded. This is a bank error. The reconciling item of $825 will appear as an increase to the bank cash balance. (b)
Solutions Manual .
No entry needed as this is a bank error.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 7-21 Cash and cash equivalents should be reported at $19,750 ($5,500 + $750 + $10,000 + 3,500). The cash refund due from CRA is a receivable. Stale-dated cheques cannot be used, so the corresponding accounts receivable remains outstanding. Postdated cheques are receivables until they can be cashed on their valid date. The Treasury bill is a short-term investment of less than 90 days and may be considered a cash equivalent.
BRIEF EXERCISE 7-22 Current Assets: Dupré Company should report the cash in bank, payroll bank, store cash floats, and petty cash as cash on its balance sheet. The investments with original maturity dates of fewer than 90 days may be grouped with cash as cash and cash equivalents. The short-term investments with maturity dates of 100 to 365 days should be reported as a separate item. Noncurrent Assets: The plant expansion fund cash should be reported as a noncurrent asset, assuming the fund is not expected to be used during the next year.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 7-1 (a) Weakness or Strength 1. No establishment of responsibility over the cash—weakness
(b) Suggested Improvements The employees should use separate cash drawers.
Cash counts not performed independently—weakness
Cash counts should be performed by a supervisor at the end of the shift and the totals compared to the cash register tape.
2.
Improper segregation of duties could result in the misappropriation of cash— weakness
Different individuals should receive cash, record cash receipts and deposit the cash. In a small business this may be impossible; therefore, it is imperative that management take an active role in the operations of the business so to be able to detect any accounting irregularities.
3.
Improper segregation of duties—weakness.
The same individual could omit the documentation of a purchase order, receive a shipment and take the merchandise, all without a trace. Implement segregation of duties to prevent the misappropriation (loss) of assets.
4.
Repair of physical controls—strength.
5.
Internal reviews completed regularly and issues resolved—strength.
6.
Human resources control over employees’ duties including vacations— strength except for the controller position.
Solutions Manual .
Apply the policy of replacing the position during vacations to the controller position.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 7-2 1.
(a) Access to cash is not restricted. Cash is not placed in a secure device until deposited. The locked metal box being used is likely portable and not secure. The control activity that is being violated is the physical and IT control. (b)
2.
The excess cash should be stored in a secure storage device such as a safe with no access possible by the employees.
(a) The responsibility for the cash drawer is not assigned to a single employee. Follow up and control over cash shortages is compromised. The control activity that is being violated is the establishment of responsibilities. (b) If several employees need to share the same cash drawer to ring up sales, each employee should be assigned an access code that is tracked by the cash register for each transaction. Any cash shortages or entry errors can be narrowed down to a particular employee using the access code.
3.
(a) All employees handling cash should be bonded. Failing to do so violates the human resource control. Cash shortages through fraud may not be recoverable from insurance. (b)
4.
Bond all employees handling cash.
(a) Improper segregation of duties has been established leaving the possibility of the misappropriation of company assets by the assistant controller. The control activity violated is the segregation of duties. (b)
Solutions Manual .
Reassign the duties such that anyone having access to cash does not also have access to the accounting records.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 7-2 (Continued) 5.
(a) Destroying the remittance advices and credit card sales receipts weekly exposes the business to the risk of not being able to substantiate a claim against a customer. The control activity violated is the documentation procedures. (b)
Obtain adequate storage space and eliminate the weekly destruction of the documents.
EXERCISE 7-3 Mar. 15 Cash ($8,740 − $54) ................... Debit Card Expense ($1.35 × 40) ............................ Sales ......................................
8,686
(b) June 21 Cash ($1,960 − $78) ................... Credit Card Expense ($1,960 × 4%) ......................... Sales ......................................
1,882
(a)
54 8,740
78 1,960
July 17 No entry (c)
Oct.
7 Accounts Receivable—Ramos . Sales ......................................
Nov. 10 Cash ........................................... Accounts Receivable—Ramos
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550 550 550 550
Chapter 7
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Accounting Principles, Seventh Canadian Edition
EXERCISE 7-4 1.
(a)
Company cheques are not pre-numbered and access to blank cheques is not restricted, leaving the possibility for someone to make an unauthorized payment from the business bank account, which may go undetected. Payment transactions may also remain unrecorded in the accounting records. The control activities that are being violated are the documentation and physical and IT controls.
(b) Obtain pre-numbered cheques and account for their numerical sequence. Store the unused cheques in a secure area. 2.
(a) Improper segregation of duties, because only one employee is signing cheques. (b) Require two employees to sign each cheque. It would be appropriate to have only one person sign the cheques, only if it was the owner.
3.
(a)
Improper segregation of duties, leaving the possibility of the misappropriation of company assets as a result of having supplier paid for goods, which have not been ordered or received. As well, the purchasing agent can direct merchandise to be delivered to a location other than the company’s place of business. The control activities violated are establishment of responsibility and the segregation of duties.
(b)
Reassign the duties such that anyone having access to inventory is not assigned the duty of authorizing payments. As well, purchasing agents should be restricted from having access to the inventory.
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Chapter 7
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Accounting Principles, Seventh Canadian Edition
EXERCISE 7-4 (Continued) 4.
(a)
Improper segregation of duties, leaving the possibility of the misappropriation of company assets through an unsupported payment or a payment that is not a business expense. Duplicate payments can be achieved by failing to stamp the invoice as having been paid. The control activities violated are establishment of responsibility and the segregation of duties.
(b) Reassign the duties such that anyone having signing authority on the bank account does not have record keeping duties or the task of stamping invoices paid. 5.
6.
(a)
The control activities violated is independent checks of performance. The control achieved by verification of the bank reconciliation has failed. The controller prepares and signs all cheques, records all the journal entries and prepares the bank reconciliation which would provide her the opportunity to commit and conceal a fraud.
(b)
Have the owner properly scrutinize and approve the bank reconciliation. Also, consider assigning responsibility for the bank reconciliation to another individual.
(a) The control activity violated is human resource controls. Individuals placed in a position of trust could misappropriate company assets. (b)
Solutions Manual .
Perform thorough background checks.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 7-4 (Continued) 7.
(a) The control activity violated is human resource controls. The purchasing agent may be misappropriating company assets. (b)
Insist that all personnel take scheduled vacation and have their positions staffed during their absence.
EXERCISE 7-5 (a) Feb. 14
(b) Feb. 28
Petty Cash ........................................ Cash .............................................
100
Petty Cash ($175 − $100) ................. Supplies ($10 + $13 + $23) ............... Miscellaneous Expense ................... Merchandise Inventory .................... Freight Out........................................ Cash ($175 − $5) .......................... Cash Over and Short ...................
75 46 7 30 17
100
170 5
EXERCISE 7-6 (a) Sept. 4
(b) Sept. 30
Solutions Manual .
Petty Cash ........................................ Cash .............................................
Merchandise Inventory ($25 + $30 + $40) .......................... Freight Out ($15 + $20) .................... Supplies ............................................ Cash Over and Short ....................... Petty Cash ($200 − $150)............. Cash ($150 − $50) ........................
7-27
200 200
95 35 10 10 50 100
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 728 May
1
June 1
July 1
July 10
Solutions Manual .
Petty Cash ........................................ 150.00 Cash .............................................
150.00
Delivery Expense ............................. Postage Expense ............................. Travel Expense................................. Cash Over and Short ....................... Cash ($150.00 – $4.75).................
31.25 39.00 62.00 13.00 145.25
Delivery Expense ............................. Entertainment Expense ................... Supplies ............................................ Cash ($150.00 – $3.25).................
31.00 71.00 44.75 146.75
Petty Cash ............................................ 50.00 Cash .............................................
50.00
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 729 (a) TINDALL COMPANY Bank Reconciliation September 30, 2017 Cash balance per bank statement.................................. Add: Deposits in transit ................................................ Less: Outstanding cheques .......................................... Adjusted cash balance per bank .................................... Cash balance per books .................................... Add: Error in cheque No. 212: Supplies ......... EFT collection of Accounts Receivable
$5,470 $ 54 78
Less: Bank service charge ............................... $ 22 NSF cheque ............................................. 220 Adjusted cash balance per books.................................. (b)
Sept. 30 Cash ........................................... Supplies ($482 – $428) ......... Accounts Receivable............ 30
Solutions Manual .
Bank Charges Expense ............ Account Receivable .................. Cash.......................................
7-29
$7,100 1,380 8,480 3,120 $5,360
132 5,602 242 $5,360
132 54 78 22 220 242
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 730 (a) Bank Reconciliation January 31 Cash balance per bank statement................ Add: Deposits in transit ..............................
$3,560.20 530.00 4,090.20 730.00 $3,360.20
Less: Outstanding cheques......................... Adjusted cash balance per bank ..................
Cash balance per books ............................... $3,875.20 Less: NSF cheque ........................................ $490.00 Bank service charge .............................. 25.00 515.00 Adjusted cash balance per books ................ $3,360.20
(b) Jan. 31 Accounts Receivable ................ Bank Charges Expense ............ Cash.......................................
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490 25 515
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 7-31 (a) CRANE VIDEO COMPANY Bank Reconciliation July 31 Cash balance per bank statement ................ Add: Deposits in transit ..............................
$7,263 1,300 8,563 591 $7,972
Less: Outstanding cheques......................... Adjusted cash balance per bank .................. Cash balance per books ............................... Add: Collection of note receivable .............. Collection of interest revenue .............
$7,284 $700 36
Less: Bank service charges ($28+ $20) ..... Adjusted cash balance per books ................
(b) July 31 Bank Charges Expense ............ Cash.......................................
48
31 Cash ........................................... Note Receivable .................... Interest Revenue...................
736
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7-31
736 8,020 48 $7,972
48 700 36
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 7-32 (a) BRAD’S BURGER COMPANY Bank Reconciliation July 31 Cash balance per bank statement ................ Add: Bank error ............................................. Deposits in transit ................................
$7,363 $700 2,200
Less: Outstanding cheques......................... Adjusted cash balance per bank .................. Cash balance per books ............................... Add: Collection of note receivable .............. Collection of interest revenue .............
$8,784 $1,250 36
Less: NSF cheque ......................................... Error on cash sales ($32 - $23) ........... Bank service charges ($22 + $20)....... Adjusted cash balance per books ................
350 9 42
(b) July 31 Bank Charges Expense ............ Sales........................................... Accounts Receivable ................ Cash.......................................
42 9 350
31 Cash ........................................... Note Receivable .................... Interest Revenue...................
1,286
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7-32
2,900 10,263 594 $9,669
1,286 10,070 401 $9,669
401 1,250 36
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 7-33 (a)
Deposit in transit on May 31: $1,353
(b) Other adjustments: Interest earned of $32 must be added to the balance per books. EFT deposit of $956 must be added to the balance per books The error in the May 9th deposit must be corrected on the books; therefore the balance per books must increase by $63 ($3,281 − $3,218).
EXERCISE 7-13 (a)
Outstanding cheques on May 31: No. 255 $ 262 No. 261 786 No. 264 680 $1,728
(b) Other adjustments: Decrease balance per books $54 for service charges recorded by bank. Decrease balance per books $450 for error in cheque 260—should be $500 not $50. Decrease balance per books for NSF cheque of $395.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 7-34 1. (a)
The amount of $40 ($2,090 – $2,050) needs to be added to the company cash balance.
(b) July 9
2. (a)
Cash....................................... Account Receivable .......
40 40
The amount of $450 ($1,060 – $610) needs to be added to the company cash balance.
(b) July 14
Cash....................................... Accounts Payable...........
450 450
3. (a) The amount of $270 ($630 – $360) needs to be deducted from the company cash balance. (b) July 16
Supplies................................. Cash ................................
270 270
4. (a) Nothing is recorded on the bank reconciliation. This was a bank error and it was corrected by the bank on July 23. (b) No entry needed as this was a bank error. 5. (a) The amount of $300 ($970 – $670) needs to be added to the company cash balance. (b) July 31
Cash....................................... Accounts Receivable .....
300 300
6. (a) The amount of $200 needs to be added to the bank balance. (b) No entry needed as this was a bank error.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 7-35 (a) CLARESVIEW COMPANY Bank Reconciliation August 31, 2017 Cash balance per bank statement.................................. Add: Error Cheque# 705 ($198 – $189) ... $ 9 Deposits in transit............................... 17,050 Less: Outstanding cheques # 673................................................ $1,490 # 710................................................. 2,550 # 712................................................. 2,480 Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: EFT deposits of Accounts Receivable ...............
$17,100 17,059 34,159
6,520 $27,639 $26,030 2,050 28,080
Less: Bank service charge ....................... $ 25 NSF cheque ..................................... 416 Adjusted cash balance per books..................................
441 $27,639
(b) Aug. 31 Cash ............................................... 2,050 Accounts Receivable............
2,050
31 Bank Charges Expense ............ Account Receivable .................. Cash.......................................
441
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25 416
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 7-36 (a)
Cash and cash equivalents balance June 30, 2017 1. Currency and coin ............................................. 2. Guaranteed investment certificate .................. 3. June cheques..................................................... 5. Royal Bank chequing account.......................... 6. Royal Bank savings account ............................ 9. Cash register floats ........................................... 10. Over-the-counter cash receipts for June 30: Currency and coin......................................... Cheques from customers ............................. Debit card slips ............................................. Bank credit card slips ................................... Total cash and cash equivalents ......................
$ 76 12,900 375 2,360 4,160 330 540 90 550 740 $22,121
(b) 2. Note: The Guaranteed investment certificate in the amount of $12,900 could be reported as a short-term investment on the balance sheet instead of as a cash equivalent. If it was reported as a short-term investment then the balance sheet would show Cash of $9,221. 4. Postdated cheque—Balance sheet (accounts receivable) 7. Prepaid postage in postage meter—Balance sheet (prepaid expense) 8. IOU from company receptionist—Balance sheet (other receivables)
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Accounting Principles, Seventh Canadian Edition
EXERCISE 7-17 (a)
Cash and cash equivalents balance: Cash in bank ........................................... Cash on hand ......................................... Highly liquid investments ...................... Petty cash ............................................... Total cash and cash equivalents...........
$42,000 12,000 34,000 500 $88,500
(b) The “Cash in plant expansion fund” should be reported as part of long-term investments (a noncurrent asset). “Receivables from customers” should be reported as accounts receivable in the current assets. “Stock investments” should also be reported in the current assets.
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 7-1A 1. (a) The same employee is responsible for purchasing and receiving goods as well as matching the purchase order to the receiving report and the supplier’s invoice. This employee also approves the invoice for payment. (b) The following duties should be divided among the staff: (1) Purchasing, (2) Receiving and preparing receiving reports, (3) Matching receiving reports to invoices, and (4) Approving the invoice for payment. The responsibility for the matching of the purchase order with the receiving report and the invoice should be assigned to the assistant controller. 2. (a) The numerical sequence of cheques is not tracked. (b) The numerical sequence of cheques should be tracked. Checking the numerical sequence of used and recorded pre-numbered cheques helps to ensure that a payment is not recorded more than once or not at all. 3. (a) The controller is responsible for stamping the invoice paid. (b) The cheque signer, the owner Stephanie Seegall, should be assigned the responsibility for stamping the invoices paid to prevent reuse. 4. (a) The controller is responsible for preparing all of the cheques. (b) The responsibility for the preparation of the cheques along with the accompanying supporting documents (invoices matched to receiving reports) should be done by the assistant to the controller as stated in item 1 above and the assistant should also check the invoice’s accuracy and pricing.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-1A (Continued) 5. (a) The controller is responsible for the preparation of all of the journal entries. (b) The journal entries should be prepared by the assistant controller and the controller should approve the entries. 6. (a) The assistant controller posts the journal entries. (b) The task of posting approved journal entries should be assigned to the bookkeeper or accountant in charge of entering other business transactions. 7. (a) Pre-signed cheques are left in the safe for the controller to use in the owner’s absence. (b) During the absence of the owner, payments should be postponed until the owner’s return, or signing authority for reduced amounts of payments delegated to the controller. Upon the owners’ return, the cheque duplicates or journals of the cheques signed by the controller should be approved by the owner. 8. (a) Unrecorded cheques are charged to the owner’s drawing account and there currently is no approval of the bank reconciliation. (b) All entries relating to the owner’s account should be approved by the owner. The owner should review and approve the bank reconciliation monthly. Taking It Further: Designing and implementing a strong system of internal control can help employees from being falsely accused of fraud. Any errors in the purchasing and recording of payment transactions could lead to false fraud accusations directed to anyone involved in these activities.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-2A
(a) Weaknesses & (b) Problems 1. No segregation of duties between receiving the cash and admitting students to the lessons. The teachers could admit students for free or charge extra and pocket the difference or report fewer students and pocket the extra money.
Taking It Further: Suggested Improvements The duties of receiving cash and admitting students should be assigned to separate individuals.
2. No segregation of duties in the accounting functions. The general manager could prepare fictitious invoices for payment and it would not be detected.
An independent person should approve the invoices for payment and prepare the bank reconciliations.
3. No segregation of duties. Sales persons are responsible for determining credit policies and they receive a commission based on sales. They could provide credit to a bad credit risk customer in order to receive the commission on the sale.
An independent person should be responsible for providing credit to customers. Alternatively, a policy could be implemented where salespeople are only paid a commission on sales that are collected. This would reduce motivation to make sales to financially weak customers.
4. No establishment of responsibility. No individual is solely responsible for the accounting software. All programmers have access to the accounting software which could provide unauthorized changes to the accounting records.
Access to the accounting records should be restricted and protected with password or biometric restrictions.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-2A (Continued) 5. Documentation is lacking. Receiving and purchase orders have been eliminated which could result in unauthorized purchases and/or receipts or fictitious invoices being paid, since no support is required. An employee could set up a bank account and collect the payment.
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Receiving reports and purchase orders should be reinstated.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-3A Roger has created a situation that leaves many opportunities for undetected fraud. Here is a list of some of the deficiencies in internal control. You may find others. 1.
Establishment of responsibility (a) Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. (b) Roger should have had the key and dispersed funds when necessary for purchases.
2.
Segregation of duties (a) Freda Stevens counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Freda to take some of the money and deposit the rest since there was no external check on her work. (b) Roger should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Freda deposit the funds. (a) Sara Billings was collecting tickets and receiving cash for additional tickets sold. (b) There should have been one person selling tickets at the door and a second person collecting tickets.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-3A (Continued) 3.
Documentation procedures (a) The tickets were unnumbered. (b) By numbering the tickets, the students could have been held more accountable for the tickets. (a) No record was kept of which students took tickets to sell or how many they took. (b) 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 been sold at the door on the day of the dance.) (a) There was no control over unsold tickets. This deficiency made it possible for students to sell tickets, keep the cash, and tell Roger that they had disposed of the unsold tickets. (b) Students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Roger. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned. (a) Instead of receipts, students simply wrote notes saying how they used the funds. (b) A requirement to provide a valid receipt should have been put in place. (a) A receipt was not received from Obnoxious Al. Without a receipt, there is no way to verify how much Obnoxious Al was actually paid. For example, it is possible that he was only paid $100 and that Roger took the rest. (b) If the payment has to be done in cash, Obnoxious Al should be required to sign that the receipt, confirming that he has received the payment.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-3A (Continued) 4.
Physical and IT controls
(a) The tickets were left in an unlocked box on his desk. (b) Roger should have assigned control of the tickets to one individual, and kept the tickets in a locked box over which that student alone had control. 5. Independent checks of performance (a) No verification of the number of students attending the event was established. (b) A count of the number of people attending the event should have taken place when admission was granted. This total could then have been compared to the sales proceeds to determine that all ticket sales have been properly accounted for and cash obtained. 6.
Human resource controls None apply in this case
Taking It Further: Designing and implementing a strong system of internal control can help protect students and their teacher from being falsely accused of fraud. The instincts of Principal Skinner are correct, when it didn’t appear reasonable to him that only $430 in cash would be left from an event generating roughly $2,000 in sales. His suspicions could lead to false fraud accusations directed to anyone involved in organizing the event. Had proof been required to explain this unreasonable result, it would have been very difficult for Roger or the students to defend themselves. Bad feelings between the students and the teacher could develop from suspicions concerning who had perpetrated the fraud. Roger and the SRC students had done the work on a volunteer basis and for a good cause. If they feel they have been suspected of fraud, they will likely not volunteer in the future.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-4A (a) Feb. 1 15
28
Mar. 15
16 31
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Petty Cash ...................................... Cash ........................................
200.00
Freight-Out ..................................... Postage Expense ........................... Entertainment Expense ................. Cash Over and Short ..................... Cash ($200.00 - $5.00) ............
82.00 72.50 36.60 3.90
Freight-Out ..................................... Contribution Expense.................... Repairs Expense ............................ Supplies .......................................... Cash Over and Short ..................... Cash ($200.00 – $48.00) .........
42.50 25.00 41.90 45.00
Freight-Out ..................................... Entertainment Expense ................. Postage Expense ........................... Supplies .......................................... Cash Over and Short.............. Cash ($200.00 – $13.00) .........
37.60 53.75 33.25 67.00
Petty Cash ...................................... Cash ........................................
50.00
Postage Expense ........................... Travel Expense............................... Freight-Out ..................................... Entertainment Expense ................. Cash Over and Short ..................... Cash ($250.00 – $16.00) .........
40.00 75.60 47.10 68.50 2.80
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200.00
195.00
2.40 152.00
4.60 187.00 50.00
234.00
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 7-4A (Continued) (b) 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. Taking It Further: This could be a problem for the company as Su Ma may start taking longer and longer to repay the cash and may eventually end up stealing cash from the petty cash fund for personal expenses. Another problem is that there may not be cash in the petty cash fund when needed to pay for expenses, depending on the amount Su Ma is borrowing. To strengthen the system the company could implement the following controls: Management should not allow the fund to be used for certain types of transactions (such as making shortterm loans to employees). Each payment from the fund must be documented on a pre-numbered petty cash receipt, signed by both the custodian and the person who receives the payment. Management should periodically conduct a surprise check of the petty cash fund and ensure the cash on hand plus receipts are equal to the petty cash fund balance—they should make sure there are no unexplained shortages and all payments have been in accordance with company policies.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-5A
(a)
July
1 Petty Cash.................................. Cash.......................................
300 300
8 Cash ............................................. 32,347 ($32,750 − $168 − $235) Debit Card Expense (134 × $1.25) 168 Credit Card Expense ($11,726* × 2%)...................... 235 Sales ...................................... *($32,750 − $12,081 − $8,943) 8 Freight Out................................. Supplies ..................................... Advertising Expense ................. R. Malik, Drawings..................... Cash Over and Short................. Cash ($300 − $87) .................
69 35 46 58 5 213
15 Cash ........................................... 28,689 ($29,050 − $195 − $166) Debit Card Expense (156 × $1.25) 195 Credit Card Expense ($8,306* × 2%)........................ 166 Sales ...................................... *($29,050 − $10,912 − $9,832) 25
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Postage Expense...................... Advertising Expense ................. Supplies ..................................... Cash Over and Short................. Petty Cash ($300-250 ).......... Cash ($250 − $16) .................
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32,750
29,050
79 93 98 14 50 234
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-5A (Continued) (b) The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense. There are some instances where either a cheque is not accepted or it is not practical to issue a cheque. Because of the costs involved in issuing a cheque, the business is justified in paying for small purchases with petty cash. There are a number of internal controls over the petty cash fund that Malik should follow: One person should be appointed the petty cash custodian and made responsible for the fund. A pre-numbered petty cash receipt should be signed by the custodian and the individual receiving payment for each payment from the fund. The controller’s office should examine all payments and stamp supporting documents to indicate they were paid when the fund is replenished. Surprise counts should be made to determine whether the fund is properly administered and that the sum of the petty cash receipts and remaining cash is equal to the petty cash fund balance. Taking It Further: An advantage of accepting debit and bank credit card transactions, as opposed to accepting only cash and personal cheques from customers, is that the company knows immediately if the customer has enough money or established credit to pay for their purchases. Another advantage is that sales will likely increase if customers can use debit or credit cards. Accepting debit and credit card transactions also acts as an internal control by limiting the amount of cash employees are exposed to. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-6A (a) Nov.
1 Petty Cash.................................. Cash.......................................
150
15 Repairs Expense ($16 + $26) .... Advertising Expense ................. R. Hayes, Drawings ................... Miscellaneous Expense ............ Cash Over and Short ............ Cash ($150 − $11) .................
42 51 38 9
30 Repairs Expense ($30 + $11) .... Supplies ..................................... R. Hayes, Drawings ................... Miscellaneous Expense ............ Cash Over and Short................. Cash ($150 − $11) .................
41 44 44 7 3
150
1 139
139
(b) Had the petty cash fund not be reimbursed as of the end of November, the financial statements would be affected as follows: Expenses understated: Repairs ............................................... $41 Cash Over and Short ........................... 3 Miscellaneous Expense ....................... 7 $51 Profit overstated ...................................... 51 R. Hayes, Drawings understated ............ 44 Cash overstated....................................... 139 Supplies understated .............................. 44 Total assets overstated ($139 – $44)...... 95 Total owner’s equity overstated ($51 + $44) 95
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PROBLEM 7-6A (Continued) Taking It Further: In order to ensure that the petty cash fund is properly administered, the owner should ensure the following internal control features: 1. Responsibility for the petty cash fund is assigned to a single person. 2. The petty cash fund is kept in a secure location, out of reach by other employees. 3. The petty cash custodian insists that supporting documents or receipts are provided before any reimbursement or payment is made from the petty cash fund. 4. A pre-numbered petty cash receipt is signed by the custodian and the individual receiving payment for each payment from the fund. 5. The petty cash custodian does not accept I.O.U.s from employees in exchange for loans. 6. The petty cash custodian prepares a schedule of the payments that have been made and sends the schedule, supported by petty cash receipts and other documentation, to the controller. 7. The receipts and supporting documents are examined by the controller to verify that they were proper payments from the fund and that the documents are marked “Paid” so that they cannot be submitted again for payment. The controller’s approval is documented before a cheque is issued to restore the fund to its established amount.
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PROBLEM 7-6A (Continued) Taking It Further: (Continued) 8. The cheque issued for replenishment of the fund must be made payable to the custodian who must then endorse the cheque to cash it and replenish the fund. 9. Check that the amounts of cash over and short are reasonable in size. 10. Perform surprise counts to determine whether the fund is properly administered and whether the sum of the petty cash receipts and remaining cash is equal to the petty cash fund.
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PROBLEM 7-7A (a) LISIK COMPANY Bank Reconciliation October 31, 2017 Cash balance per bank statement ...................................... $10,155 Add: Deposit in transit......................................... $ 960 Bank error—Lasik cheque ................................. 585 1,545 11,700 Less: Outstanding cheques ($415 + $555 + $646 + $315)............................... 1,931 Adjusted cash balance per bank .................................... $ 9,769 Cash balance per books ................................................. Add: Collection of EFT ...................................... $1,875 Error in recording cheque #1181 for Accounts Payable ($574 − $457) .......... 117 Interest revenue ...................................... 25 Less: NSF cheque ............................................. $805 Error in Oct. 12 deposit of cash sales 324 ($741 − $417) .................................... Bank service charge ............................... 30 Cheque printing charge .......................... 35 Adjusted cash balance per books..................................
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$ 8,946
2,017 10,963
1,194 $9,769
Chapter 7
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-7A (Continued) (b) Oct. 31 Cash ............................................... 2,017 Accounts Receivable............. Accounts Payable—Helms & Co. Interest Revenue....................
1,875 117 25
31 Accounts Receivable—W. Hoad 805 Sales............................................ 324 Bank Charges Expense ($35 + $30) 65 1,194 Cash........................................ Check: $8,946 + $2,017 − $1,217 = $9,769 adjusted cash balance Taking It Further: Any business that chooses not follow the policy of performing bank reconciliations on its bank accounts runs several risks: 1.
2.
3.
The business will be relying on a bank balance, which is missing reconciling items. This could lead to decisions that might cause the bank account to fall into an overdraft position, causing issues with the bank and additional interest charges. Unauthorized payments will remain undetected. If the perpetrator has since left the business, the amount may not be recoverable. Deposits that did not reach the bank account and have been diverted intentionally could be permanently lost.
4.
Errors in the accounting records remain undetected. If the error is with a customer deposit, it will be embarrassing or impossible for the business to rectify the error and obtain additional collections from the customer. Errors made on payments to suppliers may hurt the business’s relationship with its suppliers.
5.
Errors made by the bank will be undetected.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-8A (a) FORESTER THEATRE Bank Reconciliation October 31, 2017 Cash balance per bank statement.................................. Add: Bank error Bohr Company cheque ....... $600 Deposits in transit.................................... 1,436 Less: Outstanding cheques ........................................... Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: Collection of note receivable ..............................
$6,804 2,036 8,840 515 $8,325 $6,841 2,500 9,341
Less: Correction of cheque #1581 error for Payment on account ($685 - $658)......... $27 NSF cheque Tyler Bickell ....................... 934 Service charge ........................................ 45 Correction in May 12 deposit of cash sales ($846 − $836) .................................... 10 Adjusted cash balance per books..................................
1,016 $8,325
(b) Oct. 31 Cash ............................................... 2,500 Notes Receivable ...................
2,500
31 Accounts Payable – M. Datz ...... 27 Accounts Receivable—Y. Bickell 934 Sales............................................ 10 Bank Charges Expense ............. 45 1,016 Cash........................................ Check: $6,841 + $2,500 − $1,016 = $8,325 adjusted cash balance
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PROBLEM 7-8A (Continued) Taking It Further: It might be true that the cost of making payments to suppliers using EFTs is less costly than making payments using cheques. Sue Forester is not correct in her statement that using EFTs is less expensive because there is a reduced need for internal control compared to writing cheques. The internal control procedures will be the same, but adapted to another method of payment. Some additional programmed controls and password controls will have to be implemented to protect the business against unauthorized payments.
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PROBLEM 7-9A (a) YAP CO. Bank Reconciliation March 31, 2017 Cash balance per bank statement ...................................... $10,863 Add: Deposits in transit................................................ 1,025 11,888 Less: Outstanding cheques No. 3451 .............................................. $2,260 No. 3479 .............................................. 159 No. 3481 .............................................. 862 No. 3482 .............................................. 1,126 Bank error—cheque #3478 ($1,380 – $1,080) ............................... 300 4,707 Adjusted cash balance per bank .................................... $7,181 Cash balance per books ................................................. Add: Correction to cheque #3473 ($725 – $275) ......................................... $450 Interest revenue ..................................... 23 Less: Loan payment—principal ......................... $1,000 Loan payment—interest ......................... 125 NSF cheque Mr. Jordan .......................... 595 Service charge ........................................ 49 Correction in Mar. 26 cash receipts of Accounts Receivable ($2,675−$2,657) ..... 18 Adjusted cash balance per books..................................
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$8,495 473 8,968
1,787 $7,181
Chapter 7
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-9A (Continued)
(b)
Mar. 31 Cash ........................................... Accounts Payable ................. Interest Revenue................... 31
Note Payable.............................. Interest Expense ....................... Accounts Receivable—Jordan . Bank Charges Expense ............ Accounts Receivable ................ Cash.......................................
473 450 23 1,000 125 595 49 18 1,787
Check: $8,495 + $473 − $1,787 = $7,181 adjusted cash balance Taking It Further: The accountant for Yap Co. needs to notify the bank of the details of the bank error for cheque #3478. The bank will need to withdraw a further $300 from Yap’s bank account. Until such time as the bank corrects this error, the amount of $300 will remain a reconciling item on the bank side of the bank reconciliation.
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PROBLEM 7-10A (a) MALONEY COMPANY Bank Reconciliation November 30, 2017 Cash balance per bank statement................................. Add: Deposits in transit ............................................... Less: Outstanding cheques No. 2451 ......................................... $1,260 No. 2472 ......................................... 504 No. 2478 ......................................... 538 No. 2482 ......................................... 612 No. 2484 ......................................... 830 No. 2485 ......................................... 975 No. 2487 ......................................... 1,200 Adjusted cash balance per bank ................................... Cash balance per books ................................................ Add: EFT collected by Bank ....................... $2,479 Error in Nov. 20 deposit of Accounts Receivable ($2,966 − $2,699) .......... 267 Less: NSF cheque—Pendray Holdings....... $ 260 Error in cheque #2476 for Accounts Payable ($2,830 − $2,380) ................ 450 Loan payment .................................... 2,250 Adjusted cash balance per books.................................
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$14,527 1,338 15,865
5,919 $ 9,946 $10,160
2,746 12,906
2,960 $ 9,946
Chapter 7
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-10A (Continued) (b)
Nov. 30 Cash ........................................... Accounts Receivable............ Interest Revenue................... Accounts Receivable............ 30
Accounts Receivable ................ Accounts Payable ..................... Notes Payable............................ Interest Expense ....................... Cash.......................................
2,746 2,430 49 267 260 450 2,000 250 2,960
Check: $10,160 + $2,746 − $2,960 = $9,946 adjusted cash balance Taking It Further: When performing the bank reconciliation, it is easier to detect a company error than an error committed by the bank. For errors in recording transactions on the Cash account of the company, the source documents and data supporting the entries are readily at hand to retrace the transaction and the resulting error. In the procedure of retracing or matching entries appearing on the bank statement to the accounting records, research can be performed to determine that the error was in the recording of the transaction on the company books. Although rare, some errors can occur that are caused by the bank. These errors could include a transaction belonging to a different business recorded on the bank statement of the company. Determining that the error is a bank error is done by process of elimination, after determining that the error is clearly not a recording error in the books of the company. In this case, since the transaction recorded by the bank is not supported by source documents of the company, an inquiry needs to be made with the bank, particularly in the case of a deposit. If the error relates to a cheque, the paid cheque can be inspected for some clues as to the source and nature of the error.
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PROBLEM 7-11A (a)
Balance per Bank Statement Balance May 31, 2017 .................................................. $17,690 Add: Deposits ............................................ $14,052 Interest .............................................. 35 14,087 31,777 Less: Cheques cleared .............................. $10,748 NSF cheques .................................... 175 EFT for insurance............................. 500 Service charge ................................. 12 11,435 Unadjusted bank balance, June 30, 2017 ............... $20,342 Balance Per Books Adjusted balance, May 31, 2017 ............................. Add: Cash receipts................................................. Less: Cash payments ............................................. Unadjusted cash balance, June 30, 2017 ..............
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$ 16,940 17,809 (18,491) $ 16,258
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-11A (Continued) (b) TRILLO COMPANY Bank Reconciliation June 30, 2017 Unadjusted bank balance Add: Deposits in transit................................... $ 3,127 Error Trillo Co. cheque #119 .................. 467
$20,342 3,594 23,936
Less: Outstanding cheques No. 694 ................................................ $ 264 No. 708 ................................................ 2,910 No. 713 ................................................ 3,058 No. 714 ................................................ 3,860 10,092 Adjusted bank balance ....................................................... $13,844 Unadjusted cash balance ................................................... $16,258 Add: Interest .................................................... $ 35 Error in cheque # 712 for Equipment ($3,626 − $3,266) ................................... 360 395 16,653 Less: NSF cheque ................................................. $ 175 Cheque # 710 for Accounts Payable not recorded .............................................. 1,492 Error in June 17 deposit of Accounts Receivable ($3,810 – $3,180) ................ 630 EFT for insurance payment .................... 500 Bank service charges ............................. 12 2,809 Adjusted cash balance........................................................ $13,844
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PROBLEM 7-11A (Continued) (c)
June 30 Cash .......................................... Interest Revenue................... Equipment .............................
395
30 Accounts Receivable—Massif Co. 175 Accounts Payable ..................... 1,492 Accounts Receivable ................ 630 Bank Charges Expense ............ 12 Insurance Expense.................... 500 Cash.......................................
35 360
2,809
Check: $16,258 + $395 − $2,809 = $13,844 adjusted cash balance (d) The reported cash balance on the June 30, 2017 balance sheet is $13,844. Taking It Further: The bank officials would expect that the bank account balance will not equal the balance on Trillo Company’s balance sheet. Depending on the time lag between the recording of transactions on the books and the bank, it is possible that the difference is substantial. This is normal and should not be alarming. The discrepancy between the two balances would be larger for businesses that operate seven days a week. Deposits made on the weekend would not be processed by the bank until Monday. In that case, the bank balance would seem low until the deposits are processed by the bank. On the other hand, if the business mails many payments made by cheque to several areas of the country, it is possible that large amounts of outstanding cheques will make the bank account appear high until the cheques are presented for payment and clear the bank account.
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PROBLEM 7-12A (a) SALLY’S SWEET SHOP Bank Reconciliation August 31 Unadjusted bank balance Add: Deposits in transit ................................... $ 2,530 Bank error Cheque #4832 Wally’s Water Works ............... 795 Less: Outstanding cheques No. 421 ................................................ $ 165 No. 485 ................................................ 265 No. 492 ................................................ 175 No. 494 ................................................ 1,165 1,770 Outstanding EFT—for utilities ............... 245 Adjusted bank balance ................................................... Unadjusted cash balance ............................................... Add: EFT collections of Accounts Receivable $1,735 Deposit error August 15 – cash sales ($4,990- $4,690) ....................................... 300 Error in cheque # 490 for Accounts Payable ($266 − $206) .............................. 60 Less: NSF cheque ($385 + $25) ........................ $410 Bank service charges—cheque printing 45 Adjusted cash balance ...................................................
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$11,135 3,325 14,460
2,015 $12,445 $10,805
2,095 12,900 455 $12,445
Chapter 7
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-12A (Continued) (b)
Aug. 31 Cash .......................................... Accounts Receivable............ Sales ...................................... Accounts Payable ................. 31
Accounts Receivable ................ Bank Charges Expense ............ Cash.......................................
2,095 1,735 300 60 410 45 455
Check: $10,805 + $2,095 − $455 = $12,445 adjusted cash balance (c)
The reported cash balance on the August 31 balance sheet is $12,445.
Taking It Further: The appropriate segregation of duties internal control activity calls for the task of preparing the bank reconciliation to be separated from the responsibility of signing cheques. This is to ensure that someone who has signing authority on the business bank account is not able to conceal the fraud of an unauthorized payment by making false entries on the bank reconciliation.
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PROBLEM 7-13A (a)
Cash and cash equivalents: 1. Cash on hand.................................................... 2. Petty cash fund................................................. 3. Chequing account ............................................ US bank account .............................................. 7. Treasury bills .................................................... Total ..............................................................
$
530 125 24,500 16,300 25,000 $66,455
(b) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record the petty cash expenses and reduce petty cash by $175. Once the petty cash fund is reimbursed, $300 cash will be available once again. 4. The overdraft protection for $10,000 on the chequing account would not be reported on the balance sheet. It may be disclosed in the notes to the financial statements. 5.
Access to the $4,250 is restricted to a specific purpose and should be reported as restricted cash, reported as a current or noncurrent asset, depending on the when the leases expire.
6. Postdated cheques are not assets. The amount would be part of the Accounts Receivable balance. 7. Short-term investments with original maturity dates greater than 90 days (shares intended to be sold within a year and guaranteed investment certificate) would be listed separately in the current asset section. 8. The owner’s personal bank account is not an asset of the business. 9. NSF cheques would be included in Accounts Receivable, assuming the company expects collection. Solutions Manual .
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PROBLEM 7-13A (Continued) Taking It Further: It is important to present restricted cash separately from cash on the balance sheet so that creditors and other users of the financial statements realize that the restricted amounts are not available for the everyday payments required by the business in normal operations.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-1B
Activities
Application to Cash Receipts
Establishment of responsibility
Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash. Only the manager has access to unlocked rolls of tickets.
Segregation of duties
The duties of receiving cash and admitting customers are assigned to the cashier and to the usher. The manager maintains custody of the cash, and the company accountant records the cash.
Documentation procedures
Tickets are pre-numbered. Cash count sheets are prepared. Deposit slips are prepared. Copies are used for verification and recording.
Physical and IT controls
A safe is used for the storage of cash and a machine is used to issue tickets.
Performance reviews
Cash counts are made by the manager at the end of each cashier's shift. Daily comparisons are made by the company controller.
Other controls
Cashiers are bonded.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-1B (Continued) Taking It Further: Actions by the usher and cashier to misappropriate cash could include: (1) Instead of tearing the tickets, the usher could return the tickets to the cashier who could resell them, and the two could divide the cash. (2) The cashier could issue a less expensive ticket than paid for, and the usher would admit the customer. The difference between the ticket issued and the cash received could be divided between the usher and cashier. (3) The cashier and usher could agree to let friends into the theatre at no cost (or in exchange for an "under the table" payment).
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-2B
(a)
The weaknesses in internal accounting control over collections are: (1) The church employees tasked with counting and/or depositing the money from collections should be bonded as a form of human resources control. (2) There is no (external) audit that would provide an independent check of performance. In place of an audit is trust. (3) Each usher could take cash from the collection plates en route to the basement office. (4) The head usher counts the cash alone, which gives him/her an opportunity to steal. (5) The head usher’s notation of the count is left in the unlocked safe. This means that someone could take money out of the safe and redo the note stating the new amount. (6) The financial secretary counts the cash alone. Again, this gives her an opportunity to steal. (7) The financial secretary withholds $150 to $200 per week. She does not have to provide any support for how she spends this cash. (8) The cash is vulnerable to robbery when kept in the unlocked safe overnight. (9) Cheques are made payable to “cash.” This means anyone could cash the cheque. (10) The financial secretary has custody of the cash, maintains church records, and prepares the bank reconciliation.
(b) The improvements should include the following: (1) The ushers should transfer their cash collections to a cash pouch (or bag) held by the head usher. (2) The head usher and finance committee member should take the cash to the office. The cash should be counted by the head usher and the financial secretary in the presence of the finance committee member.
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(3) Following the count, the financial secretary should prepare a deposit slip, in duplicate, for the total cash received, and the secretary should immediately deposit the cash in the bank’s night deposit vault. (4) At the end of each month, a member of the finance committee should prepare the bank reconciliation. (5) All cheques should be made payable in the church’s name. (6) A petty cash fund should be set up for small expenditures. Taking It Further: When the opportunity, financial pressure or rationalization factors are present, the weaknesses in internal control can lead to fraud.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-3B
(a) Weaknesses & (b) Problems 1. Cash is collected and kept in the car. This could result in theft.
Taking It Further Suggested Improvements Cash should be deposited in the bank each day.
2. The person purchasing the merchandise is the same person that verifies receipt of the goods and approves invoices for payment. Because this person is responsible for all activities related to purchasing, errors and theft could occur.
An independent person should verify the receipt of goods. The purchaser should approve bills for payment by the controller.
3. All three cashiers use the same cash drawer. This could result in difficulty establishing responsibility for errors or missing money.
Each employee should use a separate cash drawer.
4. The office manager deposits the cheques and posts the entry in the accounting records. This could result in the office manager depositing cheques in his/her own account, taking the cash and not posting the entry for accounting purposes.
Mail should be opened by two individuals. The reconciliation of daily cash receipts should be forwarded to the accounting department and used as a basis for entering the receipt information into the accounting records.
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PROBLEM 7-3B (Continued) Taking It Further Suggested Improvements
(a) Weaknesses & (b) Problems 5. The custodian creates receipts for employees when they don’t have them. Cash is given to employees without any documentation provided. Naiara could create fictitious receipts and take cash herself or give it to friends.
Naiara never takes a vacation. This may be a technique to prevent others from assisting with her accounting functions; thereby, examining her work and discovering errors or misappropriations.
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Pre-numbered petty cash receipts must be signed by the custodian and the individual receiving payment for each payment from the fund. Surprise counts can be made at any time to determine whether the fund is intact. Employees should be required to take vacation.
Chapter 7
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-4B (a) July
1 15
31
Aug. 15
16 31
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Petty Cash ...................................... Cash ........................................
200.00
Freight-Out ..................................... Postage Expense ........................... Entertainment Expense ................. Supplies .......................................... Cash Over and Short ..................... Cash ($200.00 - $ 5.70) ...........
94.00 42.40 45.90 10.70 1.30
Freight-Out ..................................... Contribution Expense .................... Postage Expense ........................... Repairs Expense ............................ Cash ($200.00 - $8.00) ............
82.10 30.00 47.80 32.10
Freight-Out ..................................... Entertainment Expense ................. Postage Expense ........................... Supplies .......................................... Cash Over and Short ..................... Cash ($200.00 - $12.00) ..........
77.60 30.00 47.80 32.10 .50
Petty Cash ...................................... Cash ........................................
100.00
Postage Expense ........................... Travel Expense............................... Freight-Out ..................................... Cash Over and Short ..................... Cash ($300.00 - $17.00) ..........
145.00 90.60 46.00 1.40
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200.00
194.30
192.00
188.00 100.00
283.00
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-4B (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. Taking It Further: Frank Cheema is not correct. Transactions occurring in the petty cash fund do not get recorded into the general ledger unless entries for the different expenses are recorded at the point of replenishing the petty cash fund. Until the replenishment of the fund occurs, from a general ledger stand point, the amount recorded to the general ledger Petty Cash account represents cash. At any point in time, the petty cash fund will likely have some cash and some receipts for payments made out of the fund. This is one of the reasons why it is a good practice to replenish the fund at the end of the fiscal year so that the expenses can be recorded in the fiscal year and the amount of cash in the petty cash fund is in fact cash that should be included on the balance sheet.
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PROBLEM 7-5B
(a)
May
1 Petty Cash.................................. Cash.......................................
250 250
8 Cash ............................................. 34,371 ($35,000 − $128 − $501) Debit Card Expense (122 × $1.05) 128 Credit Card Expense ($12,530* × 4%)...................... 501 Sales ...................................... 35,000 *($35,000 − $12,912 − $9,558 = $12,530) 8
15
Freight Out................................. Postage Expense....................... Advertising Expense ................. Miscellaneous Expense ............ Cash Over and Short ............ Cash ($250 − $75) .................
4 175
Cash ........................................... 16,079 ($16,380 − $89 − $212) Debit Card Expense (85 × $1.05) 89 Credit Card Expense ($5,300* × 4%)........................ 212 Sales ...................................... *($16,380 − $3,690 − $7,390 = $5,300)
15 Petty Cash ($300 − $250) .......... B. Ramesh, Drawings................ Supplies ..................................... Freight Out................................. Cash Over and Short................. Cash ($250 − $5) ...................
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7-75
16,380
50 98 36 60 1 245
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-5B (Continued) (b) An advantage of accepting debit and bank credit card transactions as opposed to accepting only cash and personal cheques from customers is that the company knows immediately if the customer has enough money or established credit to pay for their purchases. Another advantage is that sales will likely increase if customers can use debit or credit cards. Accepting debit and credit card transactions also acts as an internal control by limiting the amount of cash to which employees are exposed. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards. Taking It Further: The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best paid by cash rather than by cheque because of the nature of the expense. There are some instances where either a cheque is not accepted or it is not practical to issue a cheque. Because of the costs involved in issuing a cheque, the business is justified in paying small amounts of purchases with petty cash. There are a number of internal controls over the petty cash fund that Ramesh should follow: One person should be appointed the petty cash custodian and will be responsible for the fund. A pre-numbered petty cash receipt should be signed by the custodian and the individual receiving payment for each payment from the fund. The controller’s office should examine all payments and stamp supporting documents to indicate they were paid when the fund is replenished. Surprise counts should be made to determine whether the fund is properly administered and whether the sum of the petty cash receipts and remaining cash is equal to the petty cash fund.
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PROBLEM 7-6B
(a)
June 8 Petty Cash.................................. Cash....................................... 15
30
200 200
Supplies ..................................... Repairs Expense ....................... Advertising Expense ................. E. Bender, Drawings ................. Miscellaneous Expense ............ Cash Over and Short................. Cash ($200 − $1) ...................
35 48 55 40 19 2
Freight Out................................. Supplies ..................................... Advertising Expense ................. E. Bender, Drawings ................. Miscellaneous Expense ............ Cash Over and Short ............ Cash ($200 − $29) .................
10 54 48 45 18
199
4 171
(b) Had the petty cash fund not be reimbursed as of the end of June, the financial statements would be affected as follows: Expenses understated: Freight Out ........................................... $10 Advertising Expense............................ 48 Cash Over and Short (Expense recovery) (4) Miscellaneous Expense ....................... 18 $72 Profit overstated ...................................... 72 E. Bender, Drawings understated .......... 45 Cash overstated....................................... 171 Supplies understated .............................. 54 Total assets overstated ($171 – $54) ..... 117 Total owner’s equity overstated ($72 + $45) 117
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PROBLEM 7-6B (Continued) Taking It Further: Some expenses are made from petty cash rather than by cheque because of the nature of the expense. There are some instances where either a cheque is not accepted or it is not practical to issue a cheque. Because of the costs involved in issuing a cheque, the business is justified in paying for small purchases with petty cash. The internal controls over payments from petty cash include: 1. Responsibility for the petty cash fund is assigned to a single person. 2. The petty cash fund is kept in a secure location, out of reach by other employees. 3. The petty cash custodian insists on supporting documents or receipts are provided as evidence of the amount that has been paid before any reimbursement or payment is made from the petty cash fund. 4. A pre-numbered petty cash receipt is signed by the custodian and the individual receiving payment, for each payment from the fund. 5. The petty cash custodian does not accept I.O.U.s from employees in exchange for loans. 6. The petty cash custodian prepares a schedule or summary of the payments that have been made and sends the schedule, supported by petty cash receipts and other documentation, to the controller.
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PROBLEM 7-6B (Continued) Taking It Further: (Continued) 7. The receipts and supporting documents are examined by the controller to verify that they were proper payments from the fund and stamped “Paid” so that they cannot be submitted again for payment. The controller’s approval is documented before a cheque is issued to restore the fund to its established amount. 8. The cheque issued for replenishment of the fund must be made payable to the custodian who must then endorse the cheque to cash it and replenish the fund. 9. Check that the amounts of cash over and short are reasonable in size. 10. Perform surprise counts to determine whether the fund is properly administered and whether the sum of the petty cash receipts and remaining cash is equal to the petty cash fund.
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PROBLEM 7-7B (a) AGRICULTURAL GENETICS COMPANY Bank Reconciliation May 31, 2017 Cash balance per bank statement.................................. Add: Deposit in transit.................................................. Less: Outstanding cheques ($236 + $105 + $235) Adjusted cash balance per bank
$6,405 2,416 8,821 576 $8,245
Cash balance per books ................................................. $6,782 Add: EFT collections of Accounts Receivable 2,200 Interest revenue ...................................... 80 2,280 9,062 Less: NSF cheque Pete Dell ............................. $680 Error in deposit of May 18 for cash sales ($886 – $836).................................. 50 Error in cheque # 1151 for payment on account ($685 − $658) ....................... 27 Bank service charge ($40 + $20) ............ 60 817 Adjusted cash balance per books.................................. $8,245 (b) May 31 Cash ............................................... 2,280 Accounts Receivable............ Interest Revenue................... 31 Accounts Receivable—P. Dell .. Sales........................................... Accounts Payable—L. Kingston Bank Charges Expense ............ Cash.......................................
2,200 80
680 50 27 60 817
Check: $6,782 + $2,280 – $817 = $8,245 adjusted cash balance
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PROBLEM 7-7B (Continued) Taking It Further: The bank manager should expect that the bank and book balances will not be equal. Depending on the time lag between recording of transactions on the books and the bank, it is possible that the difference is substantial. This is normal and should not be alarming. The discrepancy between the two balances would be larger for businesses that operate seven days a week. Deposits made during the week end would not be processed by the bank until Monday. The bank balance would seem low until the deposits are processed by the bank. On the other hand, if the business mails many payments made by cheque to several areas of the country, it is possible that large amounts of outstanding cheques will make the bank account appear high until the cheques are presented for payment and clear the bank account.
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PROBLEM 7-8B (a) EZ FERTILIZER Bank Reconciliation June 30, 2017 Cash balance per bank statement.................................. Add: Bank error Bohr Company cheque ............ $ 234 Deposit in transit....................................... 1,587 Less: Outstanding cheques .......................................... Adjusted cash balance per bank Cash balance per books ................................................. Add: EFT collections of note receivable ............ 1,550 Error payment on account cheque #1924 D. Katz ($536 - $356) ............................... 180 Interest revenue ......................................... 45 Less: NSF cheque A. Vallee ............................. Error in deposit of June 21 for cash sales ($642 – $624)..................................
$6,776 1,821 8,597 946 $7,651 $6,925
1,775 8,700
$966 18
Bank service charge ($40 + $25) ............ 65 Adjusted cash balance per books..................................
1,049 $7,651
(b) June 30 Cash ............................................... 1,775 Notes Receivable .................. Accounts Payable—D. Katz . Interest Revenue...................
1,550 180 45
30 Accounts Receivable— A. Vallee Sales........................................... Bank Charges Expense ............ Cash.......................................
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-8B (Continued) Taking It Further: The purpose of the bank reconciliation is to ensure that the transactions recorded in the records of the business are authorized, complete and accurate. Since the bank account is used daily, it is important that the reconciliation be performed on a monthly basis. Doing so ensures that the internal control features of the bank reconciliation are adhered to in order to protect the asset and to provide accurate up-to-date accounting information. Decisions concerning the availability of cash are frequent. It is important that, when those decisions are being made, management can rely on the accuracy of the amounts provided by the accounting system. Should bank or accounting record errors be detected through the process of preparing the bank reconciliation, timely action can be taken place to correct those errors and prevent additional errors from occurring in the future.
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PROBLEM 7-9B (a) KATSARIS COMPANY Bank Reconciliation September 30, 2017 Cash balance per bank statement................................ Add: Deposits in transit .............................................. Less: Outstanding cheques No. 4451 ...... $1,740 No. 4464 ...... 620 No. 4469 ...... 600
No. 4471 No. 4473 No. 4476
$621 1,234 1,280 6,095
Bank error on cheque No. 4475 ($553 − $535) ............................... 18 Adjusted cash balance per bank ................................. Cash balance per books .............................................. Add: Error in cheque No. 4470 for Accounts Payable ($3,400 − $3,040) ........... 360 Interest revenue ............................ 65 EFT collection of Accounts Receivable ($3,145 − $65) .............................. 3,080 Less: NSF cheque ................................... $1,027 Error in Sept. 16 deposit of Accounts Receivable ($2,763 − $2,673) ...... 90 Bank service charges ................... 45 Adjusted cash balance per books................................
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$17,930 754 18,684
6,113 $12,571 $10,228
3,505 13,733
1,162 $12,571
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-9B (Continued) (b) Sept. 30 Cash ............................................... 3,505 Account Payable................... Interest Revenue................... Accounts Receivable............
360 65 3,080
30 Accounts Receivable —Hopper Holdings ............... Accounts Receivable ................ Bank Charges Expense ............ Cash.......................................
1,162
1,027 90 45
Check: $10,228 + $3,505 – $1,162 = $12,571 adjusted cash balance Taking It Further: The accountant for Katsaris Company needs to notify Hopper Holdings of the NSF cheque they had given to Katsaris as a payment on account. A replacement cheque should be requested immediately. Hopper needs to be notified of the additional $12 service charge that it is expected to include with its replacement cheque. The accountant also needs to notify the bank of the details of the bank error for cheque #4475. The bank will need to withdraw a further $18 from Katsaris’s bank account. Until such time as the bank corrects this error, the amount of $18 will remain a reconciling item on the bank side of the bank reconciliation
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PROBLEM 7-10B (a) RIVER ADVENTURES COMPANY Bank Reconciliation May 31, 2017 Cash balance per bank statement.................................. Add: Deposits in transit .............................. $1,286 Error in cheque #564 ($603 − $306) ... 297 Less: Outstanding cheques No. 533 ............................................ $279 No. 555 ............................................ 79 No. 558 ............................................ 943 No. 560 ............................................ 890 No. 566 ............................................ 950 Adjusted cash balance per bank .................................... Cash balance per books ................................................. Add: EFT proceeds of Accounts Receivable plus interest ($1,615 + $35) .............. $1,650 Error in May 26 deposit of Accounts Receivable ($980 − $890) ............... 90 Error in cheque #563 for Accounts Payable ($2,887 − $2,487)............... 400 Less: NSF cheque ......................................... $ 440 Bank service charges ......................... 25 Adjusted cash balance per books..................................
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$4,308 1,583 5,891
3,141 $2,750 $1,075
2,140 3,215 465 $2,750
Chapter 7
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-10B (Continued) (b) May 31 Cash ........................................... Accounts Receivable............ Interest Revenue................... Accounts Receivable............ Accounts Payable .................
2,140
31 Accounts Receivable—R. King Bank Charges Expense ............ Cash.......................................
440 25
1,615 35 90 400
465
Check: $1,075 + $2,140 − $465 = $2,750 adjusted cash balance Taking It Further: When performing the bank reconciliation, it is easier to detect a company error than an error committed by the bank. For errors in recording transactions on the Cash account of the company, the source documents and data supporting the entries are readily at hand to retrace the transaction and the resulting error. During the process of matching entries appearing on the bank statement to the accounting records, research can be performed to determine that the error was in the recording of the transaction on the company books. Although rare, some errors can occur that are caused by the bank. These errors could include a transaction belonging to a different business recorded on the bank statement of the company. Determining that the error is a bank error is done by process of elimination, after determining that the error is clearly not a recording error in the books of the company. In this case, since the transaction recorded by the bank is not supported by source documents of the company, an inquiry needs to be made with the bank, particularly in the case of a deposit. If the error relates to a cheque, the paid cheque can be inspected for some clues as to the source and nature of the error.
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PROBLEM 7-11B (a)
Balance per Bank Statement Balance November 30, 2017 ................................... Add: Deposits........................................................ Less: Cheques cleared ............................... $8,741 NSF cheques ................................... 520 Service charge ................................ 48 Balance, December 31, 2017 ..................................
$ 7,181 11,951 19,132 9,309 $9,823
Balance Per Books Adjusted cash balance, November 30, 2017.......... $ 6,968 Add: Cash receipts................................................. 13,741 Less: Cash payments................................................. (11,548) Unadjusted cash balance, December 31, 2017...... $9,161
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PROBLEM 7-11B (Continued) (b) KIRAN’S KAYAKS Bank Reconciliation December 31, 2017 Balance per bank statement ........................................... Add: Deposits in transit................................................ Less: Outstanding cheques No. 165 ................................................ $ 812 No. 185 .................................................... 1,165 No. 189 ................................................... 1,721 Adjusted cash balance per bank .................................... Balance per books .......................................................... Add: Error in cheque No. 186 for Equipment ($3,941 − $3,491) ................................................ Less: NSF cheque ............................................. $520 Error in Dec. 18 deposit of Accounts Receivable ($3,707 − $3,007) ................ 700 Bank service charges ............................. 48 Adjusted cash balance ................................................... (c)
Dec. 31 Cash .......................................... Equipment .............................
$ 9,823 2,218 12,041
3,698 $8,343 $9,161 450 9,611
1,268 $8,343
450
31 Accounts Receivable—M. Sevigny 520 Accounts Receivable ................ 700 Bank Charges Expense ............ 48 Cash.......................................
450
1,268
Check: $9,161 + $450 − $1,268 = $8,343 adjusted cash balance (d) The reported cash balance on the December 31, 2017 balance sheet is $8,343.
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PROBLEM 7-11B (Continued) Taking It Further: The bank reconciliation must be prepared before the closing entries so that all the affected account balances are brought upto-date first. The bank reconciliation is a key control to ensure all items flowing through the cash account are recorded correctly and completely. If the bank is not reconciled, closing entries may be posted and the books closed with material errors and missing items.
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PROBLEM 7-12B (a) SOUTH HAMPTON POOL SUPPLIES Bank Reconciliation May 31, 2017 Unadjusted bank balance Add: Deposits in transit ................................... $ 2,930 Bank error cheque #3723 South Hampton Pizzeria.......... 600 Less: Outstanding cheques No. 321 ................................................ $ 653 No. 371 ................................................ 238 No. 375 ................................................ 281 No. 376 ................................................ 958 2,130 Outstanding EFT—for utilities ............... 225 Adjusted bank balance ................................................... Unadjusted cash balance ............................................... Add: EFT collections of Account Receivable ............. Less: NSF cheque ($249 + $17) ........................ $266 Error in cheque #370 for Accounts Payable ($488 – $408) ........................... 80 Error in May 15 deposit of cash sales ($2,850 – $2,580).................................... 270 Bank service charges ............................. 44 Adjusted cash balance ...................................................
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$7,350 3,530 10,880
2,355 $8,525 $8,210 975 9,185
660 $8,525
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Accounting Principles, Seventh Canadian Edition
PROBLEM 7-12B (Continued) (b) May 31 Cash .......................................... Accounts Receivable............
975
31 Accounts Receivable ................ Accounts Payable ..................... Sales........................................... Bank Charges Expense ............ Cash.......................................
266 80 270 44
975
660
Check: $8,210 + $975 − $660 = $8,525 adjusted cash balance (c)
The reported cash balance on the May 31, 2017 balance sheet is $8,525.
Taking It Further: The prompt preparation of the bank reconciliation is a key activity for proper internal control. Assuming the appropriate segregation of duties have been followed in the assignment of the responsibility of preparing the bank reconciliation, this process allows for the detection of errors or omissions in transactions affecting the cash account. Following the reconciliation process, adjusting journal entries are prepared for the correction of errors or for transactions that have occurred in the bank account but have not yet been recorded in the cash account in the business’s books. Once completed, an added independent check of the preparation of the reconciliation is performed by the individual assigned to review and approve the bank reconciliation. Through proper segregation of the cash handling, record keeping, and bank reconciliation tasks, an additional layer of internal control becomes effective in properly controlling cash and preventing fraud.
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PROBLEM 7-13B (a)
Cash and Cash Equivalents balance: 1. 2. 3. 4. 6.
Cash on hand ..................................................... $ 2,339 Petty cash fund .................................................. 69 Bank chequing account .................................... 7,460 60-day treasury bill ............................................ 5,000 US Dollar Account ................................................ 8,555 Total ................................................................... $23,423
(b) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record the $206 total expenses for the receipts in the fund. 4. The 6-month $3,000 term deposit should be reported as short-term investments, in the current assets section on the balance sheet, because its term exceeds three months. 5. The stale-dated cheque is not an asset of the business. The amount owed by the customer would be part of the accounts receivable balance. 7. The $10,500 cash received from the property sale is restricted and should be reported as either a current or noncurrent asset depending on when the property sale will be completed. 8. The $500 deposit with Ontario Hydro should be recorded as an advance or deposit in the current assets section of the balance sheet.
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PROBLEM 7-13B (Continued) Taking It Further: Cash may be reported as a non-current asset when the cash is not available to be used in the next twelve months. If the company has placed cash in trust for a property sale as in item 7 above, but the sale is not expected to occur in the next twelve months, the amount should be classified as non-current on the balance sheet. It would be important to classify this amount as non-current to assist the users of the financial statements in evaluating the liquidity of the business and measuring the amount of cash that is available to settle liabilities in the future.
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BYP 7-1 FINANCIAL REPORTING AND ANALYSIS
(a)
1.
Cash and cash equivalents balance at: Aug. 31, 2014 $11,585,000 Aug. 31, 2013 81,266,000 (These amounts appear on the statement of financial position and the statement of cash flows)
2.
Decrease in the cash and cash equivalent from 2013 to 2014 $69,681,000
3.
Cash provided from operating activities for the year ended Aug. 31, 2014 $194,477,000
(b) Based on the information appearing above, we can conclude that there must have been an unusual transaction that occurred during the year for the cash and cash equivalent to decrease by 86% ($69,681,000 ÷ $81,266,000) in spite of a strong amount of cash being generated from operating activities. By scanning the statement of cash flows, we see that close to one half of one billion dollars was spent on business combinations.
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BYP 7-2 INTERPRETING FINANCIAL STATEMENTS (a) Cash equivalents are short-term highly liquid investments that are not subject to significant changes in value and with maturities of three months or less when purchased. (b) 2014 (1) Working capital = (2) Current ratio
$164,931 =
–
$32,677
$164,931 $32,677
=
= $132,254
5.0:1
2013 (1) Working capital =
$157,102 –
(2) Current ratio
=
$157,102 $20,818
$20,818 =
= $136,284 7.5:1
Avigilon Corporation is extremely liquid. The cash balances alone are able to cover the current liabilities and still have large remaining balances. (c)
Inventory should be excluded in the calculation of an acidtest ratio because it is considered a slower asset to turn over and ultimately convert to cash.
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Accounting Principles, Seventh Canadian Edition
BYP 7-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP 7-4 COMMUNICATION ACTIVITY Ms. L.S. Osman Tenacity Corporation Re: Internal control over your business Dear Ms. Osman: Your company has grown significantly over the past several years to the point where controls over cash must be implemented. The most significant weakness we identified was the lack of segregation of duties in the accounting department. In the past, operations were small enough that one person could perform the accounting and you could review almost all transactions. However, this is no longer the situation and the lack of segregation of duties could have adverse consequences for your business. For example, because Blake Pike is responsible for ordering parts, taking delivery, authorizing payments and signing cheques, it is possible that he could pay himself as a payee. Also, without segregating the signing process from the bank reconciliation process, any misappropriation of funds could proceed undetected. Because Blake is involved in all aspect of the handling of purchasing and paying for parts, without anyone supervising his work or checking his work, it is possible for Blake to take parts from your business and cover for the shortage in the accounting records. It is also possible for him to pay a friend for parts that have not been received.
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BYP 7-4 (Continued) To minimize the risk of misappropriation of parts and cash the following segregation of duties should be implemented: 1.
There should be segregation between the individuals who order parts, take delivery of the auto parts, authorize the payments and then sign the cheques for the payments of the auto parts. What is essential in the assignment of duties is that those individuals who have access to parts or cash should not have access to the accounting records and vice-versa.
2.
Individuals other than those handling parts should be assigned the responsibility to sign cheques once they have checked that the parts were actually received for orders that were authorized.
3.
An individual other than the individuals handling parts and signing cheques should be assigned the responsibility of preparing the monthly bank reconciliation.
4.
Monthly bank reconciliations should be reviewed by a person independent of the recording process. In your case, the reviewer should probably be you.
I would be pleased to discuss these weaknesses and my recommended improvements to your system of internal control with you, at your convenience. Yours sincerely,
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BYP 7-5 “ALL ABOUT YOU” ACTIVITY (a)
Identity theft occurs when someone uses your personal information without your knowledge, for criminal purposes. The key types of information that thieves use include: 1) Social insurance card 2) Driver’s licence 3) Credit cards and PINs 4) Bank cards 5) Passport
(b) Identity thieves may get your personal information by: 1) Stealing your mail 2) Looking for personal documents in your trash 3) Tampering with ATMs or card machines in shops to steal your banking information 4) Taking personal information through public sources (e.g. telephone books and social media) (c)
Some of the signs your identity might have been stolen: 1) Bills and statements don't arrive when they are supposed to — they may have been stolen from the mailbox or someone may have changed the mailing address for your accounts. 2) You receive calls from collection agencies or creditors for an account you don't have. 3) You receive notification from your bank, credit card or online business about a new account in your name, or added charges. 4) Financial account statements show withdrawals or transfers you didn't make. 5) A creditor calls to say you've been approved or denied credit that you haven't applied for.
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BYP7-5 (Continued) (d) 1. and 2. Some of the physical and IT controls that can be implemented to safeguard your identity and some of the checks that you can do to recognize identity theft and prevent it from continuing include: 1.
2.
3.
4. 5.
6.
7.
8.
9.
empty your mailbox daily (if you’re going away on vacation, ask friends or trusted neighbours to pick up your mail or you can also opt for Canada Post's "hold mail" service) store ID cards and documents, such as birth certificates, social insurance numbers and passports, in a secure place such as a locked fireproof safe shred any documents and items with personal information once you no longer need them (e.g., expired ID cards, credit card offers and financial statements) check balances on your statements from banks, credit cards and companies regularly report any strange activities in your bills and statements, however minor, right away (fraudsters often steal in small amounts from many cards to evade detection) check your credit report once a year for errors or strange activities (you may also wish to consider purchasing a credit monitoring service that alerts you when there are changes to your credit report or score) avoid giving out any personal information over the telephone unless you've placed the call yourself or know the business avoid giving out sensitive personal information like a SIN number or credit card number over the telephone when you’re in a public place (you never know who may be listening) limit information on your personal cheques to no more than your name and address
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BYP7-5 (Continued) 10. 11. 12.
13.
14.
15. 16. 17.
18.
19. 20. 21.
22.
change your passwords often and make them strong avoid posting personal information online such as your date of birth and mailing address review and understand the privacy settings on all social media sites you use before posting any update (you should review the privacy settings regularly as they often change) disable the “geo-tracking” option on your phone before posting public photos on social media sites (by default, this option is enabled on most phones and it allows someone to figure out exactly where your photos were taken) remove all the information from your hard drive before you sell or dispose of your computer, phone or tablet, alternatively have the device destroyed set up email alerts that notify you each time your name is used somewhere online avoid online shopping and banking when using public WiFi as the connection may not be secure verify the security of a website before giving your credit card number or other financial information to a business, (look for a lock symbol located somewhere on the web page or make sure the URL begins with "https”) sign out of the website after completing a financial transaction online, and clear your browser’s cookies and cache ensure your computer’s anti-virus and other security features to detect malware are up-to-date avoid downloading apps or software on your phone or tablet unless they’re from official app stores or libraries understand that government organizations, financial institutions and police will never email or text to ask for your passwords or PINs never click on a link from a spam message, especially when it promises rewards, prizes or any exclusive information
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BYP 7-6 Santé Smoothie Saga Divisions of duty to strengthen internal accounting control are limited as the situation allows the involvement of only two individuals: Natalie and John. (a) 1.
Natalie and not John should perform the procedure of making deposits. If performed by John, the cash could be stolen before it is deposited in the bank. The frequency of the deposits should be increased from once a week to on an as needed basis instead of being kept in Natalie’s house, particularly if the receipts are in cash. If John was allowed to have control over the cash, he could avoid making a cash deposit and keep the cash. Later on in the record keeping for the deposits, he could cover up the fraud.
2.
John should be assigned the task of preparing cheques with the accompanying supporting documents only when the payments are due. Natalie should be the sole signing authority on the business bank account. She should review the supporting documents and write “paid” on the invoices to avoid duplicating the payment. Natalie should mail the payments and not John. In Natalie’s absence, no payments should be made directly by John and all payments should be postponed until Natalie’s return. If John was allowed to sign cheques, he could make unauthorized payments and cover the fraud in the record keeping of the transaction.
3.
John can record the deposits in the accounting records.
4.
John can record the cheques in the accounting records.
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BYP7-6 (Continued) 5.
Natalie should prepare the monthly bank reconciliation. In Natalie’s absence the procedure should be postponed until her return because John could potentially cover up a mistake in the recording of transactions when preparing the bank reconciliation.
6.
The accounting information for the business could be lost or stolen if it is all stored on John’s laptop. The accounting records should be under the care and custody of Natalie. Regular back-ups should be prepared.
7.
John can be assigned the duty to prepare financial statement on the condition that any adjusting journal entries are approved by Natalie before they are entered in the accounting system.
8.
John should not be able to write cheques to himself as this leaves the company vulnerable to theft. John should submit a monthly invoice to Natalie for her approval. Natalie should then write and sign the cheque. Having John perform a lot of the bookkeeping functions relating to the accounting system has the advantage of giving Natalie more time to do other tasks for her business. On the other hand, it opens up the possibility for some errors in accounting. Natalie will need to devote time for the review and approval of the accounting transactions initiated by John. In order to get better assurance that the work performed by John is proper and timely, Natalie can do spot checks on key accounts in the accounting system. She can also access the bank records on line regularly to review the activity in the business bank account and satisfy herself that all of the cash received by the business reaches the bank account and that payments out of the account are valid. This would strengthen the component of internal control for independent check for performance.
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BYP7-6 (Continued) (b) Santé Smoothie Bank Reconciliation October 31, 2017 Cash balance per bank statement.................................. Add: Deposits in transit – Oct. 28 ................................ Correction of cheque #452 ($452 - $425) ............ Less: Outstanding cheques No. 595 ................................................ No. 604 ................................................
$3,359 110 27 3,496
$238 297
Adjusted cash balance per bank ....................................
535 $2,961
Cash balance per books .................................................
$3,224
Less: EFT for Telus ........................................... $85 NSF cheque Ron Black........................... 100 NSF fee .................................................... 35 Bank service charges ............................. 13 Correction in Oct. 20 deposit of cash Sales ($125 −$155) ........................................... 30 Adjusted cash balance per books..................................
263 $2,961
Oct. 30 Telephone Expense................... Accounts Receivable—Black ... Bank Charges Expense ............ Sales........................................... Cash.......................................
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CHAPTER 8 Accounting for Receivables ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Questions
Brief Problems Exercises Exercises Set A
1. Prepare journal entries for accounts receivable transactions.
1, 2, 3, 4,
1, 2, 3, 4
1, 2, 3, 6
1, 2, 3, 8, 9
1, 2, 3, 8, 9
2. Demonstrate how to value accounts receivable and prepare adjusting journal entries for uncollectible accounts.
5, 6, 7, 8, 9, 10, 11, 12, 13
5, 6, 7, 8, 9, 10
4, 5, 6, 7, 12
1, 2, 3, 4, 5, 6, 7, 8
1, 2, 3, 4, 5, 6, 7, 8
3. Prepare journal entries for notes receivable transactions. 4. Demonstrate the presentation, analysis, and management of receivables.
14, 15, 16, 11, 12, 17 13, 14
8, 9, 10, 11
9, 10
9, 10
18, 19, 20, 6, 14, 15, 21, 22, 23 16
3, 11, 12, 13
2, 3, 8, 10, 11, 12, 13
2, 3, 8, 10, 11, 12, 13
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A
Difficulty Level Moderate
Time Allotted (min.) 35-45
Moderate
20-30
Moderate
35-45
Moderate
15-25
Moderate
20-30
6A
Prepare aging schedule and record bad debts and explain method. Prepare aging schedule and record bad debts.
Moderate
15-25
7A
Determine missing amounts.
Complex
20-30
8A
Record accounts receivable transactions and record bad debt expense. Record receivables transactions.
Simple
15-25
Moderate
35-45
Moderate
25-30
Moderate
20-30
12A
Record notes receivable transactions; show balance sheet presentation. Prepare assets section of balance sheet; calculate and interpret ratios. Calculate and interpret ratios.
Moderate
15-25
13A
Evaluate liquidity.
Moderate
15-25
1B
Record accounts receivable transactions. Post to subsidiary and general ledgers and prepare adjusting entry. Identify impact of accounts receivable transactions; determine statement presentation Record accounts receivable and bad debts transactions; show financial statement presentation. Calculate bad debt amounts and answer questions.
Moderate
35-45
Moderate
20-30
Moderate
35-45
Moderate
15-25
Moderate
20-30
6B
Prepare aging schedule and record bad debts and comment. Prepare aging schedule and record bad debts.
Moderate
15-25
7B
Determine missing amounts.
Complex
20-30
8B
Record accounts receivable transactions and record bad debt expense. Record receivables transactions.
Simple
15-25
Moderate
35-45
Moderate
30-40
Moderate
20-30
12B
Record note receivable transactions; show balance sheet presentation. Prepare assets section of balance sheet; calculate and interpret ratios. Calculate and interpret ratios.
Moderate
15-25
13B
Evaluate liquidity.
Moderate
15-25
2A 3A 4A 5A
9A 10A 11A
2B 3B 4B 5B
9B 10B 11B
Description Record accounts receivable transactions, post to subsidiary and general ledgers and prepare adjusting entry. Identify impact of accounts receivable transactions; determine statement presentation Record accounts receivable and bad debts transactions; show financial statement presentation. Calculate bad debt amounts and answer questions.
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objective
1. Record
accounts receivable transactions.
2. Calculate the
net realizable value of accounts receivable and account for bad debts.
3. Account for
Knowledge Q8-2 Q8-4 BE8-1
Comprehension Application Q8-1 BE8-2 P8-3A Q8-3 BE8-3 P8-8A BE8-4 P8-9A E8-1 P8-10A E8-2 P8-1B E8-3 P8-2B E8-6 P8-3B P8-1A P8-8B P8-2A P8-9B P8-10B
Analysis
Q8-8 Q8-11 Q8-13
Q8-5 Q8-6 Q8-7 Q8-9 Q8-10 Q8-11 Q8-12
BE8-5 BE8-6 BE8-7 BE8-8 BE8-9 BE8-10 E8-4 E8-5 E8-6 E8-7 E8-12 P8-1A
P8-7A P8-7B
Q8-17
Q8-14 Q8-16
Q8-23
Q8-18 Q8-19 Q8-20 Q8-21 Q8-22
Q8-15 BE8-11 BE8-12 BE8-13 BE8-14 E8-8 E8-9 BE8-6 P8-8A BE8-14 P8-10A BE5-15 P8-2B E8-3 P8-3B E8-11 P8-8B E8-12 P8-10B P8-2A P8-3A Santé Saga BYP8-6
notes receivable.
4. Demonstrate
the presentation, analysis, and management of receivables. Broadening Your Perspective
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P8-2A P8-3A P8-4A P8-5A P8-6A P8-8A P8-1B P8-2B P8-3B P8-4B P8-5B P8-6B P8-8B E8-10 E8-11 P8-9A P8-10A P8-9B P8-10B
BE8-16 E8-13 P8-11A P8-12A P8-13A P8-11B P8-12B P8-13B BYP8-1 BYP8-2
Synthesis Evaluation
BYP8-4 BYP8-5
Chapter 8
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Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
For a service company, a receivable is recorded when service is provided on account, the performance obligation is complete, and the revenue is recognized. For a merchandising company, a receivable is recorded when the goods are delivered, fulfilling the performance obligation, revenue is recognized, and the customer is given credit terms.
2.
Accounts receivable are amounts owed by customers on account while notes receivable are claims for which formal instruments (written instructions) of credit are issued as evidence of the debt. An account receivable is the result of a credit sale while a note receivable can result from financing a purchase, lending money, or extending an account receivable beyond normal amounts or due dates. An account receivable is usually due in a short period of time (e.g., 30 days) while a note receivable can extend for a longer period of time (e.g., 30 days to many years). An account receivable does not incur interest unless the account is overdue. A note usually bears interest for the entire term.
3. (a) In order to manage its accounts receivable, a company must be able to account for customer transactions on a customer-by-customer basis. The use of detailed customer accounts ensures that customer payments on account are properly recorded and outstanding balances are promptly and appropriately updated. Up-to-date accounts assist management with collection efforts. Detailed records also allow management to properly assess the credit status of any individual customer when deciding on credit terms and determining if allowing additional sales creates additional credit risks. (b) In order to keep track of individual customer accounts, companies use a subsidiary ledger that shows all of the sales and collection activity on a customer-by-customer basis. The accounts receivable account in the general ledger is a control account that tracks all transactions affecting accounts receivable in total for all customer accounts. That total is in turn used when preparing the balance sheet. Each transaction that affects accounts receivable is posted twice: once to the subsidiary ledger and once to the general ledger. Normally, in a manual system, entries to the subsidiary ledger are posted daily, while entries to the general ledger are summarized and posted monthly. 4.
Interest is recorded on an account receivable balance once the customer has failed to pay the account by the due date documented on the invoice. Sometimes a grace period, for example three days, is given for payments received beyond the due date, before interest is applied to the account. The rate of interest calculated must correspond to the terms given in the invoice.
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QUESTIONS (Continued) 5.
Companies decide to sell goods or services on credit because of the forces of competition. Given a choice between two suppliers, a customer will choose the supplier that offers credit over one that does not. Lost sales have a direct adverse impact on profit. Consequently, it is better for a business to offer credit and suffer some losses from accounts that need to be written off than to lose the sale outright.
6.
I agree that Access can eliminate bad debts by making only cash sales. I agree with the sales manager that doing so might not be a prudent decision. The sales lost to competitors might cause a downturn in profit far greater than any caused by bad debt expense. Strategies, including doing a proper scrutiny of potential customers’ credit worthiness, can greatly reduce the risk of non-collection. As well, Access should closely monitor its accounts receivable to reduce further losses on suspect accounts by suspending sales.
7.
The net realizable value of accounts receivable is the collectible amount of the accounts receivable; the amount of the cash expected from the collection of the accounts. Reporting accounts receivable at net realizable value ensures that the company is portraying its current assets accurately on its balance sheet, which indicates the company’s ability to pay its liabilities when due.
8.
The allowance method of accounting for bad debts affects the financial statements. It leads to the accrual and recognition of bad debt expenses on the income statement. This accrual is recorded to recognize the expense in the same accounting period as the sale on account. The risk of not being able to convert the account receivable to cash that could lead to a write-off should be estimated and accrued. The second result that occurs from recording of the accrual is the creation and maintenance of a contra asset account called Allowance for Doubtful Accounts which reduces gross accounts receivable to the net realizable value of those accounts receivable reported in the balance sheet. Consequently, assets are not overstated in the balance sheet. The financial statement reader is therefore able to properly assess the liquidity of the business, and expected future collections on account of the business.
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QUESTIONS (Continued) 9.
The two approaches of estimating uncollectibles under the allowance method are (1) percentage of receivables (balance sheet approach) and (2) percentage of sales (income statement approach). Under the percentage of receivables approach, the balance in the allowance for doubtful accounts is derived either (a) by applying a percentage estimate of bad debts to total receivables or (b) from an analysis of individual customer accounts. This method emphasizes net realizable value of accounts receivable. The percentage of sales approach establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts. This method emphasizes the matching of expenses with revenues.
10.
The bad debts expense account is a temporary account that reflects only the current year’s estimate of expense required to bring the allowance account to its required balance. Since it is a temporary account, it is closed at the end of the fiscal year. On the other hand, the allowance account is a permanent account, which is used to value accounts receivable at net realizable value at the end of a reporting period. Entries for the accrual of bad debt expenses cause the allowance account to increase, but write offs and collections of accounts previously written off also result in decreases and increases to the allowance account, respectively.
11.
When a specific customer account is determined to be uncollectible and written off, bad debt expense does not increase. The recognition of the expense occurred earlier, when an estimate of the expense was accrued at the end of a previous reporting period. Having done so, the write-off entry is an expected outcome of what the earlier estimate predicted. Recording of a write off to the expense account would cause the expense to be double counted.
12.
An aging schedule is a summary of all accounts receivable outstanding showing a total for each age category. A percentage estimate of likely write-offs is applied to each age category to arrive at a more accurate estimate of the required balance in the allowance for doubtful accounts and consequently the net realizable value of accounts receivable. The older the account receivable, the higher the percentage of write-off applied, based on past experience.
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QUESTIONS (Continued) 13.
The first entry is made to reverse the write-off of the account receivable in order to reinstate the accounts receivable since it has been proven to be collectible. The second entry records the collection of the account receivable. Although the result of the two journal entries could be accomplished with one combined entry, it is best to have separate journal entries for the reversal and subsequent collection. By both debiting and crediting accounts receivable, the customer’s subsidiary ledger account will be updated to show the reversal of the previous write-off and the collection of the cash. This will provide more accurate information about the customer’s payment history in case that customer wants to obtain credit again in the future.
14.
A company will take a note receivable from a customer in settlement of a late accounts receivable because it provides a stronger legal claim to assets and normally includes interest. The note is further evidence and acknowledgement on the part of the customer of the amounts owed to the company.
15.
A dishonoured note is a note that is not paid in full at maturity. The payee still has a claim against the maker of the note for both the principal and the unpaid interest. If there is hope of collection, the payee can transfer the amount owing to an accounts receivable account. If there is no hope of collection, the payee should write off the note.
16.
A note receivable is a formal credit instrument and a written promise to pay a specified amount of money on demand or at a definite time. The party to whom payment is made is called the payee and the party making the promise is referred to as the maker of the note. Notes will generally carry a formal interest rate and interest is paid throughout the term of the note. An accounts receivable is a short term (usually 30 days) financing vehicle that customers can use, no interest is charged for the period before the amount is due, and no formal written document is prepared. Customers are simply granted a credit term and expected to pay the amount in the appropriate time period. Notes receivable generally have a term longer than 30 days and can have terms up to several years.
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QUESTIONS (Continued) 17.
Disagree. Although the account has a normal credit balance, it is a contra asset account which should appear on the asset side of the balance sheet as a deduction from gross accounts receivable. The sub-total (accounts receivable less allowance for doubtful accounts) reports the net realizable value of the accounts receivable.
18.
Each of the major types of receivables should be identified in the balance sheet as follows: Current assets: Accounts receivable xx Less: Allowance for doubtful accounts......... xx Notes receivable .......................................... Sales taxes recoverable ............................................... Income taxes receivable ............................................... Total current assets ................................................. Long-term investments Notes receivable ...........................................................
xx xx xx xx xx xx
19.
An increase in the current ratio normally indicates an improvement in liquidity. This may not always be the case because the composition of current assets may vary. For example, increased receivables will result in a higher current asset position, and higher current ratio. However, the increase in receivables may be due to slower collections rather than improved sales. The same argument would hold true for increases in inventory balances.
20.
In order to determine if the increase in the current ratio is an improvement in financial health, other ratios the firm should consider are receivable turnover and collection period, inventory turnover, and days sales in inventory ratios.
21.
When a company’s receivable turnover is slower (fewer times), this means that the business has not been able to convert accounts receivable to cash as quickly as it did in the past. The management of receivables has therefore worsened.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 22.
The reasons companies sometimes sell their receivables are: (1) For competitive reasons, sellers of large ticket items often must provide financing to purchasers of their goods for extended periods. Selling receivables provides a more current source of cash to help finance operations. (2) Receivables may be sold because they may be the only reasonable source of cash readily at hand. (3) The collection of accounts is often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivable to another party who has the necessary resources and expertise in collection matters. This will also speed up the collection of cash and possibly avoid bad debt write-offs.
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Chapter 8
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 (a) (b) Trans. Accounts Notes No.: Receivable Receivable
(c) Total Assets
(d) (e) Total Owner's Liabilities Equity
1. 2. 3. 4. 5. 6.
Increase Increase Increase No effect No effect No effect
No effect Increase No effect No effect No effect Decrease
Increase No effect No effect Decrease Decrease No effect
No effect No effect Increase No effect Increase No effect
Increase No effect Increase No effect No effect Increase
BRIEF EXERCISE 8-2 (a) Sept. 1
Accounts Receivable ......................... 16,000 Service Revenue ............................
16,000
(b) Sept. 10 Cash .................................................... 15,680 Sales Discount ($16,000 × 2%) .......... 320 Accounts Receivable .....................
16,000
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Chapter 8
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 8-3 (a) May 1
Accounts Receivable ........................... 30,000 Sales ...............................................
(b) June 30 Accounts Receivable ......................... Interest Revenue ............................ ($30,000 × 10% × 1/12) (c) July 5
30,000
250 250
Cash ($30,000 + $250) .......................... 30,250 Accounts Receivable .....................
30,250
BRIEF EXERCISE 8-4 Aug. 7
Credit Card Receivable—J. Biggs .... Sales ............................................... Cost of Goods Sold ............................ Merchandise Inventory ..................
600
15 Sales Returns and Allowances.......... Credit Card Receivable— J. Biggs
100
Credit Card Receivable— J. Biggs ... Interest Revenue ............................ [($600 - $100) × 18% × 1/12)]
7.50
Sept. 7
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600 250 250
100 7.50
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 8-5 Number of Days Outstanding 0-30 days 31-60 days 61-90 days Over 90 days Total
Accounts Receivable
% Estimated Uncollectible
$265,000 70,000 45,000 20,000 $400,000
1% 4% 10% 20%
Accounts receivable Less: Allowance for doubtful accounts Net realizable value
Estimated Uncollectible Accounts $ 2,650 2,800 4,500 4,000 $13,950 $400,000 13,950 $386,050
BRIEF EXERCISE 8-6 (a) Dec. 31 Bad Debts Expense: [$13,950 − $4,500]
$9,450
(b) GOUDREAU CO. Balance Sheet (Partial) December 31, 2017 Assets Current assets $ 90,000 Cash............................................................................. Accounts receivable .....................................$400,000 Less: Allowance for doubtful accounts ... 13,950 386,050 Merchandise inventory............................................... 130,000 Prepaid insurance....................................................... 7,500 Total current assets ............................................... $613,550
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 8-7 (a) Apr. 30
Bad Debts Expense .............................. 13,050 [($950,000 − $60,000 − $20,000) x 1.5%] Allowance for Doubtful Accounts .
(b) Accounts receivable Less: Allowance for doubtful accounts* Net realizable value *($6,000 + $13,050)
13,050 $310,000 19,050 $290,950
BRIEF EXERCISE 8-8 1. 2. 3. 4. 5. 6.
Collect previously written off account Provide service on account Write off uncollectible account Collect accounts receivable Record bad debt expense Reverse previously written off account
(f) (a) (c) (b) (d) (e)
BRIEF EXERCISE 8-9 (a)
Jan. 31 Allowance for Doubtful Accounts Accounts Receivable............
5,500 5,500
(b) Accounts receivable Less: Allowance for doubtful accounts Net realizable value
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(1) Before Write-Off $575,000
(2) After Write-Off $569,500
28,000 $547,000
22,500 $547,000
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 8-10 June 4
Accounts Receivable ......................... Allowance for Doubtful Accounts.
5,500
Cash .................................................... Accounts Receivable .....................
5,500
5,500 5,500
BRIEF EXERCISE 8-11 Note (a) Total Interest 1. $15,000 × 6% × 9/12 = $675 2. $44,000 × 8% × 6/12 = $1,760 3. $30,000 × 7% × 15/12 = $2,625
(b) Interest 2017 $15,000 × 6% × 4/12 = $300 $44,000 × 8% × 2/12 = $587 $30,000 × 7% × 3/12 = $525
(c) Interest 2018 $15,000 × 6% × 5/12 = $375 $44,000 × 8% × 4/12 = $1,173 $30,000 × 7% × 12/12 = $2,100
BRIEF EXERCISE 8-12 Jan. 10 Accounts Receivable—Lechner .......... 15,600 Sales ...............................................
15,600
Feb. 9 Notes Receivable—Lechner ................ 15,600 Accounts Receivable—Lechner ...
15,600
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Chapter 8
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 8-13 (a) June 1 Notes Receivable ................................. 27,000 Accounts Receivable..................... Oct.
27,000
1 Cash ...................................................... 27,540 Notes Receivable ........................... Interest Revenue [$27,000 × 6% × 4/12]
27,000 540
1 Accounts Receivable ........................... 27,540 Notes Receivable ........................... Interest Revenue [$27,000 × 6% × 4/12]
27,000 540
1 Allowance for Doubtful Accounts ....... 27,000 Notes Receivable ...........................
27,000
(b)
Oct.
(c) Oct.
Note: The Allowance for Doubtful Accounts is used assuming Lee Company uses only one allowance account for both accounts and notes receivable.
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Chapter 8
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 8-14 (a) 2017 July 1 Oct 1
Notes Receivable................................ 100,000 Cash................................................
100,000
Cash ........................................................ 1,000 Interest Revenue............................ ($100,000 × 4% × 3/12)
1,000
Interest Receivable................................. 1,000 Interest Revenue............................ ($100,000 × 4% × 3/12)
1,000
(b) Dec 31
(c) Included in the current assets section of the balance sheet will be $1,000 of interest receivable and $100,000 note receivable.
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 8-15 Receivables turnover $2,000,000 ÷ [($270,000 + $280,000) ÷ 2] = 7.27 times Collection period 365 days ÷ 7.27 = 50 days
BRIEF EXERCISE 8-16 (a) Receivables turnover — 2014 $3,157,241 ÷ [($60,396 + $111,034) ÷ 2] = 36.83 times Collection period — 2014 365 days ÷ 36.83 = 9.9 days Receivables turnover — 2013 $2,954,777 ÷ [($111,034 + $117,533) ÷ 2] = 25.85 times Collection period — 2013 365 days ÷ 25.85 = 14.1 days (b) The company’s receivables turnover and collection period have improved dramatically in 2014, and so the company’s liquidity should have improved.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 8-1 June 3 Credit Card Receivable—Kidd .................. 1,050 Sales ......................................................
1,050
6 Cash ........................................................... Credit Card Expense [$840 × 2.5%] .......... Sales ......................................................
819 21 840
9 Accounts Receivable—Montpetit ............. Sales ......................................................
421 421
19 Cash .......................................................... 229.50 Debit Card Expense ................................. 0.50 230.00 Sales ...................................................... 20 Cash ........................................................... Credit Card Receivable—Kidd .............
315
23 Accounts Receivable—Montpetit ............. Sales ......................................................
498
25 Cash ........................................................... Accounts Receivable— Montpetit .......
421
315
498
421
30 Cash ......................................................... 409.50 Credit Card Expense [$420 × 2.5%] .......... 10.50 Sales ...................................................... 420.00
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Chapter 8
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-2 (a) Jan. 6 Accounts Receivable—Pryor.................... 7,000 Sales ......................................................
7,000
16 Cash ........................................................... 6,860 Sales Discounts ($7,000 x 2%) ................. 140 Accounts Receivable—Pryor ...............
7,000
Jan. 10 Accounts Receivable—Laskowski ........... 9,000 Sales ......................................................
9,000
15 Sales Returns and Allowances................. Accounts Receivable—Laskowski ......
600 600
Mar. 10 Accounts Receivable—Laskowski ........... Interest Revenue .................................. [($9,000 − $600) × 1%]
84
(b)
Mar. 31 Cash ........................................................... 8,484 Accounts Receivable—Laskowski .......... ($9,000 - $600 + $84)
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84
8,484
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-3 (a) Oct. 15 Credit Card Receivable ............................. 15,000 Service Revenue .................................. 15,000 Cash [$7,500 − $263] ................................. 7,237 Credit Card Expense [$7,500 × 3.5%] ....... 263 Service Revenue ..................................
7,500
30 Accounts Receivable ................................ 2,000 Service Revenue ............................
2,000
Cash [$5,000 − $50] ................................... 4,950 Debit Card Expense [100 × $0.50] ............ 50 Service Revenue ...................................
5,000
20
31
Nov. 15 Cash ........................................................... 15,000 Credit Card Receivable......................... 15,000
(b) CASA GARAGE CO. Income Statement Two Months Ended November 30, 2017 Service revenue............................................................. Operating expenses Salaries expense...................................... $5,000 Rent expense ........................................... 4,000 Supplies expense .................................... 500 Credit and debit card expense ................ 313 Profit...............................................................................
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$ 29,500
9,813 $ 19,687
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 8-4 (a) (1)
Dec. 31 Bad Debts Expense ..................... 15,800 Allowance for Doubtful Accounts [($180,000 x 10%) − $2,200]
(2)
15,800
31 Bad Debts Expense ..................... 20,250 Allowance for Doubtful Accounts 20,250 [($1,420,000 − $50,000 − $20,000) x 1.5%]
(b) Accounts receivable Less: Allowance for doubtful accounts Net realizable value
(1) $180,000
(2) $180,000
18,000* $162,000
22,450** $157,550
*$18,000 = $2,200 + $15,800 **$22,450 = $2,200 + $20,250 (c) (1) Bad debt expense = $18,000 + $2,600 = $20,600 (2) Bad debt expense = $20,250 (1) Accounts receivable $180,000 Less: Allowance for doubtful 18,000* accounts Net realizable value $162,000
(2) $180,000 17,650** $162,350
*$18,000 = −$2,600 + $20,600 **$17,650 = −$2,600 + $20,250
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-5 (a) Age of Accounts 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
Amount $170,000 35,700 20,000 15,300
(b) Accounts receivable Less: Allowance for doubtful accounts Net realizable value (c)
% 1 10 25 60
Estimated Uncollectible $1,700 3,570 5,000 9,180 $19,450 $241,000 19,450 $221,550
Sept. 30 Bad Debts Expense ..................... 20,850 Allowance for Doubtful Accounts [$19,450 + $1,400]
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-6 (a) and (b) Item (a) $45,000 Amount of credit sales in sales account (b)
$800
(c)
$ 15,000 +45,000 −800 −35,200 $24,000
Opening balance Item (a) Sales on account Item (b) Write offs of accounts receivable Collection on account (given) Ending balance
(d)
$1,200 −800 −2,400
Opening balance Write offs of accounts receivable (given) Required ending balance in Allowance (Item (c) $24,000 x 10%) Adjustment to allowance and bad debt expense recorded
$-2,000
Write offs of accounts receivable
(e) $2,400 Required balance based on aging 10% of (c)
Entries (not required) with description: (a)
(b)
(d)
(c)
Accounts Receivable ......................... 45,000 Sales ............................................... Sales on account for the year Allowance for Doubtful Accounts ..... Accounts Receivable ..................... Write-off of accounts receivable
45,000
800
Bad Debts Expense ............................ 2,000 Allowance for Doubtful Accounts. To record estimate of uncollectible accounts.
800
2,000
Cash collected $35,200 (credit entry to accounts receivable).
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Chapter 8
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-7 (a) 2016 Dec. 31 Bad Debts Expense [(5% × $650,000) + $2,300] ................. 34,800 Allowance for Doubtful Accounts.
34,800
2017 Mar. 5 Allowance for Doubtful Accounts ..... Accounts Receivable—Mirza ........
3,700
3,700
5 Allowance for Doubtful Accounts ..... Accounts Receivable—Wight .......
6,900
June 6 Accounts Receivable—Wight ............ Allowance for Doubtful Accounts.
6,900
6 Cash .................................................... Accounts Receivable—Wight .......
6,900
6,900
6,900
6,900
(b)
Date 2016 Dec. 31 31 2017 Mar. 5 5 June 6
General Ledger Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance Balance unadjusted AJE
DR 2,300 34,800 32,500
Write off Mirza Write off Wight Collection of Wight
3,700 6,900 6,900
(c) Accounts receivable Less: Allowance for doubtful accounts Net realizable value
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28,800 21,900 28,800
Before Recovery $641,000
After Recovery $641,000
21,900 $619,100
28,800 $612,200
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 8-8 Using the equation, Interest (I) = Principal (P) x Rate (R) x Time (T): (a)
Solve for P $12,000 = P x 6% x 2 $12,000 = P x 0.12 $12,000 ÷ 0.12 = P x 0.12 ÷ 0.12 P = $12,000 ÷ 0.12 P = $100,000 (b) Solve for R $4,800 = $120,000 x R x (6 ÷ 12) $4,800 = $60,000 x R $4,800 ÷ $60,000 = $60,000 x R ÷ $60,000 R = $4,800 ÷ $60,000 R = 0.08 or 8% (c)
Solve for I I = $180,000 × 10% × 3/12 I = $4,500
(d)
Total interest on the note is $4,500 ($180,000 × 10% × 3/12 – same in (c) above)
(e)
Solve for I I = $120,000 x 0.08 x (5/12) I = $4,000 OR $4,800 ÷ 6 × 5 = $4,000
(f)
Solve for I I = $100,000 x 0.06 x (2/12) I = $1,000 OR $12,000 ÷ 24 × 2 = $1,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-9 Using the equation = Interest (I) = Principal (P) x Rate (R) x Time (T): (a) Solve for P $450 = P x 9% x (4 ÷ 12) $450 = P x 0.03 $450 ÷ .03 = (P x 0.03) ÷ 0.03 P = $450 ÷ .03 P = $15,000 (b) Solve for R $1,500 = $60,000 x R x (5 ÷ 12) $1,500 = $25,000 x R $1,500 ÷ $25,000 = ($25,000 x R) ÷ $25,000 R = $1,500 ÷ $25,000 R = 0.06 or 6% (c) Solve for I I = $30,000 x 10% x (6 ÷ 12) I = $1,500 (d) Solve for I I = $45,000 X 8% x (4 ÷ 12) I = $1,200
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Chapter 8
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-10 Nov. 1 Notes Receivable—Morgan ............... 60,000 Cash................................................ 15 Accounts Receivable—Giorgi ........... 12,000 Sales ............................................... Cost of Goods Sold ............................ 7,500 Merchandise Inventory .................. Dec. 1 Notes Receivable—Wrightman.......... 21,000 Sales ............................................... Cost of Goods Sold ............................ 14,000 Merchandise Inventory .................. 15 Notes Receivable—Giorgi.................. 12,000 Accounts Receivable—Giorgi ....... Dec. 31 Interest Receivable............................. Interest Revenue* .......................... *Calculation of interest revenue: Morgan: $60,000 × 8% × 2/12 Wrightman: $21,000 × 6% × 1/12 Giorgi: $12,000 × 7% × 0.5/12 Total accrued interest
7,500
21,000 14,000
12,000 940
$800 105 35 $940
June 15 Accounts Receivable—Giorgi ........... 12,420 Interest Receivable ........................ Interest Revenue [$12,000 × 7% × 5.5/12] .................. Notes Receivable—Giorgi .............
8-27
12,000
940
Mar. 1 Cash ...................................................... 21,315 Interest Receivable ........................ Interest Revenue [$21,000 × 6% × 2/12] ..................... Notes Receivable—Wright ............
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60,000
105 210 21,000
35 385 12,000
Chapter 8
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-11 May
1 Notes Receivable—Jioux ................... 15,000 Accounts Receivable—Jioux ........
June 30 Interest Receivable............................. Interest Revenue [$15,000 × 6% × 2/12] .....................
150
July 31 Notes Receivable—Irvine................... Cash................................................
2,000
15,000
150
Aug. 31 Cash .................................................... Interest Revenue ($2,000 × 5% × 1/12)
2,000 8 8
Sept. 30 Cash ........................................................ 2,008 Interest Revenue ($2,000 × 5% × 1/12) Notes Receivable—Irvine ..............
8 2,000
Nov. 1 Allowance for Doubtful Accounts ....... 15,150 Notes Receivable—Jioux .............. Interest receivable .........................
15,000 150
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-12 (a)
Total interest revenue for the year ended December 31, 2017 − $1,448 calculated as follows: Note 1. 2. 3.
Calculation
Interest Revenue $15,000 × 4% × 4/12 = $ 200 $32,000 × 4% × 11/12 = 1,173 $9,000 × 5% × 2/12 = 75 Total $1,448
Interest Revenue is reported under other revenues on the income statement. (b)
All notes receivable will be reported under the current asset section of the balance sheet because they are all due within the next 12 months from the balance sheet date for a total of $56,000. Interest receivable is also due within the next 12 months of the balance sheet date and therefore is reported under the current asset section of the balance sheet in the amount of $1,448.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-13 (a) Dec. 31 Bad Debts Expense .............................. 28,000 Allowance for Doubtful Accounts. ($700,000 × 4%)
28,000
(b) NICHOLAY INDUSTRIES Balance Sheet (Partial) December 31, 2017 Assets Current assets Cash.......................................................................... $ 40,000 Short-term investments........................................... 50,000 Accounts receivable ................................. $700,000 Less: Allowance for doubtful accounts . 28,000 672,000 Notes receivable, due April 10, 2018 ...................... 45,000 Interest receivable ................................................... 1,125 Merchandise inventory............................................ 325,000 Prepaid insurance.................................................... 8,000 Total current assets ............................................ $1,141,125 (c) Receivables Turnover: ($4,000,000 − $100,000) ÷ [($700,000 + $0*) ÷ 2] = 11.1 times *Accounts receivable at the beginning of the year would have been $0 because this was the first year of business. Average Collection Period: 365 days ÷ 11.1 = 32.9 days
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Accounting Principles, Seventh Canadian Edition
EXERCISE 8-14 (a)
Current Ratio: 2014: $2,066 ÷ $2,201 = 0.94 2013: $1,977 ÷ $2,498 = 0.79
(b) Receivables Turnover: 2014: $12,134 ÷ [($937 + $822) ÷ 2] = 13.80 times 2013: $10,575 ÷ [($822 + $841) ÷ 2] = 12.72 times Average Collection Period: 2014: 365 days ÷ 13.80 = 26.5 days 2013: 365 days ÷ 12.72 = 28.7 days (c)
Both liquidity and the management of accounts receivable have improved. For liquidity, the current ratio is low but has increased significantly from 0.79 to 0.94. For the management of accounts receivable, the improvement is evidenced by the decrease in the average collection period from 28.7 days to 26.5 days and the increase in the receivables turnover from 12.72 times to 13.80 times.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 8-1A (a) Jan. 3 Cash ........................................................ 18,000 Accounts Receivable—Brown’s Rep. 4
Accounts Receivable—Custom Rep... Allowance for Doubtful Accounts.
18,000
1,400 1,400
Cash .......................................................... 1,400 Accounts Receivable—Custom Rep.
1,400
Accounts Receivable—Jen’s Auto Body 3,800 Sales ...............................................
3,800
Cash .......................................................... 1,500 Sales ...............................................
1,500
Sales Returns and Allowances ........... 800 Accounts Receivable—Jen’s Auto Body
800
Cash ........................................................ 13,200 Accounts Receivable—Luxury Autos
13,200
Cash ........................................................ 25,000 Accounts Receivable—Jen’s Auto Body
25,000
Accounts Receivable—Brown’s Repair 5,600 Sales ...............................................
5,600
25 Cash (Visa) ............................................. 10,000 Sales ...............................................
10,000
8
9
18
19
20
23
26
Accounts Receivable—Luxury Autos. 18,000 Sales ...............................................
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18,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 8-1A (Continued) (a) (Continued) Jan. 31 Allowance for Doubtful Accounts ........... 3,800 Accounts Receivable—Best Auto Rep. (b) Dec. 31 Bal. Jan. 4 Jan. 8 Jan. 23 Jan. 26
Jan. 31 Bal.
Jan. 31
Accounts Receivable 75,000 Jan. 3 1,400 Jan. 4 3,800 Jan. 18 5,600 Jan. 19 18,000 Jan. 20 Jan. 31
18,000 1,400 800 13,200 25,000 3,800
41,600 Allowance for Doubtful Accounts Dec. 31 Bal. 3,800 Jan. 4 Unadj. Bal.
Accounts Receivable—Best Auto Repair Dec. 31 Bal. 3,800 Jan. 31 Jan. 31 Bal. 0 Accounts Receivable—Brown’s Repair Dec. 31 Bal. 23,000 Jan. 3 Jan. 23 5,600 Jan. 31 Bal. 10,600 Accounts Receivable—Custom Repair Dec. 31 Bal. 0 Jan. 4 Jan. 4 1,400 Jan. 31 Bal. 0
Solutions Manual .
3,800
8-33
3,750 1,400 1,350
3,800
18,000
1,400
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Accounting Principles, Seventh Canadian Edition
PROBLEM 8-1A (Continued) (b) (Continued) Accounts Receivable—Jen’s Auto Body Dec. 31 Bal. 35,000 Jan. 18 Jan. 8 3,800 Jan. 20 Jan. 31 Bal. 13,000 Accounts Receivable—Luxury Autos Dec. 31 Bal. 13,200 Jan. 19 Jan. 26 18,000 Jan. 31 Bal. 18,000 (c)
(d)
Bad Debts Expense ........................................ 2,810 Allowance for Doubtful Accounts [($41,600 × 10%) − $1,350] ..................... Best Auto Repair Brown’s Repair Custom Repair Jen’s Auto Body Luxury Autos Total subsidiary ledgers
800 25,000
13,200
2,810
$ 0 10,600 0 13,000 18,000 $41,600
Balance equals control account of $41,600 Taking It Further: While discontinuing to offer credit to customers and insisting that customers use only credit or debit cards and cash will essentially eliminate the risk of non-collection and speed up collection of cash, it will have adverse effects. Customers will likely decide to buy goods or services from another supplier who does offer credit. In addition, credit and debit cards will bring about fees expenses. Losing a sale can bring adverse consequences to profitability.
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PROBLEM 8-2A (a) Transaction Cash Sept. 1. NE 2. NE 3. +$59,200 4. NE 5. NE Oct. 1. NE 2. +$350 3. +$58,500 4. NE 5. NE 6. NE
(1) (2)
Acc. Receiv.
Allow. for Doubt. Accts.
+$56,300 −$900 −$59,200 +$745 NE
NE −$25,335 NE +$400 NE NE NE NE (1)+$1,108 NE
+$30,965 +$30,965 −$500 −$500 NE NE +$745 +$745 −$1,108 −$1,108
+$63,900 NE −$58,500 −$7,500 +$710 NE
NE −$28,700 +$350 NE NE NE −$7,500 NE NE NE (2)+$5,864 NE
+$35,200 +$35,200 NE NE NE NE NE NE +$710 +$710 −$5,864 −$5,864
Invent.
Total Assets
Owner's Equity
($56,300 − $900) x 2% = $1,108 Bad Debts Expense = [($70,055 x 4%) + $3,062] = $5,864 (See Accounts Receivable and Allowance for Doubtful Accounts balances in ledger that follows.)
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PROBLEM 8-2A (Continued) (a) (Continued) Ledgers not required, used for accumulating balances
Date Sept. 1. 2. 3. 4. Oct. 1. 2. 2. 3. 4. 5.
Date Sept. 5. Oct. 2. 4. 6.
Accounts Receivable Explanation Ref. Debit Opening Balance Sales Returns Collections Interest charges
Credit Balance
56,300 900 59,200 745
Sales Recovery Collection recovery Collections Write offs Interest charges
63,900 350 350 58,500 7,500 710
74,500 130,800 129,900 70,700 71,445 135,345 135,695 135,345 76,845 69,345 70,055
Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance Opening Balance Bad debts expense
1,108
Recovery Write offs Bad debts expense
350 7,500 5,864
(b) Current assets: Accounts receivable.............................. Less: Allowance for doubtful accounts
2,980 4,088 4,438 3,062Dr. 2,802
$70,055 2,802 $67,253
(c) Bad debts expense: $16,832 ($9,860 + $1,108 + $5,864)
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PROBLEM 8-2A (Continued) Taking It Further: Cotton Company can use the percentage of sales method at month-end periods to accrue bad debt expenses and then use the percentage of accounts receivable method at the end of the fiscal year because the interim statements are not distributed to anyone outside of the company. The percentage of sales method is easy to administer and provides an adequate estimate for interim internal financial statement reporting. For the fiscal year end, the percentage of receivables method, a balance sheet approach, shows the accounts receivable at their net realizable value.
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PROBLEM 8-3A (a)
Accounts Receivable ................................. 400,000 Sales .......................................................
400,000
Cash ............................................................ 361,500 Accounts Receivable.............................
361,500
(b) Allowance for Doubtful Accounts ............. 10,500 Accounts Receivable.............................
10,500
(c)
Accounts Receivable ................................. Allowance for Doubtful Accounts ........
1,750
Cash ............................................................ Accounts Receivable.............................
1,750
1,750 1,750
Posting to accounts not required:
Date
Date
Accounts Receivable Explanation Ref. Debit
Credit Balance
Balance Sales 400,000 Collections Write offs Reverse write off 1,750 Coll. of prev. write off
100,000 500,000 138,500 128,000 129,750 128,000
1,750
Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance Balance Write offs Reverse write off Bad debts expense
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361,500 10,500
10,500 (d)
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1,750 9,750
7,000 3,500 Dr. 1,750 Dr. 8,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 8-3A (Continued) (d) Bad Debts Expense ($8,000 + $1,750) ........... 9,750 Allowance for Doubtful Accounts ........
9,750
(e) Current assets: Accounts receivable ................................. $128,000 Less: Allowance for doubtful accounts 8,000
$120,000
(f)
The bad debts expense on the income statement for the period would be $9,750.
Taking It Further: When a specific customer account is determined to be uncollectible and written off, bad debt expense does not increase. Recognition of the expense occurred earlier, when an estimate of the expense was accrued at the end of a reporting period. Having done so, the write-off entry is an expected outcome of what the earlier estimate predicted. Recording a write off to the expense account would cause the expense to be double counted.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 8-4A (a)
$19,000 [$24,000 − ($20,000 − $17,500 + $2,500)]
(b) $22,500 ($1,000,000 x 2.25%) The balance in the allowance is not taken into consideration when using the percentage of sales approach. (c)
$27,000 [$24,000 − ($12,000 − $17,500 + $2,500)]
(d) The write off of an uncollectible account does not affect the current year’s bad debts expense at the time of recording the write off (debit the allowance and credit the accounts receivable). Accounts receivable is decreased and the allowance for doubtful accounts is also decreased, resulting in no change in the amount of the net realizable value of accounts receivable. However, when using the percentage of receivables approach, the amount of the bad debt expense recorded at the end of the period will be impacted by the amount of accounts receivable written off during the period. Since write offs decrease the allowance for doubtful accounts and the allowance account needs to be adjusted to the required balance at the end of the accounting period, the more the allowance account is reduced by write offs during the year, the higher the expense for the period will need to be in order to restore the allowance account to the required balance. If write offs during the accounting period are very low, then the expense should also be low for the accounting period.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 8-4A (Continued) (e)
The collection of an account previously written off will decrease the net realizable value of accounts receivable. The collection involves two entries; the first entry reverses the original write off and the second entry records a collection on account. This first entry increases the accounts receivable and the allowance for doubtful accounts, and so has no effect on the net realizable value of accounts receivable. But, the second entry decreases the accounts receivable balance, so the net realizable value of the receivables decreases.
Taking It Further: Hohenberger could speed up collection of accounts receivable by either borrowing from a bank using the accounts receivable as collateral or by selling the accounts receivable to a finance company that specializes in collecting these amounts. The advantages to each approach is a ready supply of cash that can be used in operations. Hohenberger would not have to wait 30 or more days for cash to be collected. In the case of selling accounts receivable, Hohenberger will not have to incur the time and cost involved to collect from customers. The disadvantages of borrowing from the bank are: Interest will have to be paid on the loan Banks are normally only willing to loan up to 75% of accounts receivable amounts and will not loan money on old outstanding accounts. The disadvantages of selling the accounts receivable to a finance company are: The amount of cash received in exchange for the accounts receivable will be discounted (reduced) by a fee charged by the finance company. So the amount of cash received will be less than the balance of accounts receivable. The finance company may be able to recover from Hohenberger any amounts that their customers ultimately did not pay.
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PROBLEM 8-4A (Continued) -
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Customers may not be satisfied with the arrangement, i.e., having to pay a different company, and may take their business elsewhere.
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PROBLEM 8-5A (a)
Total Estimated percentage uncollectible Estimated uncollectible accounts
(b)
(c)
(d)
(e)
Total $640,000
$36,200
0-30 31-60 $360,000 $140,000
61-90 $100,000
91-120 $40,000
2%
5%
10%
30%
$7,200
$7,000
$10,000
$12,000
Bad Debts Expense .................................. Allowance for Doubtful Accounts [$36,200 + $3,000] ..........................
39,200
Allowance for Doubtful Accounts ........... Accounts Receivable ....................
18,000
Accounts Receivable................................ Allowance for Doubtful Accounts
5,500
Cash........................................................... Accounts Receivable ....................
4,500
39,200
18,000
5,500 4,500
When the year-end adjusting journal entry is prepared, bad debts expense is increased and the allowance for doubtful accounts is also increased. This results in recording bad debts expenses in the same period as the sales to which they relate, which means the expense has been matched with the revenue.
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PROBLEM 8-5A (Continued) (f)
The allowance method requires the accrual of bad debt expenses in the period in which the sales revenue is recorded. The Allowance for Doubtful Accounts account is a contra asset to accounts receivable. Its purpose is to reduce the value of the accounts receivable asset to its net realizable value reported on the balance sheet.
Taking It Further: The advantage of using an aging schedule to estimate uncollectible accounts is the amount calculated is much more sensitive to the length of time the receivable has been outstanding. The disadvantage of using an aging schedule (as compared to estimating uncollectible accounts as a percentage of total receivables) is it can be time consuming to gather the information if the accounting system being used does not calculate an aging of the accounts receivable.
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PROBLEM 8-6A
(a)
2016 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
2017 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
Amount $145,000 63,000 38,000 24,000 $270,000
Amount $115,000 35,000 45,000 80,000 $275,000
% 3 6 12 25
Estimated Uncollectible $ 4,350 3,780 4,560 6,000 $18,690
% 3 6 12 25
Estimated Uncollectible $ 3,450 2,100 5,400 20,000 $30,950
(b) 2016 Accounts Receivable ................................................ $270,000 Less: Allowance for Doubtful Accounts ................. 18,690 Net Realizable Value.................................................. $251,310 2017 Accounts Receivable ................................................ $275,000 Less: Allowance for Doubtful Accounts ................. 30,950 Net Realizable Value.................................................. $244,050
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PROBLEM 8-6A (Continued) (c) 1.
2.
3.
4.
Bad Debts Expense .................................... 12,090 Allowance for Doubtful Accounts [$18,690 − $6,600] ..................................
12,090
Allowance for Doubtful Accounts ............. 23,500 Accounts Receivable.............................
23,500
Accounts Receivable ................................. Allowance for Doubtful Accounts ........
2,200 2,200
Cash ............................................................ Accounts Receivable.............................
2,200
Bad Debts Expense .................................... 33,560 Allowance for Doubtful Accounts ........ [$30,950 − ($18,690 − $23,500 + $2,200)]
2,200
33,560
Taking It Further: Although accounts receivable have only increased $5,000 or 2% ($275,000 − $270,000), the estimated uncollectible amounts have increased by $12,260 or 66% ($30,950 − $18,690). The most significant increase occurred in the over 90 day balance where estimated uncollectible accounts rose from $24,000 to $80,000, demonstrating a dramatic deterioration in the age of the accounts receivable, resulting in a much larger allowance for doubtful accounts.
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PROBLEM 8-7A
Beg. Bal. Sales End. Bal.
Accounts Receivable 845,000 Note 1 (b) 4,200 (a) 5,370,000 Write offs (c) 50,400 4,200 Collections (d) 5,237,100 927,500
Note 1 Collection of account previously written off
Write off
Allowance for Doubtful Accounts Beg. Bal. 76,050 Rev. write off (b) 4,200 50,400 Bad debts (e) 53,700 End. Bal. 83,550 Sales Sales
5,370,000
Bad Debts Expense (e) 53,700 Accounts Receivable (a) ............................... 5,370,000 Sales ....................................................... Accounts Receivable ............................................. 4,200 Allowance for Doubtful Accounts (b)........ Cash ........................................................................ 4,200 Accounts Receivable (b) ............................ Collection of previously written off account Allowance for Doubtful Accounts ............. Accounts Receivable (c) .......................
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5,370,000 4,200 4,200
50,400 50,400
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Accounting Principles, Seventh Canadian Edition
PROBLEM 8-7A (Continued) Bad Debts Expense (e) .............................. Allowance for Doubtful Accounts (e) ... (Sales $5,370,000 x 1% = $53,700)
53,700 53,700
Cash ............................................................ 5,237,100 Accounts Receivable (f) ........................ 5,237,100 Force in account receivables account: ($845,000 + $5,370,000 + $4,200 − $50,400 − $4,200 − $927,500 = $5,237,100)
Taking It Further: Bad debt expense is a temporary account reported on the income statement. The balance is closed to Income Summary at the end of the accounting period. Allowance for doubtful accounts is a permanent account which is a contra asset to accounts receivable. Its purpose is to reduce the value of the accounts receivable asset to its net realizable value.
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PROBLEM 849A (a) # of Days Past due Not yet due 1-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due
Amount $137,000 29,000 24,000 30,000 44,000 $264,000
% 2 5 10 24 50
Estimated Uncollectible $ 2,740 1,450 2,400 7,200 22,000 $35,790
(b) Bad Debts Expense ...................................... 25,790 Allowance for Doubtful Accounts ........ ($35,790 − $10,000) =$25,790
25,790
(c) Current assets: Accounts receivable .................................. $264,000 Less: Allowance for doubtful accounts 35,790 $228,210 Taking It Further: By increasing the amount of credit checking, Kimler’s credit manager should be able to reduce the risk of not being able to collect accounts receivable but he won’t be able to eliminate the risk completely. Consequently, so long as Kimler sells on account, it will have bad debts. The risk of non-collection is not always apparent when first taking on a customer. Financial difficulties for a customer can develop over time or from an unpredictable, sudden event.
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PROBLEM 8-9A Jan. 2 Accounts Receivable —Sapounas .... 24,000 Sales ............................................... Cost of Goods Sold ............................ 14,400 Merchandise Inventory .................. Feb. 1 Notes Receivable—Sapounas ........... 24,000 Accounts Receivable —Sapounas 15 Notes Receivable—Garrison ............. 15,000 Sales ............................................... Cost of Goods Sold ............................ 9,000 Merchandise Inventory .................. Mar. 15 Accounts Receivable—Hoffman ....... 12,000 Sales ............................................... Cost of Goods Sold ............................ 7,200 Merchandise Inventory .................. Apr. 15 Cash .................................................... 12,000 Accounts Receivable—Hoffman ... May 15 Cash .................................................... 15,188 Notes Receivable—Garrison ......... Interest Revenue [$15,000 × 5% × 3/12] ..................... 31 Interest Receivable............................. 400 Interest Revenue ............................ (Sapounas note $24,000 × 5% × 4/12 = $400) July 1 Allowance for Doubtful Accounts ....... 24,400 Notes Receivable—Sapounas....... Interest Receivable ........................
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24,000 14,400
24,000
15,000 9,000
12,000 7,200
12,000
15,000 188 400
24,000 400
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Accounting Principles, Seventh Canadian Edition
PROBLEM 8-9A (Continued)
July 13 Notes Receivable—Weber ................. Sales ............................................... Cost of Goods Sold ............................ Merchandise Inventory ..................
6,000
Oct. 13 Accounts Receivable— Weber. ......... Notes Receivable— Weber............ Interest Revenue ($6,000 × 7% × 3/12) .......................
6,105
6,000 3,600 3,600
6,000 105
Taking It Further: The advantages of a note receivable compared to accounts receivable are that a note receivable gives a stronger legal claim to assets and includes interest. The disadvantage of a note receivable is that it postpones the collection of cash. The delay in collection can add to the risk of non-collection as time goes by if the financial condition of the customer is deteriorating further. Although the note can provide interest revenue if collected, if the note is dishonoured, neither the principal nor the interest is collected.
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PROBLEM 8-10A
(a)
Oct. 31 Accounts Receivable—Fournier Notes Receivable—Fournier Interest Receivable ($9,000 × 9% × 1/12) .............. Interest Revenue ($9,000 × 9% × 1/12) ..............
9,136 9,000 68 68
31 Cash ........................................... 12,240 Notes Receivable—Leroy ..... Interest Receivable ($12,000 × 8% × 2/12) ............ Interest Revenue ($12,000 × 8% × 1/12) ............ Oct. 31 Interest Receivable.................... 93 Interest Revenue................... (Nesbitt note $16,000 × 7% × 1/12 = $ 93)
12,000 160 80 93
(b) Notes Receivable Explanation Ref. Debit
Date Oct.
1 31 31
Oct.
Balance
9,000 12,000 Interest Receivable Explanation Ref. Debit
Date 1 31 31 31
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Credit Balance
Credit Balance
Balance
68 160 Adjusting entry
93
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PROBLEM 8-10A (Continued) (c) FARWELL COMPANY Balance Sheet (partial) October 31, 2017 Assets Current assets Interest receivable ......................................................
$93
Long-term investments Notes receivable ............................................................. $16,000
(d) Oct. 31 Allowance for Doubtful Accounts Notes Receivable—Fournier . Interest Receivable ($9,000 × 9% × 1/12) ...............
9,068 9,000 68
The interest previously accrued on this note should be written off, as well as the note itself. Also, no interest would be accrued for October. Taking It Further: The Fournier Co. note carries a higher interest rate as it is likely that Fournier has a poor credit rating and represents a collection risk that is higher than the average customer. Companies and banks will often charge a higher rate of interest to customers who have a history of defaulting on their loans – this is an attempt to compensate for the higher risk taken when loaning to customers with poor credit ratings.
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PROBLEM 8-11A (a) JENSEN COMPANY Balance Sheet (Partial) December 31, 2017 (in thousands) Assets Current assets Cash............................................................................... $ 395.6 Short-term investments................................................ 194.9 Notes receivable ........................................................... 96.0 Accounts receivable ....................................... $590.4 Less: Allowance for doubtful accounts ........ 35.4 555.0 Merchandise inventory................................................. 630.9 Prepaid expenses ......................................................... 20.1 Supplies .......................................................................... 21.7 Total current assets ......................................................... 1,914.2 Long-term investments Notes receivable ......................................................... 191.1 Property, plant, and equipment Equipment ......................................................$1,732.8 Less: Accumulated depreciation ................ 858.7 874.1 Total assets ............................................................... $2,979.4
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PROBLEM 8-11A (Continued) (b) 2017 Receivables turnover:
2016
($4,565.5 − $31.3) ($590.4 + $611.1) ÷ 2 = 7.5
= 8.3*
365 ÷ 7.5 = 48.7 days
365 ÷ 8.3 = 44 days
*Given in the problem Average collection period:
Jensen’s receivables turnover ratio was lower in 2017, which means that Jensen was taking a little longer in 2017 in turning receivables into cash. The increase average collection period from 2016 to 2017 is consistent with the decrease in the receivables turnover ratio clearly indicating that it is taking a little longer to turn accounts receivable into cash. Taking It Further: When analyzing the accounts receivable turnover and average collection period, consideration should be given to any changes in policy implemented by management during 2017 with respect to granting credit or offering discounts to their customers. As well, sales of accounts receivable during the year would also affect the receivables turnover. Other ratios that would be useful in assessing the accounts receivable turnover and average collection period are the current ratio and inventory turnover. Jensen should also look at average turnover and collection periods in their industry. By comparing to their industry, companies have a benchmark to compare against to assess their own performance.
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PROBLEM 8-12A (a) Rogers
Shaw
($ in millions) Beginning of year Accounts receivable (net) Add: allowance balance Gross accounts receivable
$1,509 104 $1,613
$486 27 $513
End of year Accounts receivable (net) Add: allowance balance Gross accounts receivable
$1,591 98 $1,689
$493 32 $525
Receivables turnover:
Rogers
Shaw
$12,850 ($1,613 + $1,689) ÷ 2
$5,241 ($513 + $525) ÷ 2
= 7.8 Average collection period:
365 ÷ 7.8 = 47 days
= 10.1 365 ÷ 10.1 = 36 days
(b) Shaw’s receivables turnover is 29% [(10.1 – 7.8) ÷ 7.8] higher than Rogers which means Shaw was more efficient than Rogers in collecting its receivables. Taking It Further: Selling accounts receivable will increase the receivable turnover ratio and will reduce the average collection period. Even though both companies follow the same practice, it would make comparisons between the two companies difficult because of the amount and the timing of the accounts receivable being sold.
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PROBLEM 8-13A (a)
Collection period Days sales in inventory Operating cycle
2017 365 ÷ 7.3 = 50.0 days 365 ÷ 6.3 = 57.9 days 50.0 + 57.9 = 107.9 days
2016 365 ÷ 10.1 = 36.1 days 365 ÷ 6.1 = 59.8 days 36.1 + 59.8 = 95.9 days
2015 365 ÷ 10.3 = 35.4 days 365 ÷ 6.4 = 57.0 days 35.4 + 57.0 = 92.4 days
(b)
Initially, it seems like Satellite Mechanical’s liquidity has improved over the three-year period. The current ratio has improved from 1.4 to 1 to 2.0 to 1. The acid-test ratio has also improved from 0.7 to 1 to 1.1 to 1. However, this has occurred mainly because of the accounts receivable collection period increasing over the three-year period. The operating cycle has also weakened from 92.4 days to 107.9 days. So, it may be that their liquidity has not improved.
(c)
To the extent that a lower inventory turnover ratio causes the business to incur additional costs for financing, storage, or waste, the inventory turnover can and does reduce profitability. The opposite trend would also hold true. Having cash tied up in receivables could result in higher borrowing costs to finance operations, which would affect profitability.
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PROBLEM 8-13A (Continued) Taking It Further: The dramatic deterioration in the collection period in 2017 of 13.9 days (50.0 days – 36.1 days) is explained by Satellite’s change in policy concerning no longer offering sales discounts to its customers. Satellite should continue to weigh the benefit of saving the cost of sales discounts against the additional cost of financing accounts receivable by an extra 13.9 days or longer. If Satellite determines that the benefit no longer exceeds the costs, they should reconsider their sales discount policy for the future.
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PROBLEM 8-1B (a) Jan. 3 Cash .......................................................... 8,000 Accounts Receivable—Hair Designs
8,000
4 Accounts Receivable—New Do .......... Allowance for Doubtful Accounts.
900 900
Cash ...................................................... Accounts Receivable—New Do ....
900
8 Accounts Receivable—Great Looks... Sales ...............................................
3,000
9 Cash ...................................................... Sales ...............................................
2,000
18 Sales Returns and Allowances ........... Accounts Receivable—Great Looks
500
900
3,000
2,000
500
19 Cash ...................................................... 5,000 Accounts Receivable—Luxury Spa
5,000
20 Cash ........................................................ 10,000 Accounts Receivable—Great Looks.
10,000
23 Accounts Receivable—Hair Designs.. Sales ...............................................
9,000
9,000
24 Cash .......................................................... 3,000 Accounts Receivable—Ken’s Salon
3,000
25 Cash (Visa) ............................................... 5,000 Sales ...............................................
5,000
26 Accounts Receivable—Luxury Spa ...... 12,000 Sales ...............................................
12,000
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PROBLEM 8-1B (Continued) (a) (Continued) Jan. 31 Allowance for Doubtful Accounts ........... 6,000 Accounts Receivable—Ken’s Salon (b) Dec. 31 Bal. Jan. 4 Jan. 8 Jan. 23 Jan. 26
Jan. 31 Bal.
Accounts Receivable 35,000 Jan. 3 900 Jan. 4 3,000 Jan. 18 9,000 Jan. 19 12,000 Jan. 20 Jan. 24 Jan. 31 26,500
Allowance for Doubtful Accounts Dec. 31 Bal. Jan. 31 6,000 Jan. 4 Unadj. Bal. 1,600 Accounts Receivable—Hair Designs Dec. 31 Bal. 8,000 Jan. 3 Jan. 23 9,000 Jan. 31 Bal. 9,000
6,000
8,000 900 500 5,000 10,000 3,000 6,000
3,500 900
8,000
Accounts Receivable—Great Looks Dec. 31 Bal. 11,000 Jan. 18 Jan. 8 3,000 Jan. 20 Jan. 31 Bal. 3,500
500 10,000
Accounts Receivable—Ken’s Salon Dec. 31 Bal. 9,000 Jan. 24 Jan. 31 Jan. 31 Bal. 0
3,000 6,000
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PROBLEM 8-1B (Continued) (b) (Continued) Accounts Receivable—Luxury Spa Dec. 31 Bal. 7,000 Jan. 19 Jan. 26 12,000 Jan. 31 Bal. 14,000 Accounts Receivable—New Do Dec. 31 Bal. 0 Jan. 4 Jan. 4 900 Jan. 31 Bal. 0 (c)
(d)
Bad Debts Expense ........................................ 3,190 Allowance for Doubtful Accounts [($26,500 × 6%) + $1,600] ....................... Hair Designs Great Looks Ken’s Salon Luxury Spa New Do Total subsidiary ledger
5,000
900
3,190
$9,000 3,500 0 14,000 0 $26,500
Balance equals control account of $26,500. Taking It Further: If the subsidiary ledger is not reconciled to the general ledger control account for accounts receivable, it could mean that sales have not been properly recognized in the general ledger accounts. In addition, cash transactions may be incorrect in the general ledger. Cash receipts could be recorded in the subsidiary ledger and not in the general ledger accounts. This would lead to bank reconciliations that do not agree with the accounting records if cash was received and deposited. Cash receipts recorded in the subsidiary leger but not in the general ledger might also indicate employee theft of cash or cheques. Further, customers may receive statements for transactions Solutions Manual .
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that were recorded in error. In summary, errors introduced will be in sales, accounts receivable, and cash. Reconciling the subledger accounts to the control account is a critical step to ensure that errors, omissions, and fraud are minimized. In a computerized accounting system, posting to the subsidiary accounts receivable and control accounts occurs simultaneously and so the chances of error are far reduced. The reconciliation step is still required, but it is generally much easier and faster.
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PROBLEM 8-2B (a) Transaction Cash April 1. NE 2. NE 3. +$69,200 4. NE 5. NE May 1. NE 2. $450 3. +$78,500 4. NE 5. NE 6. NE
(1) (2)
Acc. Receiv.
Allow. for Doubt. Accts.
Invent.
Total Assets
Owner's Equity
+$64,600 −$800 −$69,200 +$1,645 NE
NE −$35,530 NE NE NE NE NE NE (1)+$1,914 NE
+$29,070 +$29,070 −$800 −$800 NE NE +$1,645 +$1,645 −$1,914 −$1,914
+$76,600 NE −$78,500 −$9,580 +$1,570 NE
NE −$42,130 $450 NE NE NE −$9,580 NE NE NE (2)+$6,818 NE
+$34,470 +$34,470 NE NE NE NE NE NE +$1,570 +$1,570 −$6,818 −$6,818
($64,600 − $800) x 3% = $1,914 Bad Debt Expense = [($75,535 x 6%) + 2,286] = $6,818 (See Accounts Receivable and Allowance for Doubtful Accounts balances in ledger that follows.)
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PROBLEM 8-2B (Continued) (a) (Continued) Ledgers not required, used for accumulating balances
Date April 1. 2. 3. 4. May 1. 2. 2. 3. 4. 5.
Date April 5. May 2. 4. 6.
Accounts Receivable Explanation Ref. Debit Opening Balance Sales Returns Collections Interest charges
Credit Balance
64,600 800 69,200 1,645
Sales Recovery Collection recovery Collections Write-offs Interest charges
76,600 450 450 78,500 9,580 1,570
89,200 153,800 153,000 83,800 85,445 162,045 162,495 162,045 83,545 73,965 75,535
Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance Opening Balance Bad debts expense
1,914
Recovery Write-offs Bad debts expense
450 9,580 6,818
4,930 6,844 7,294 2,286 Dr. 4,532
(b) Current assets: Accounts receivable.............................. Less: Allowance for doubtful accounts
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$71,003
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PROBLEM 8-2B (Continued) (c)
The bad debts expense on the income statement for the period would be $28,612 ($19,880 + $1,914 + $6,818)
Taking It Further: Rayon Co. can use the percentage of sales method at month end for the purpose of accruing bad debt expenses and then use the percentage of accounts receivable method at the end of the fiscal year when the monthly statements are not distributed to anyone outside of the company or when the percentage of sales approach gives a good approximation of the expense and net realizable value of the accounts receivable. The percentage of sales method is easy to administer and provides an adequate estimate for interim internal financial statement reporting. For the fiscal year end, the percentage of receivables method, a balance sheet approach, reduces the year-end balance of accounts receivable to the net realizable value.
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PROBLEM 8-3B (a) Accounts Receivable .................................1,900,000 Sales ....................................................... 1,900,000 Cash ............................................................2,042,000 Accounts Receivable............................. 2,042,000 (b) Allowance for Doubtful Accounts ............. 58,000 Accounts Receivable............................. (c)
Accounts Receivable ................................. Allowance for Doubtful Accounts ........
4,000
Cash ............................................................ Accounts Receivable.............................
4,000
58,000
4,000 4,000
Posting to accounts not required:
Date
Accounts Receivable Explanation Ref. Debit
Credit Balance
Balance 800,000 Sales 1,900,000 2,700,000 Collections 2,042,000 658,000 Write offs 58,000 600,000 Coll. of prev. write off 4,000 604,000 Payment 4,000 600,000
Date
Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance Balance Write offs 58,000 Coll. of prev. write off Bad debts expense (d)
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4,000 46,000
44,000 14,000 Dr. 10,000 Dr. 36,000
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PROBLEM 8-3B (Continued) (d) Bad Debts Expense ($36,000 + $10,000) ... 46,000 Allowance for Doubtful Accounts ........ (e)
(f)
Current assets: Accounts receivable .............................. $600,000 Less: Allowance for doubtful accounts 36,000
46,000
$564,000
The bad debts expense on the income statement for the period would be $46,000.
Taking It Further: When a customer account is collected after it had been written off, bad debt expense does not get reduced. Write offs and collections of accounts previously written off do not get recorded to the bad debt expense account. When a customer’s account is collected, subsequent to it having been written off, the allowance for doubtful accounts is reinstated with a credit entry for the reversal of the original write off. Later on, when the required balance in the allowance account is established, a smaller amount will be needed to restore the allowance account. The entry to restore the allowance account to its required balance will bring about a reduced amount of bad debts expense.
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PROBLEM 8-4B (a) $62,000 [$52,000 − ($30,000 − $48,000 + $8,000)] (b) $49,750 [$52,000 − ($42,250 − $48,000 + $8,000)] (c) ($3,300,000 x 1.5%) = $49,500 (d) The write off of an uncollectible account does not affect the current year’s bad debts expense at the time of recording the write off (debit the allowance and credit the accounts receivable). Accounts receivable are decreased and the allowance for doubtful accounts is also decreased resulting in no change in the amount of the net realizable value of accounts receivable. But, the amount of the bad debt expense recorded at the end of the period will be impacted by the amount of accounts receivable write offs during the period. Since write -offs decrease the allowance for doubtful accounts and the allowance account needs to be adjusted to the required balance at the end of the accounting period, the more the allowance account is reduced by write offs during the year, the higher the expense will be to return the allowance account to the required balance. If write offs during the accounting period are very low, then the expense should also be low for the accounting period. (e)
Similar to a collection on account, the collection of an account previously written off will decrease the net realizable value of accounts receivable. The collection of an account previously written off involves two entries. The first entry reverses the original write off, which increases the accounts receivable and the allowance for doubtful accounts and thus does not affect the net realizable value of the accounts receivable. The second entry records a collection on account, which will decrease accounts receivable and thus, the net realizable value.
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PROBLEM 8-4B (Continued) Taking It Further: In spite of being very diligent when scrutinizing a customer’s credit worthiness prior to the shipment of goods, the risk of non-collection remains. A company cannot be absolutely certain of getting paid by all customers. A certain amount of collection risk must be tolerated in order to remain competitive to attract and retain customers. If the company had some way of determining which accounts were going to be uncollectible, it could avoid the collection risk altogether by not selling to these customers on credit. Unknown and unforeseen circumstances or events may arise that render customers unable to pay their accounts. They themselves might be suffering from collection risks from their own customers.
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PROBLEM 870B (a)
Total estimated uncollectible accounts Number of Days Outstanding Total 0-30 31-60 61-90 Over 90 Accounts $210,000 $120,000 $55,000 $20,000 $15,000 receivable 1% 7% 12% 25% Estimated % uncollectible Estimated uncollectible $11,200 $1,200 $3,850 $2,400 $3,750 accounts
(b) Bad Debts Expense .................................... Allowance for Doubtful Accounts ........ [$11,200 − $5,000] (c)
6,200 6,200
Allowance for Doubtful Accounts ............. 12,200 Accounts Receivable.............................
(d) Accounts Receivable ................................. Allowance for Doubtful Accounts ........
3,400
Cash ............................................................ Accounts Receivable.............................
3,400
(e)
12,200
3,400 3,400
If Creative Co. used 8% of total accounts receivable rather than aging the accounts, the adjustment would be $11,800 [($210,000 × 8%) − $5,000]. The remaining entries would remain unchanged.
Taking It Further: Aging the accounts rather than applying a percentage to the total accounts receivable should produce a more accurate allowance and bad debts expense. It also focuses management’s attention on the receivables and the loss percentages, which can result in better receivables management. Solutions Manual .
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PROBLEM 8-6B
(a)
2016 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
2017 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
Amount $220,000 105,000 40,000 25,000 $390,000
Amount $190,000 40,000 65,000 75,000 $370,000
% 2.5 6 18 25
Estimated Uncollectible $ 5,500 6,300 7,200 6,250 $25,250
% 2.5 6 18 25
Estimated Uncollectible $ 4,750 2,400 11,700 18,750 $37,600
(b) 2016 Accounts Receivable .............................................. $390,000 Less: Allowance for Doubtful Accounts ................ 25,250 Net Realizable Value ............................................... $364,750 2017 Accounts Receivable ................................................ $370,000 Less: Allowance for Doubtful Accounts ................. 37,600 Net Realizable Value.................................................. $332,400
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PROBLEM 8-6B (Continued) (c) 1.
2.
3.
4.
Bad Debts Expense .................................... 28,650 Allowance for Doubtful Accounts [$25,250 + $3,400] ..................................
28,650
Allowance for Doubtful Accounts ............. 22,300 Accounts Receivable.............................
22,300
Accounts Receivable ................................. Allowance for Doubtful Accounts ........
2,500 2,500
Cash ............................................................ Accounts Receivable.............................
2,500
Bad Debts Expense .................................... 32,150 Allowance for Doubtful Accounts ........ [$37,600 − ($25,250 − $22,300 + $2,500)]
2,500
32,150
Taking It Further: Although total accounts receivable decreased by $20,000 or 5% ($390,000 − $370,000), the estimated uncollectible amounts increased by $12,350 ($37,600 − $25,250) or 49%. The most significant increase occurred in the over 90 day balance. The balance rose from $25,000 to $75,000, demonstrating a dramatic deterioration in the age of the accounts receivable, resulting in a higher allowance.
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PROBLEM 8-7B
Beg. Bal. Sales Rev. Write off End Bal.
Accounts Receivable 360,000 Collections 2,545,000 (a) 2,633,540 Write offs (d) 28,540 (b) 5,520 Note 1 5,520 (c) 420,000
Note 1 Collection of account previously written off
Write-offs
Allowance for Doubtful Accounts Beg. Bal. (e) 21,600 Rev. write off (b) 5,520 28,540 Bad debts (f) 30,820 End. Bal. 29,400 Sales Sales
(a) 2,633,540
Bad Debts Expense (f) 30,820 Beginning balance of the Allowance for Doubtful Accounts is 6% of the beginning balance of Accounts Receivable of $360,000 ($360,000 × .06) = $21,600 (e). Ending balance of the Allowance for Doubtful Accounts of $29,400 is 7% of the ending balance of Accounts Receivable (c) of $420,000 ($29,400 ÷ .07). Allowance for Doubtful Accounts ................ Accounts Receivable (d) ..........................
28,540
Accounts Receivable (b)............................... 5,520 Allowance for Doubtful Accounts (b)... 5,520 Cash ............................................................... Accounts Receivable ............................ Collection of account which was previously written off
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5,520 5,520
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PROBLEM 8-7B (Continued) Bad Debts Expense (f) .................................. 30,820 Allowance for Doubtful Accounts (f) ....... Force in allowance account: ($29,400 − $21,600 − $5,520 + $28,540 = $30,820)
30,820
Accounts Receivable (a) ................................. 2,633,540 Sales (a)..................................................... 2,633,540 Force in accounts receivable account: ($420,000 − $360,000 − $5,520 + $5,520 + $28,540 + $2,545,000) = $2,633,540
Taking It Further: Bad debt expense is a temporary account reported on the income statement. The balance is closed to Income Summary at the end of the accounting period. Allowance for doubtful accounts is a permanent account which is a contra asset to accounts receivable. Its purpose is to reduce the accounts receivable asset to its net realizable value.
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PROBLEM 8-8B (a) # of Days outstanding 1-7 not yet due 1-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
Amount $74,000 70,000 25,000 37,000 22,500 $228,500
% 1 4 8 18 40
Estimated Uncollectible $ 740 2,800 2,000 6,660 9,000 $21,200
(b) Bad Debts Expense .................................... 27,700 Allowance for Doubtful Accounts ........ ($21,200 + $6,500) =$27,700
27,700
(c) Current assets: Accounts receivable .................................. $228,500 Less: Allowance for doubtful accounts 21,200 $207,300 (d) The amount reported on the income statement for bad debt expense will be $27,700.
Taking It Further: Should Bravo eliminate credit sales altogether and only sell for cash, they will likely have a large decrease in sales because customers will prefer to have credit terms and may seek out a competitor. The decrease in sales will have a more adverse effect on profits than would the cost of bad debts resulting from the current credit terms.
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PROBLEM 8-9B Jan. 2 Accounts Receivable—Braun............ 25,000 Sales ............................................... Cost of Goods Sold ............................ 13,750 Merchandise Inventory ..................
25,000 13,750
Feb. 1 Notes Receivable—Braun. ................. 25,000 Accounts Receivable—Braun .......
25,000
Mar. 31 Cash ($20,000 + $200 + $300) ............ 20,500 Notes Receivable—Vincent........... Interest Revenue [$20,000 × 6% × 3/12] Interest Receivable [$20,000 × 6% × 2/12]
20,000 300 200
May
1 Cash ($25,000 + $375) .......................... 25,375 Notes Receivable—Braun ............. Interest Revenue ............................ [$25,000 × 6% × 3/12] 25 Notes Receivable—Noah Inc. .............. 12,000 Accounts Receivable—Noah Inc. .
Jun. 25 Cash .................................................... Interest Revenue ............................ [$12,000 × 6% × 1/12] Jul. 25
25,000 375
12,000
60 60
Allowance for Doubtful Accounts ....... 12,000 Notes Receivable—Noah Inc.........
12,000
Nov. 30 Notes Receivable—UOA Corp ............. 10,000 Cash................................................
10,000
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PROBLEM 8-9B (Continued) Dec. 31 Interest Receivable............................. 38 Interest Revenue ............................ (UOA Corp. note: $10,000 × 4.5% × 1/12 = $38)
38
Taking It Further: Durand Co. could continue to sell to Noah Inc. if the following conditions are followed: 1) Collect the note receivable plus interest that was previously written off. 2) Until Noah establishes a good relationship with Durand, deliver goods COD (Cash on delivery), and 3) For large purchases, require a deposit in advance of shipment.
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PROBLEM 8-10B (a)
The interest receivable at June 30, 2017 is: ALD Inc. Kabam Ltd. Best Foot Forward Shoe Co. DNR Co. M&J Hardware Corp. Total
$6,000 × 4% × 1/12 = $ 20 $10,000 × 5% × 1/12 = 42 $15,000 × 5.5% × 5/12 = 344 $4,800 × 8.75% × 1/12 = 35 $9,000 × 5% × 0/12 = 0 $441
The notes receivable balance at June 30, 2017 is $44,800 ($6,000 + $10,000 + $15,000 + $4,800 + $9,000). (b) July 1 Cash ............................................... Interest Receivable ($6,000 × 4% × 1/12)...................
20
2 Cash ............................................... Interest Receivable ($10,000 × 5% × 1/12).................
42
20
42
31 Cash ............................................... 15,413 Interest Revenue ($15,000 × 5.5% × 1/12).............. Interest Receivable.................... Notes Receivable—Best Foot... 31 Accounts Receivable—DNR Co. ... Notes Receivable—DNR Co...... Interest Receivable ($4,800 × 8.75% × 1/12).............. Interest Revenue ($4,800 × 8.75% × 1/12)..............
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4,870 4,800 35 35
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PROBLEM 8-10B (Continued) (b) (Continued) July 31 Interest Receivable ....................... Interest Revenue ....................... ALD Inc. Kabam Ltd. M&J Hardware Corp. Total
100 100
$ 6,000 × 4% × 1/12 = $10,000 × 5% × 1/12 = $ 9,000 × 5% × 1/12 =
$ 20 42 38 $100
(c) Date July 1 31 31 Date
Notes Receivable Explanation Ref. Debit Balance
15,000 4,800
July 1 1 31 31 31 31
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Accounts Receivable Explanation Ref. Debit
Credit Balance
4,870
4,870
Interest Receivable Explanation Ref. Debit
Credit Balance
July 31 Date
Credit Balance
Balance
20 42 344 35
Adjusting entry
100
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PROBLEM 8-10B (Continued) (d) OUELLETTE CO. Balance Sheet (partial) July 31, 2017 Assets Current assets Accounts receivable ................................................... Interest receivable ...................................................... Notes receivable ......................................................... Total current assets ............................................... Long-term investments Notes receivable .........................................................
$ 4,870 100 19,000 23,970 6,000
(e) Interest should not be accrued on this note if it is unlikely to be collected. In addition, consideration would have to be given as to whether the note should be written off. At the very least, an allowance should be created with respect to the DNR note, based upon the estimated probability of collection.
Taking It Further: The DNR Co. note carries a higher interest rate as it is likely that DNR Co. has a poor credit rating and represents a collection risk that is higher than that of the average customer. Companies and banks will often charge a higher rate of interest to customers who have a history of defaulting on their loans – this is an attempt to compensate for the higher risk taken when granting loans to customers with poor credit ratings.
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PROBLEM 8-11B (a) NORLANDIA SAGA COMPANY Balance Sheet (Partial) November 30, 2017 (in thousands) Assets Current assets Cash............................................................................... $ 417.1 Short-term investments................................................ 224.6 Accounts receivable $311.4 Less: Allowance for doubtful accounts ........ 14.8 296.6 Merchandise inventory................................................. 336.5 Notes receivable ........................................................... 51.2 Prepaid expenses ......................................................... 19.3 Supplies ......................................................................... 15.9 Total current assets ......................................................... 1,361.2 Long-term investments Notes receivable ........................................................... 101.9 Property, plant and equipment Equipment ........................................................ $924.2 Less: Accumulated depreciation .................. 471.7 .. 452.5 Total assets ............................................................... $1,915.6
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PROBLEM 8-11B (Continued) (b) 2017 Receivables turnover:
2016
($2,823.8 − $18.5) ($311.4 + $271.7) ÷ 2 = 9.6
= 9.1*
365 ÷ 9.6 = 38 days
365 ÷ 9.1 = 40 days
*Given in the problem Average collection period:
Norlandia’s receivables turnover ratio was a little higher in 2017, which means that Norlandia was more efficient in 2017 in turning receivables into cash. The average collection period echoes that finding as the average collection period was reduced from 40 days in 2016 to 38 days in 2017 Taking It Further: When analyzing the accounts receivable turnover and average collection period, consideration should be given to any changes in policy implemented by management during 2017 with respect to granting credit or offering discounts to their customers. As well, sales of accounts receivable during the year would also affect the receivables turnover. Other ratios that would be useful in assessing the accounts receivable turnover and average collection period are the current ratio and inventory turnover. Norlandia should also look at average turnover and collection periods in their industry. By comparing to their industry averages, companies have a benchmark to compare against to assess their own performance.
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PROBLEM 8-12B Nike
Adidas
($ in U.S. millions)
(in Euro millions)
Beginning of Year Jan. 1, 2014 Accounts receivable (net) Add: allowance Gross Accounts receivable
$3,117 104 $3,221
€1,809 120 €1,929
End of Year Dec. 31, 2014 Accounts receivable (net) Add: allowance Gross Accounts receivable
$3,434 78 $3,512
€1,946 139 €2,085
Receivables turnover:
Nike
Adidas
$27,799 ($3,221 + $3,512) ÷ 2
€14,534 (€1,929 + €2,085) ÷ 2
= 8.3 Average collection period:
= 7.2
365 ÷ 8.3 = 44.0 days
365 ÷ 7.2 = 50.7 days
Nike’s receivables turnover ratio was higher than Adidas’, which means that Nike was more efficient than Adidas in turning receivables into cash. This is further evidenced by the difference in the average collection period. Nike is able to collect receivables on average every 44 days while it takes Adidas 50.7 days.
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PROBLEM 8-12B (Continued) Taking It Further: The receivable turnover ratio and collection period were used as tools to make comparisons between Nike and Adidas. Their calculation is not affected by the fact that these companies use different currencies in reporting. Since the currency within a particular company’s financial statements is consistent, comparison of amounts appearing within these financial statements will yield comparative ratios to other companies with different but consistent currencies used in their financial statements.
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PROBLEM 8-13B (a)
Collection period Days sales in inventory Operating cycle
2017 365 ÷ 10.6 = 34.4 days 365 ÷ 7.3 = 50.0 days 34.4 + 50.0 = 84.4 days
2016 365 ÷ 8.9 = 41.0 days 365 ÷ 7.6 = 48.0 days 41.0 + 48.0 = 89.0 days
2015 365 ÷ 9.0 = 40.6 days 365 ÷ 7.5 = 48.7 days 40.6 + 48.7 = 89.3 days
(b) The current ratio has deteriorated from 1.9 to 1 to 1.6 to 1. The acid-test ratio has also deteriorated from 1.2 to 1 to 0.8 to 1. On the other hand, Western experienced a substantial improvement in the accounts receivable turnover in 2017. This may have reduced the balance in accounts receivable which would reduce both the current and the acid-test ratios. Inventory turnover has slightly deteriorated but the improvement in the accounts receivable turnover outweighs the deterioration in the inventory turnover and the net result is a reduction in the operating cycle. Although speeding up the collection of accounts receivable improved Western’s liquidity, the current and acid-test ratios deteriorated. The possible explanation is that other assets, besides accounts receivable and inventory (such as short-term investments), have decreased or current liabilities have increased over the years which adversely affected the current and acid test ratios. Overall, liquidity has weakened. (c) To the extent that a lower inventory turnover ratio causes the business to incur additional costs for financing, storage, or waste, the inventory turnover can and does reduce profitability. The opposite trend would also hold true.
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PROBLEM 8-12B (Continued) (c) (Continued) Having cash tied up in receivables could result in higher borrowing costs to finance operations, which would affect profitability. Taking It Further: The dramatic improvement in the collection period in 2017 of 6.6 days (41.0 days – 34.4 days) is explained by Western’s change in policy concerning offering sales discounts to its customers. Although this ratio dramatically improved, Western must weigh the benefit of collecting accounts receivable faster with the cost of the discounts. If Western determines that the cost exceeds the benefit, they should reconsider the policy for the future.
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BYP8-1 FINANCIAL REPORTING PROBLEM (a) ($ in thousands) Receivables turnover
2014
2013
= 4.8*
$751,536 [($164,302 + $163,345) ÷ 2] = 4.6
Collection period
= 76 days*
365 days = 79 days 4.6
*Given in text (b) Although the change from 2013 to 2014 is not dramatic, it shows an improvement. Receivables are turning over faster and being converted into cash 3 days faster in 2014. (c)
Gross accounts receivable Less: allowance for doubtful accounts Net realizable value of accounts receivable
(d) Accounts receivable over three months past due Accounts receivable written off
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Accounting Principles, Seventh Canadian Edition
BYP8-2 INTERPRETING FINANCIAL STATEMENTS (a) ($ in millions)
2014
2013
Current ratio
$1,322a ÷ $1,396 = 0.95:1
$1,076b ÷ $2,205 = 0.49:1
Acid-test ratio
$1,130c ÷ $1,396 = 0.81:1
$908d ÷ $2,205 = 0.41:1
Receivables turnover
Average collection period
$5,241 ($525 + $513) ÷ 2 = 10.1
$5,142 ($513 + $461) ÷ 2 = 10.6
365 ÷ 10.1 = 36.1 days
365 ÷ 10.6 = 34.4 days
a
$1,322 = $637 + $525 − $32 + $119 + $73 $1,076 = $422 + $513 − $27 + $96 + $72 c $1,130 = $637 + $525 − $32 d $908 = $422 + $513 − $27 b
Shaw’s current and acid-test ratios have improved dramatically from 2013 to 2014. On the other hand, Shaw’s receivables turnover and average collection period have deteriorated somewhat. Overall, Shaw’s liquidity is not strong. (b) Allowance balance end of 2013 Bad debt expense provision 2014 Less allowance balance end of 2014 Accounts receivable written off in 2014
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Accounting Principles, Seventh Canadian Edition
BYP8-2 (Continued)
(c)
Shaw has the advantage of billing its customers prior to delivering services. This practice allows Shaw to enforce collection of accounts receivable far more rapidly than those merchants who have to wait several days after sending invoices for the account to become due to allow collection. Should a Shaw customer fail to pay in any given billing period, Shaw has the option of suspending service to that customer immediately, thereby minimizing the risk of large outstanding accounts receivable with little chance of collection.
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BYP8-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP8-4 COMMUNICATION ACTIVITY Memorandum To:
Management
From:
Student
Re:
Management of the credit function
During the year, Toys for Big Boys has experienced a significant increase in sales due to the efforts of the sales staff. However, it is important that the sales staff be aware that, in order for the company to generate the cash it needs to continue operations, it is essential that Toys for Big Boys be able to generate cash from these sales. Cash is needed to pay for the inventory the company has purchased and to cover other operating expenses such as sales commissions. Over the past year, the company has noticed a trend whereby the sales have doubled, accounts receivable have quadrupled, and cash flow has halved. Sales staff assumed the role of managing the credit function, but it appears that they were too focused on sales without considering the quality of the sales and the ability of the customer to pay the receivable within a reasonable period of time. Given the increase in the accounts receivable, it is likely that the company has now assumed additional credit risk. The longer a customer takes to pay, the more likely that he will default on the receivable.
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BYP8-4 (Continued) The selling staff has been placed in a conflict of interest position. Since it is in their best interest to stimulate sales, this may deter them from performing adequate credit checks. To improve this process I would recommend using a separate credit department to evaluate the credit worthiness of all potential credit customers. If this change is not implemented, at the very least, a set of specific criteria should be developed that would ensure that the selling staff only grant credit to those customers who meet the company’s credit standards.
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Accounting Principles, Seventh Canadian Edition
BYP8-5 “ALL ABOUT YOU” ACTIVITY (a)
Ten tips to use your card wisely: 1. Avoid impulse buys. 2. Aim to pay your balance in full by the due date every month. 3. If you have to carry a balance, try to make payments as soon as you can. 4. Make regular payments to help build a good credit history. 5. If your monthly balance is growing, stop using your credit card until you get your finances under control. 6. Avoid taking cash advances on your credit card. 7. Every month, carefully check your credit card statement. 8. If your credit card has a rewards program, avoid increasing your spending or buying things you don’t need just to get points. 9. If unexpected expenses come up, talk to your financial institution about your options. There may be alternatives to using your credit card that will cost less in interest, such as a line of credit. 10. Keep your card, your PIN, and your security code secure.
(b) The grace period on new purchases must be a minimum of 21 days. The grace period is the time given by the credit card company between the statement date and the due date for payment. The interest-free period includes the grace period as well as the period of time between the purchase date and the statement date. Consequently the interest-free period is from Sept. 15 to 21 days beyond October 7 or October 28, resulting in 43 days. (c)
Cash advances are withdrawals of cash that are added to the credit card balance. Balance transfers are charges put on one credit card to pay off some or all of the balance on another credit card.
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BYP8-5 (Continued) (d) Number of days for the cash advance: April 1 — May 14 = 44 days. Interest charge: $1,000 × 19% × 44/365 = $22.90. (e) Calculation Results Option C: Option A: Option B: Make Pay a fixed Make the the minimum amount of minimum payment plus an $100.00 payment each additional $10 each month each month. month. Time to 10 years and 5 pay off months Interest paid
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4 years and 7 months
11 months
$413.60
$97.28
Chapter 8
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Accounting Principles, Seventh Canadian Edition
BYP8-6 Santé Smoothie Saga (a)
Answers to Natalie’s questions 1. Calculations you should perform on the statements are: Working capital = Current assets − Current liabilities Current ratio = Current assets ÷ Current liabilities Acid-test ratio = (Cash + Short-term investments + Accounts receivable) ÷ Current liabilities Inventory turnover = Cost of goods sold ÷ Average inventory Days sales in inventory = Days in the year ÷ Inventory turnover Operating cycle = Days sales in inventory + Collection period Given the type of business, it is unlikely that Curtis would have a significant amount of accounts receivable. Positive working capital and a current ratio of greater than 1 are indications that the company has good liquidity and will be more likely to be able to pay for the mixer. Note that the current ratio should be considered strong only if it is not artificially inflated by receivables or inventory. The inventory turnover and days sales in inventory will provide additional information – the days sales in inventory will tell you how long, on average it takes for inventory to be sold. The operating cycle will tell how long, on average, it takes to sell the inventory on account, and collect the cash. Of course, with few receivables, the operating cycle will not likely differ significantly from the days sales in inventory.
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BYP8-6 (Continued) (a) (Continued)
2. A promissory note gives you the advantage of earning interest for the 30 days that it is outstanding. If Curtis does not pay the note and the interest after 30 days, you are in a better position to take legal action to collect, having a promissory note in hand.
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BYP8-6 (Continued) (b) Nov. 1 Notes Receivable—Lesperance ..... Sales ............................................ Cost of Goods Sold ......................... Merchandise Inventory ...............
1,050 1,050 553 553
30 No entry Dec. 15 Cash ................................................. Interest Revenue ($1,050 × 7.5% × 1.5/12) .............. Notes Receivable—Lesperance .
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Accounting Principles, Seventh Canadian Edition
CHAPTER 9 Long-Lived Assets ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Brief Problems Problems Questions Exercises Exercises Set A Set B
1. Calculate the cost of property, plant, and equipment.
1, 2, 3, 4, 1, 2, 3, 4 5
2. Apply depreciation methods to property, plant, and equipment.
6, 7, 8, 9, 5, 6, 7, 8, 2, 3, 4, 5, 2, 3, 6, 7, 2, 3, 6, 7, 9 12 8, 9 8, 9, 12
3. Explain the factors that cause 9, 10, 11, 10, 11 12, 13, changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. 4. Demonstrate how to account 14, 15, 16, 17, for property, plant, and equipment disposals. 5. Record natural resource transactions and calculate depletion.
1, 2, 3, 12 1, 2, 3, 4, 1, 2, 3, 4, 6 6
6, 7, 8
12, 13, 14 9, 10
18, 19, 20 15
11
6. Identify the basic accounting 21, 22 issues for intangible assets and goodwill.
16
7. Illustrate the reporting and 23, 24 analysis of long-lived assets.
17, 18, 19 15, 16
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4, 5, 6, 12 4, 5, 6
6, 7, 8, 9 6, 7, 8, 9
12
12, 13, 14 10, 11
12
10, 11
9, 11, 12, 9, 11, 12, 13 13
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Difficulty Time Level Allotted (min.)
Description
1A
Record property transactions.
Simple
20-30
2A
Allocate cost and calculate partial period depreciation.
Moderate
20-30
3A
Determine cost; calculate and compare depreciation under different methods.
Moderate
30-40
4A
Account for operating and capital expenditures and asset impairments.
Moderate
20-30
5A
Record impairment and calculate revised depreciation.
Moderate
20-30
6A
Record acquisition, depreciation, impairment and disposal of land and building.
Moderate
25-35
7A
Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.
Moderate
30-40
8A
Record acquisition, depreciation and disposal of equipment.
Moderate
30-40
9A
Record property, plant and equipment transactions; prepare partial financial statements.
Complex
40-50
10A
Correct errors in recording intangible asset transactions.
Complex
15-20
11A
Record intangible asset transactions; prepare partial balance sheet.
Moderate
30-40
12A
Record natural resource transactions; prepare partial financial Moderate statements.
25-30
13A
Calculate ratios and comment.
Moderate
15-25
1B
Record property transactions.
Simple
20-30
2B
Allocate cost and calculate partial period depreciation.
Moderate
20-30
3B
Determine cost; calculate and compare depreciation under different methods.
Moderate
30-40
4B
Account for operating and capital expenditures and asset impairments.
Moderate
20-30
5B
Record impairment and calculate revised depreciation.
Moderate
20-30
6B
Record acquisition, depreciation, impairment and disposal of land and buildings.
Moderate
25-35
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Difficulty Time Level Allotted (min.)
Description
7B
Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.
Moderate
30-40
8B
Record acquisition, depreciation and disposal of furniture.
Moderate
30-40
9B
Record property, plant and equipment transactions; prepare partial financial statements.
Complex
40-50
10B
Correct errors in recording intangible asset transactions.
Complex
15-20
11B
Record intangible asset transactions; prepare partial balance sheet.
Moderate
30-40
12B
Record equipment, note payable, and natural resource transactions; prepare partial financial statements.
Moderate
25-30
13B
Calculate ratios and comment.
Moderate
15-25
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Chapter 9
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-ofChapter Exercises and Problems Learning Objective
Knowledge Comprehension Application Q9-1 Q9-3 BE9-1 P9-2A Q9-2 Q9-4 BE9-2 P9-3A BE9-3 Q9-5 BE9-4 P9-4A E9-3 E9-1 P9-6A E9-2 P9-1B E9-12 P9-2B P9-1A P9-3B P9-4B P9-6B 2. Apply depreciation Q9-7 Q9-6 BE9-5 P9-3A methods to property, Q9-9 Q9-8 BE9-6 P9-6A BE9-7 Q9-10 P9-7A plant, and equipment. Q9-11 BE9-8 P9-8A E9-3 BE9-9 P9-9A E9-2 P9-2B E9-4 P9-3B E9-5 P9-6B E9-12 P9-7B P9-2A P9-8B P9-9B P9-12B 3. Explain the factors Q9-9 Q9-10 BE9-10 P9-5A that cause changes in Q9-12 Q9-11 BE9-11 P9-6A periodic depreciation Q9-13 E9-6 P9-12A and calculate revised E9-7 P9-4B depreciation for E9-8 P9-5B P9-4A P9-6B property, plant, and
Analysis Synthesis Evaluation
1. Calculate the cost of property, plant, and equipment.
equipment. 4. Demonstrate how to account for property, plant, and equipment disposals.
Q9-16
Q9-14 Q9-15 Q9-17
5. Record natural Q9-18 resource transactions and calculate depletion. 6. Identify the basic accounting issues for intangible assets and goodwill. 7. Illustrate the reporting Q9-23 and analysis of long- BE9-17 lived assets.
Q9-19 Q9-20
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Q9-21 Q9-22
Q9-24
9-4
BE9-12 BE9-13 BE9-14 E9-9 E9-10 P9-6A P9-7A BE9-15 E9-11
P9-8A P9-9A P9-6B P9-7B P9-8B P9-9B
BE9-16 E9-12 E9-13 E9-14 BE9-18 BE9-19 E9-15 P9-9A
P9-10A P9-11A P9-10B P9-11B P9-11A E9-16 P9-12A P9-13A P9-9B P9-13B P9-11B P9-12B
P9-12A P9-12B
Chapter 9
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued) Learning Objective
Knowledge Comprehension
Broadening Your Perspective
Solutions Manual .
Application
Analysis Synthesis Evaluation BYP9-4 BYP9-5
BYP9-1 BYP9-2 BYP9-3
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Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Three characteristics of property, plant, and equipment include: they (1) have a physical substance (a definite size and shape), (2) are used in the operations of the business, and (3) are not intended for sale to customers.
2.
Examples of land improvements are: a road, driveway, sidewalks or parking lot on the property, fencing and underground sprinkler systems.
3.
The invoice cost, the cost of the safety inspection, and the cost for the required logo painted on the vehicle are capitalized, as they are required costs to put the vehicle into use. The insurance costs benefit the business for the term of the policy and so the costs should be allocated to the period of benefit from the policy, typically by initially recording the payment as prepaid insurance and then reducing the prepayment, charging insurance expense as the policy expires.
4.
The purpose of depreciation is not to accumulate the cash needed to replace an asset. Rather, depreciation is a cost allocation method which records an expense in those accounting periods where the asset has been used and has contributed to the earning of revenues. This charge also reduces the carrying amount of the asset, but it does not involve any cash.
5.
The purchase cost must be split between the land and building because the building is depreciated and the land is not. In addition, the cost of each item will be needed to determine any gain or loss on disposal if either one is later sold.
6.
Residual value is the estimated amount that a company would obtain from disposing of a long-lived asset at the end of its useful life. Residual value is not depreciated, since the amount is expected to be recovered at the end of the asset’s useful life. Residual value is used in the formula for calculating periodic depreciation using the straight line and unit-ofproduction methods. Residual value is used in an indirect way in the diminishing balance method. Rather than using residual value to reduce the depreciable amount, as is done using the other two methods, the amount of the depreciation recorded is limited to the amount that will cause the carrying amount to equal the residual value of the asset.
7.
The three factors that affect the calculation of depreciation include: cost, useful life and residual value. The cost of a depreciable asset must include all necessary costs to get the asset ready for use. The useful life is the period of time an asset is expected to be available for use. This length may be measured as a function of time or number of units of production. The residual value is the estimated amount that a company would obtain from disposing of the asset at the end of its useful life.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 8.
The amount of annual depreciation is different over the useful life of an asset depending on which of the three depreciation methods are being used. The straight-line method creates a constant amount of depreciation over the useful life. The diminishing-balance method is devised to charge a higher amount of depreciation in the earlier part of the useful life of the asset. Lastly, the unit-of-production method is less predictable in that it is based on the amount of use that is being made of the asset.
9.
A company should choose the depreciation method it believes will best reflect the pattern over which the asset’s future economic benefits are expected to be consumed. The depreciation method must be revised if the expected pattern of consumption of the future economic benefits has changed.
10.
Operating expenditures are ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. Because they are recurring expenditures and normally benefit only the current accounting period, they are expensed when incurred. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Because they benefit future periods, capital expenditures are debited to the asset account affected. Once capitalized, these expenditures are depreciated over their benefiting period.
11.
Revision of the depreciation generally occurs when there is a change to any of the three factors that affect the calculation of depreciation: the asset’s cost, useful life, or residual value. Depreciation needs to be revised if there are capital expenditures, impairments in the asset’s recoverable amount, changes in the depreciation method, or changes in the estimated remaining useful life or residual value. The revisions are based on new information that will affect only current and future periods so there is no revision of depreciation previously recorded.
12.
Factors that may contribute to an impairment loss include: obsolescence of a piece of equipment, loss of a market for a product manufactured, bankruptcy of the supplier of replacement parts for equipment, or environmental concerns causing extra costs of disposal at the end of the useful life.
13.
Extending the total service life and consequently the estimated remaining useful life of a depreciable asset will reduce the amount of depreciation recorded in the remaining years of use. The carrying amount of the asset will become the new basis to which the business will apply the formula of the depreciation method. The residual value may also be revised.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 14.
Depreciation must be updated from the last time depreciation entries were recorded to the date of the sale because the depreciation expense must properly reflect the total period over which the asset’s economic benefits are used. Updating depreciation also aids in determining the correct amount of the gain or loss on disposal.
15.
The 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, no additional depreciation should be taken on this asset, even if it is still being used. In no situation can the accumulated depreciation exceed the cost of the asset.
16.
In a sale of property, plant, or equipment, the carrying amount of the asset is compared to the proceeds from the sale. If the proceeds of the sale exceed the carrying amount of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying amount of the asset sold, a loss on disposal occurs. In an exchange, a new asset is received in an exchange for the old asset given up. The gain or loss is calculated by comparing the fair value of the asset given up to its carrying amount. The trade-in allowance on the asset given up is not relevant because it rarely reflects the fair value of the asset that is given up. Instead of using the trade-in allowance, the fair value of the asset given up is used to calculate the gain or loss on the asset being given up. A loss results if the carrying amount of the asset being given up is more than its fair value. A gain results if the carrying amount is less than its fair value.
17.
Carrying amount of an item of property, plant, or equipment is a sub-total amount representing the net amount of the cost less the accumulated depreciation. The amount is not a general ledger account and so is not used in journal entries used to record dispositions. Instead, the asset and accumulated depreciation accounts are used in the journal entry.
18.
Natural resources have two characteristics that make them different from other long-lived assets: (1) they are physically extracted in operations such as mining, cutting, or pumping; and (2) only an act of nature can replace them. Similar to property, plant, and equipment, natural resources are tangible long lived assets which are expected to last beyond one year and are therefore classified on the balance sheet as non-current. When natural resources are extracted, depletion is recorded, causing an increase in another asset, inventory, which is subsequently sold.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 19.
The units-of-production method is a common and ideal method of recording the depletion of natural resources. There is a finite quantity of units of natural resource to be extracted. As extraction occurs, the conversion from one asset (natural resource) to another (inventory) can be measured in units and cost of the units can be fairly applied. Consequently, a more precise charge for depletion can be arrived at that corresponds to the asset created (inventory) when the natural resource is reduced.
20.
I disagree. The useful life of some intangible assets might be limited to the legal life of those assets and in that case, I would agree. I disagree with the limitation of the period of amortization to the legal life of intangibles. Some intangible assets have useful lives that are much shorter than their respective legal lives and so it is appropriate for the proper matching of expenses to revenues for the shorter length of benefiting periods to be used in the calculation of amortization. In some cases, the legal life could be without time limits. In that case it would not be possible to execute a calculation. Finally, in the case of goodwill, GAAP dictates that no depreciation can be recorded under any circumstances. Only impairment losses reduce the carrying amount of goodwill.
21.
The accounting for tangible and intangible assets is much the same. Tangible and intangible assets are reported at cost, which includes all expenditures necessary to prepare the asset for its intended use. Both tangible and intangible assets with finite lives are amortized over their useful life. In the case of long-lived tangible assets, the useful life or the physical life of the asset will be used as a limit of the length of time the assets will be depreciated. In the case of intangible life, there is no physical limitation in the usefulness of asset and the length of time the asset will be amortized is the shorter of its useful life or its legal life, usually on a straight-line basis. Due to their lack of substance, intangible assets are more likely to have indefinite useful lives and not need to be amortized, but only tested for impairment. This characteristic is the main difference between the accounting of tangible and intangible assets.
22.
Goodwill is the value of many favourable attributes that are intertwined in a business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill is only recorded on the purchase of a business if the purchaser pays a price that is greater than the fair value of the net assets of the business.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 23.
Property, plant, and equipment and natural resources are often combined and reported in the balance sheet as “property, plant, and equipment” or “capital assets”. Intangible assets are listed separately after property, plant, and equipment. Goodwill must be disclosed separately. For assets that are depreciated or amortized, the balances of the accumulated depreciation and/or amortization must be disclosed in the balance sheet or in the notes to the financial statements. Depreciation and amortization expense for the period must also be disclosed either on the income statement, elsewhere in the financial statements or in the notes to the financial statements. When impairment losses have occurred they should be shown on a separate line on the income statement, with the details disclosed in a note. The notes to financial statements should disclose the depreciation or amortization methods and rates that are used. The carrying amount of each major class of long-lived assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements.
24.
I disagree. Higher turnover of assets does not necessarily result in increased profits. A higher asset turnover just means that more revenue or sales are being generated for each dollar of assets. On the other hand, a higher return on assets means a proportionately higher profit has been generated for each dollar of assets.
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Chapter 9
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 (a) (b)
The cost of the land is $95,000 ($85,000 + $1,500 + $5,000 + $3,500). The cost of the land improvements is $5,000 (parking lot).
BRIEF EXERCISE 9-2 The cost of the equipment is $42,000 (invoice price $40,375 + transportation $625 + installation and testing $1,000). The payment of $1,750 for the insurance should be recorded as prepaid insurance which will later be expensed as it is consumed.
BRIEF EXERCISE 9-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
O C C C O C O C C O
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BRIEF EXERCISE 9-4 Jan.
2
Land [$850,000 × ($352,000 ÷ $880,000)] .... 340,000 Building [$850,000 × ($396,000 ÷ $880,000)] .... 382,500 Equipment [$850,000 × ($132,000 ÷ $880,000)] .... 127,500 Cash................................................ Mortgage Notes Payable ($850,000 − $170,000) .................
170,000 680,000
BRIEF EXERCISE 9-5 Depreciable amount is $36,000 ($42,000 − $6,000). With a 4-year useful life, annual depreciation is $9,000 ($36,000 4). Under the straight-line method, depreciation is the same each year. Thus, depreciation expense is $9,000 for each year of the equipment’s life.
BRIEF EXERCISE 9-6 The diminishing-balance rate is 50% (200%÷ 4) and this rate is applied to the carrying amount at the beginning of the year. Depreciation expense for each year is as follows: Carrying Amount End of Year Beginning Depr. Depr. Accum. Carrying Year Of Year × Rate = Expense Depr. Amount $42,000 2017 $42,000 50% $21,000 $21,000 21,000 2018 21,000 50% 10,500 31,500 10,500 2019 10,500 50% 4,500¹ 36,000 6,000 ¹ Limited to the amount that reduces the carrying amount to the residual value of $6,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 9-7 (a)
Depreciable amount per unit: ($38,950 − $4,300) 550,000 km. = $0.063/km.
(b)
Annual depreciation expense: 2016: 90,000 × $0.063 = $5,670 2017: 135,000 × $0.063 = $8,505
BRIEF EXERCISE 9-8 Depreciation expense for each year:
Depreciable Year Amount* × 2017 2018
$32,000 32,000
Depr. Rate
=
25% × 9/12 25%
Depr. Expense $ 6,000 8,000
End of Year Accum. Carrying Depr. Amount $38,000 $ 6,000 32,000 14,000 24,000
*Depreciable amount = $38,000 − $6,000 = $32,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 9-9 The double diminishing-balance rate is 50% (25% × 2) and this rate is applied to the carrying amount at the beginning of the year. Depreciation expense for each year is as follows: Double Diminishing-balance Carrying Amount Beginning Year Of Year × 2017 2018 2019 2020
$38,000 28,500 14,250 7,125
Depr. Rate
=
50% × 1/2 50% 50% 50%
Depr. Expense $ 9,500 14,250 7,125 1,125¹
End of Year Accum. Carrying Depr. Amount $ 38,000 $ 9,500 28,500 23,750 14,250 30,875 7,125 32,000 6,000
¹ Limited to the amount that brings the carrying amount to the residual value of $6,000
BRIEF EXERCISE 9-10 (a)
Annual depreciation: ($250,000 − $10,000) 6 = $40,000 Equipment cost ............................................... Less accumulated depreciation ($40,000 × 3) for 2015 to 2017................. Carrying amount Dec. 31, 2017 ......................
(b) Impairment Loss......................................... Accumulated Depreciation—Equipment Carrying amount (a) ........................................ Less: Recoverable amount ............................ Impairment loss...............................................
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$250,000 120,000 $130,000 30,000 30,000 $130,000 100,000 $ 30,000
Chapter 9
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 9-11 Carrying amount, Jan. 1, 2017 ($32,000 − $9,000) ............. $23,000 Less: Residual value ....................................................... (2,000) Remaining depreciable amount ..................................... 21,000 Remaining useful life ........................................................ ÷ 4 years Revised annual depreciation expense 2017 .................. $ 5,250
BRIEF EXERCISE 9-12 Accumulated Depreciation— Equipment................................................... Equipment ..............................................
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Chapter 9
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 9-13 (a) Mar. 31
(b) Mar. 31
Depreciation Expense [($86,400 − $2,200) ÷ 5 × 3/12] ........ Accumulated Depreciation —Equipment .............................
4,210 4,210
Cash ................................................ 35,000 Accumulated Depreciation— Equipment ¹ .................................... 54,730 Gain on Disposal ...................... 3,330 Equipment ................................. 86,400
¹ [($86,400 − $2,200) ÷ 60 months × 39 months] = $54,730
$16,840 x 3 years (2014-2016) ........................... $50,520 Depreciation for 3 months in 2017 .................. 4,210 Accumulated Depreciation to March 31 .......... $54,730¹ Cost of equipment .................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Gain on disposal ...................................... (c) Mar. 31
Cash ................................................ 29,000 Accumulated Depreciation— Equipment....................................... 54,730 Loss on Disposal............................ 2,670 86,400 Equipment .................................
Cost of equipment .................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Loss on disposal ......................................
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$86,400 54,730 31,670 35,000 $ 3,300
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$86,400 54,730 31,670 29,000 $ 2,670
Chapter 9
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 9-14 Jan. 7
Equipment (new) ........................... Accumulated Depreciation —Equipment .................................. Loss on Disposal........................... Equipment (old) ........................ Cash...........................................
29,000** 30,000 7,000* 61,000 5,000
**Cost of new = consideration paid in cash plus fair value of old asset: ($5,000 + $24,000 = $29,000) *Loss on disposal = Carrying amount − fair value: [($61,000 − $30,000) − $24,000 = $7,000]
BRIEF EXERCISE 9-15 Depletion base = $6,500,000 − $500,000 = $6,000,000 Depletion per unit = $6,000,000 ÷ 25,000,000 tonnes = $0.24 per tonne Depletion expense for ore extracted in Year 1: $0.24 per tonne × 5,000,000 tonnes = $1,200,000 Aug. 31 Inventory ....................................... 1,200,000 Accumulated Depletion—Mine 1,200,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 9-16 (a)
2017 Jan.
2 Patents .................................... Cash....................................
(b) Dec. 31
150,000 150,000
Amortization Expense ($150,000 8) .......................... 18,750 Accumulated Amortization— Patents ...............................
18,750
BRIEF EXERCISE 9-17 (a) (b) (c) (d) (e) (f)
PPE NA (expense) I NR NA (current asset) PPE
(g) (h) (i) (j) (k) (l)
PPE NA (investment) PPE I NA (expense) I
BRIEF EXERCISE 9-18 H. DENT COMPANY Balance Sheet (Partial) December 31, 2017 (in millions) Property, plant, and equipment Land .......................................................... $ 400,000 Buildings .................................................... $1,100,000 Less: Accumulated depreciation ............ 600,000 500,000 Nickel mine............................................... 500,000 Less: Accumulated depletion ................. 108,000 392,000 Total property, plant, and equipment .............. 1,292,000 Goodwill ............................................................................... 410,000 Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 9-19 ($ in US millions)
Return on assets
$720 [($17,108 + $15,977) ÷ 2] = 4.35%
Asset turnover
$16,042 [($17,108 + $15,977) ÷ 2] = 0.97 times
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 9-1 (a)
The acquisition cost of a property, plant, and equipment includes all expenditures necessary to acquire the asset and make it ready for its intended use. This includes not only the invoice cost of acquisition, but any freight, installation, testing, and similar costs to get the asset ready for use. For example, the cost of factory equipment includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. Costs such as these benefit the life of the factory equipment and not just the current period. Consequently, they should be capitalized and depreciated over the equipment’s useful life.
(b) 1. 2. 3. 4. 5. 6. 7. 8.
Land Land Land Land ($4,800 − $900 = $3,900) Vehicles Vehicles Licence Expense Land Improvements
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-2 (a) Land Building Land Improvements
Appraised Value $ 476,000 748,000 136,000 $1,360,000
% of Total 35% 55% 10%
(b) Land ......................................................... Building.................................................... Land Improvements ................................ Cash..................................................... Mortgage Payable ............................... (c)
Cost Allocated $ 448,000 704,000 128,000 $1,280,000 448,000 704,000 128,000 255,000 1,025,000
Depreciable amount for the building is $654,000 ($704,000 – $50,000). With a 60-year useful life, annual depreciation expense is $10,900 ($654,000 60). Depreciable amount for the land improvements is $128,000. With a fifteen year useful life, annual depreciation expense is $8,533 ($128,000 15).
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-3 1.
False. The inverse is true. Depreciation is a process of cost allocation, not asset valuation.
2.
True.
3.
False. The fair value of a plant asset may exceed the carrying amount of that asset. The best example is land because it is not depreciated.
4.
False. Depreciation does not apply to land because its revenue producing ability generally remains intact over time.
5.
False. Buildings do not have indefinite physical life and must therefore be depreciated.
6.
True. Although there could be exceptions due to the nature of the long-lived asset.
7.
False. The process of depreciating a long-lived asset does not involve cash, but a charge as an expense on the income statement. No cash is being accumulated for the purpose of replacing the asset.
8.
True.
9.
False. Depreciation expense is reported on the income statement but the accumulated depreciation is reported on the balance sheet.
10.
False. The fair value of a depreciable asset is not a factor used in the calculation of depreciation.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-4 (a) Straight-line
Depreciable Year Cost** ×
Depr. Rate* =
Depr. Expense
2016 2017
20% × 1/2 20%
$33,000 66,000
$330,000 330,000
End of Year Accum. Carrying Depr. Amount $345,000 $33,000 312,000 99,000 246,000
* Straight-line rate = 100% ÷ 5 years = 20% ** $345,000 − $15,000 = $330,000 (b) Diminishing-balance Carrying Amount Beginning Year of Year ×
Depr. Rate*
=
Depr. Expense
2016 2017
40% × 1/2 40%
$69,000 110,400
$345,000 276,000
End of Year Accum. Carrying Depr. Amount $345,000 $69,000 276,000 179,400 165,600
*Double diminishing balance rate = 200% ÷ 5 years = 40% (c)
Units-of-Production
Units-ofDepr. Year Production × Cost/Unit* =
Depr. Expense
2016 2017
$39,050 65,230
71,000 118,600
$0.55 0.55
End of Year Accum. Carrying Depr. Amount $345,000 $39,050 305,950 104,280 240,720
*Depreciable amount per unit is $0.55 per unit: [($345,000 − $15,000) ÷ 600,000 units = $0.55]
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-4 (Continued) (d)
In this particular case, the unit-of-production can be used as management is able to reliably estimate the amount of total production that will be obtained by using the equipment. This method allows for the best matching of depreciation costs with the related benefits obtained from the asset’s use. Another factor affecting the choice of depreciation methods is consistency with methods used in the past for similar type assets. Since this is a rather expensive piece of equipment, Blue Ribbon’s policy of recording a half year’s depreciation in the year of acquisition could conceivably bias the amount charged for depreciation in 2016. Coincidentally, the date of purchase happens to be within one month of the mid-point of the fiscal year. The choice of methods would consequently not differ tremendously between the unit-of-production and the straight-line methods. Future purchases of depreciable assets could nonetheless unfairly charge depreciation in the year of purchase. By choosing the unitof-production, the bias is removed.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-5 (a) (1) Straight-line
Depreciable Year Amount* ×
Depr. Rate**
=
Depr. Expense
2016 2017 2018 2019 2020
25% × 8/12 25% 25% 25% 25% × 4/12
$19,200 28,800 28,800 28,800 9,600
$115,200 115,200 115,200 115,200 115,200
End of Year Accum. Carrying Depr. Amount $129,200 $19,200 110,000 48,000 81,200 76,800 52,400 105,600 23,600 115,200 14,000
* $129,200 − $14,000 = $115,200 **Straight-line rate = 100% ÷ 4 years = 25% (2)
Double diminishing-balance
Carrying Amount Beginning Year of Year × 2016 2017 2018 2019
$129,200 86,133 43,066 21,533
Depr. Rate* =
Depr. Expense
50% × 8/12 50% 50% 50%
$43,067 43,067 21,533 7,533**
End of Year Accum. Carrying Depr. Amount $129,200 $43,067 86,133 86,134 43,066 107,667 21,533 115,200 14,000
*Double diminishing rate = 200% ÷ 4 years = 50% ** Limited to the amount that brings the carrying amount to the residual value of $14,000.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-5 (Continued) (a) (Continued) (3) Units-of-Production
Year 2016 2017 2018 2019 2020
End of Year Units of Deprec. Depr. Accum. Carrying Production × Amt/Unit* = Expense Depr. Amount $129,200 1,900 $9.60 $18,240 $18,240 110,960 2,800 9.60 26,880 45,120 84,080 3,700 9.60 35,520 80,640 48,560 2,700 9.60 25,920 106,560 22,640 1,100 9.60 8,640** 115,200 14,000
* Depreciation amount per unit is $9.60/hour [($129,200 – $14,000) 12,000 hours = $9.60] ** Limited to the amount that brings the carrying amount to the residual value of $14,000 (actual production of 12,200 exceeded estimated total production of 12,000). (b) Over the life of the asset, depreciation expense (in total) will be the same for all three methods, so the total profit will also be the same. (c)
Cash flow is the same under all three methods. Depreciation is an allocation of the cost of a long-lived asset and not a cash expenditure.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-6 (a)
July 1 Equipment.................................. 500,000 2015 Cash.......................................
500,000
Dec. 31 Depreciation Expense ................. 25,000 2015 Accumulated Depreciation— Equipment ($500,000 ÷ 10 × 6/12)
25,000
Dec. 31 Depreciation Expense ................. 50,000 2016 Accumulated Depreciation— Equipment ($500,000 ÷ 10) ...
50,000
(b) Carrying amount of the equipment—Dec. 31, 2016 [$500,000 – ($50,000 × 1.5 years)] ............. $425,000 Recoverable amount .................................. 325,000 Impairment loss.......................................... $100,000 Dec. 31 Impairment Loss ....................... 100,000 2016 Accumulated Depreciation— Equipment ............................. (c)
100,000
January 1, 2017 Carrying amount is $325,000 Depreciation expense for 2017: $325,000 ÷ 8.5 years = $38,235. December 31, 2017 Carrying amount is $286,765 ($325,000 − $38,235).
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-7 (a)
Annual depreciation — current estimate Building: ($800,000 – $40,000) ÷ 20 yrs = $38,000 per year Equipment: ($125,000 – $5,000) ÷ 5 yrs = $24,000 per year
(b) Carrying amount — Building Jan. 1, 2017: $230,000 [$800,000 – ($38,000 × 15)] Carrying amount — Equipment Jan. 1, 2017: $77,000 [$125,000 – ($24,000 × 2)] (c)
Annual depreciation — revised estimate — 2017 Building: [($230,000 – $60,500) ÷ (30 − 15 yrs)] = $11,300 per year Equipment: [($77,000 – $4,000) ÷ (4 – 2 yrs)] = $36,500 Carrying amount — Building Dec. 31, 2017: $218,700 ($230,000 – $11,300) Carrying amount — Equipment Dec. 31, 2017: $40,500 ($77,000 – $36,500)
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-8 (a)
Annual depreciation — first two years of equipment’s life ($90,000 – $9,000) ÷ 6 yrs = $13,500 per year
(b) Carrying amount Building Sept. 30, 2017: $63,000 [$90,000 – ($13,500 × 2)] (c)
2017 Oct.
1 Equipment.................................... 15,000 Cash.......................................
15,000
(d) 2018 Sept. 30 Depreciation Expense ................. 24,333 Accumulated Depreciation —Equipment .........................
24,333
Carrying amount Sept. 30, 2017 (b)........................ Add: Upgrade ..........................................................
$63,000 15,000 78,000 Less: Revised residual value ................................ 5,000 Remaining depreciable amount ............................. $73,000 Remaining useful life (4 − 1) ................................... ÷ 3 years Revised annual depreciation expense ................... $24,333
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-9 (a) Apr. 1 Depreciation Expense ............................ 1,125 Accumulated Depreciation —Equipment................................... ($45,000 ÷ 10 years × 3/12) July 30 Depreciation Expense ............................ 2,450 Accumulated Depreciation —Equipment................................... ($12,600 ÷ 3 years × 7/12) Nov. 1 Depreciation Expense ............................ 3,125 Accumulated Depreciation—Vehicles ($35,000 − $5,000) ÷ 8 years × 10/12)
1,125
2,450
3,125
(b) Apr. 1 Accumulated Depreciation —Equipment*...................................... Loss on Disposal................................ Equipment ...................................... *[($45,000 ÷ 10 years) × 9] + $1,125 July 30 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Loss on Disposal ............................... Equipment ...................................... *[($12,600 ÷ 3 years) × 2] + $2,450 Nov. 1 Vehicles (New) ($7,000+$36,000) ....... Accumulated Depreciation —Vehicles*.......................................... Loss on Disposal** ($7000-$12,500**) Vehicles (Old)................................. Cash................................................ *($35,000 − $5,000) ÷ 8 X 6 ** ($33,500 - $22,500) - $7,000 Solutions Manual .
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41,625 3,375 45,000
1,100 10,850 650 12,600
43,000 22,500 5,500 35,000 36,000
Chapter 9
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-9 (Continued) *Accumulated depreciation on old truck: 2011 (3,750 x 2/12) 2012-2016 (3,750 x 5 years) 2017 (from part a) Total accumulated depreciation
$ 625 18,750 3,125 $22,500
**Carrying value of old truck on November 1, 2017 $12,500 (35,000-22,500)
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-10 (a) 2020 Jan. 2 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Gain on Disposal ........................... Equipment ...................................... *($65,000 − $5,000) ÷ 5 X 3
31,000 36,000 2,000 65,000
(b) 2020 May 1 Cash .................................................... 31,000 Accumulated Depreciation —Equipment*...................................... 40,000 Gain on Disposal ........................... 6,000 Equipment ...................................... 65,000 *($65,000 − $5,000) ÷ 5 = $12,000 $12,000 X (3 years + 4 months) = $40,000 (c) 2020 Jan. 2 Cash .................................................... Accumulated Depreciation —Equipment*...................................... Loss on Disposal................................ Equipment ...................................... *($65,000 − $5,000) ÷ 5 X 3
11,000 36,000 18,000 65,000
(d) 2020 Oct. 1 Cash .................................................... 11,000 Accumulated Depreciation —Equipment*...................................... 45,000 Loss on Disposal................................ 9,000 Equipment ...................................... 65,000 *($65,000 − $5,000) ÷ 5 = $12,000 $12,000 X (3 years + 9 months) = $45,000
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EXERCISE 9-11 (a) The units-of-production method is recommended for depleting natural resources because it best reflects the pattern over which the assets’ future economic benefits are expected to be consumed. It requires that an estimate can be made of the total number of units that are available to be extracted from the resource. (b) Dec. 31 Inventory ($1.50 × 100,000) ....... 150,000 Accumulated Depletion—Resource
150,000
Depreciable amount $1,300,000 − $100,000 = $1,200,000 Depreciable amount per unit: $1,200,000 ÷ 800,000 tonnes = $1.50 per tonne (c) PHILLIPS EXPLORATION Income Statement (Partial) Year Ended December 31, 2017 Cost of goods sold: (will include this amount plus other costs) ($1.50 × 100,000 tonnes) ............................ $150,000 PHILLIPS EXPLORATION Balance Sheet (Partial) December 31, 2017 Assets Property, plant, and equipment Ore mine ................................................ $1,300,000 Less: Accumulated depletion ............ 150,000
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$1,150,000
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 9-12 1.
The original entry to add the cost of removing the old building, legal fees and clearing and grading the land to the Land account is correct. The student’s accounting treatment is incorrect. The costs involved must be added to the cost of land as they were necessary costs to acquire the land and get it ready for its intended use.
2.
Although consistency is necessary in applying accounting policies, in this case it should not have been the basis for recording depreciation on the trademarks. Trademarks can have usefulness to the business indefinitely. This is the probable reason that depreciation had not been recorded for trademarks in the past. As long as trademarks continue to assist in producing revenue and their carrying amounts have not been impaired, they should not be depreciated. Rather they should be tested regularly for impairment. If a permanent decline in value has occurred, the trademarks must be written down and an impairment loss recorded on the income statement. Therefore, the depreciation entry should be reversed and no decline in value recorded unless an impairment occurs.
3.
This student’s reasoning is faulty and an incorrect application of the principle of consistency in accounting. Adjusting property, plant, and equipment for increases to their fair value occurs when the business uses the revaluation model or fair value model under the International Financial Accounting Standards (IFRS). This is very unlikely the case for Chin Company. As well, current fair 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 carrying amount.
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EXERCISE 9-13 (a) 2016 Jan. 9
Patents ............................................. Cash.............................................
45,000
May 15 Goodwill ........................................... Cash.............................................
450,000
Dec. 31 Amortization Expense..................... Accumulated Amortization —Patents ($45,000 ÷ 5) ...............
9,000
31 Impairment Loss.............................. Goodwill ($450,000 − $400,000)..
50,000
2017 Jan. 2
45,000
450,000
9,000
50,000
Patents ............................................. Cash.............................................
30,000
Mar. 31 Research Expense .......................... Cash.............................................
175,000
Apr. 1 Copyrights ....................................... Cash.............................................
66,000
July 1 Trademark ........................................ Cash.............................................
275,000
Dec. 31
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30,000
175,000
66,000
275,000
Amortization Expense..................... 21,450 Accumulated Amortization—Patents [($45,000 – $9,000 + $30,000) ÷ 4] Accumulated Amortization— Copyrights [($66,000 ÷ 10) × 9/12]
16,500
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-13 (Continued) (b) Assets Intangible assets Patents ................................................. Less: Accumulated amortization ....... Copyrights............................................ Less: Accumulated amortization ....... Trademark ............................................ Total intangible assets ........................ Goodwill ....................................................
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$75,000 25,500 66,000 4,950
$49,500 61,050 275,000 $385,550 $400,000
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 9-14 (a) Patent Purchase price Jan. 1, 2014 Amortization 2014 (1) Amortization 2015 Amortization 2016 Balance Dec. 31, 2016 Amortization 2017 (2) Balance Dec. 31, 2017 (1) (2)
Cost $400,000
Carrying Amount
Amort. $50,000 50,000 50,000
$250,000 $83,333 $166,667
($400,000 ÷ 8 years) Carrying amount ÷ (6 – 3 years) = $250,000 ÷ 3
Trademark Purchase price during 2010 Legal defence during 2016 Balance Dec. 31, 2016 Balance Dec. 31, 2017 (3)
Cost $250,000 50,000 $300,000
(b) Income statement – December 31, 2017 Operating expenses: Amortization expense—Patents Impairment loss
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Carrying Impairment Amount $300,000 $25,000 $275,000
$83,333 25,000
Chapter 9
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-15 (a)
Account Accumulated amortization— Buildings Accumulated amortization— Leasehold Improvements Accumulated amortization— Fixtures & Equipment Accumulated amortization— Computer Equipment Accumulated amortization— Software Accumulated amortization – Other intangibles
Financial Statement
Balance Sheet
Section Property, Plant and Equipment Property, Plant and Equipment Property, Plant and Equipment Property, Plant and Equipment
Balance Sheet
Intangibles
Balance Sheet
Intangibles Property, Plant and Equipment
Balance Sheet Balance Sheet Balance Sheet
Buildings Cost-U-Less banner (trademark)
Balance Sheet
Computer Equipment
Balance Sheet
Fixtures & Equipment Goodwill Interest expenses
Balance Sheet Balance Sheet Income Statement
Land
Balance Sheet
Leasehold improvements Other intangible assets Other non-current assets Software
Balance Sheet Balance Sheet Balance Sheet Balance Sheet
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Intangibles Property, Plant and Equipment Property, Plant and Equipment Intangibles Operating Expenses Property, Plant and Equipment Property, Plant and Equipment Intangibles Non-current Assets Intangibles
Chapter 9
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-15 (Continued) (b) The North West Company Inc. Balance Sheet (Partial) January 31, 2015 (in thousands) Non-current assets: Other non-current assets................................................ Property, plant, and equipment Land ............................................................................. Buildings .......................................................$377,061 Less: Accumulated amortization .................209,584 Fixtures and equipment .......................... 265,706 Less: Accumulated amortization ............ 186,617 Leasehold improvements........................ 51,845 Less: Accumulated amortization ........... 30,296 Computer equipment............................... 73,151 Less: Accumulated amortization ................. 62,074 Total property, plant, and equipment ...................
$12,555 16,041 167,477 79,089 21,549 11,077 295,233
Intangible assets Cost-U-Less banner (trademark) ............................... Software ..........................................................$28,376 Less: Accumulated amortization .................. 17,032 Other intangible assets .............................. 7,989 Less: Accumulated amortization ................. 5,750 Total intangible assets...........................................
11,344
Goodwill ...........................................................................
33,653
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8,902
2,239 22,485
Chapter 9
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Accounting Principles, Seventh Canadian Edition
EXERCISE 9-16 (a) (in millions) December 31, 2014 Asset $39,862 turnover [($79,671 + $78,315) ÷ 2]
Return on assets
December 31, 2013 $39,593 [($78,315 + $76,401) ÷ 2]
= 0.50 times
= 0.51 times
$2,699 [($79,671 + $78,315) ÷ 2]
$3,911 [($78,315 + $76,401) ÷ 2]
= 3.4%
= 5.1%
(b) Suncor’s asset turnover has essentially remained the same as revenues and total assets changed only slightly from 2013 to 2014. On the other hand, profits declined significantly, in spite of steady revenues. Return on assets has deteriorated from 5.1% to 3.4%.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 9-1A (a)
Jan. 12 Land ........................................... 420,000 Cash....................................... Notes Payable .......................
95,000 325,000
16 Land ............................................... Cash.......................................
8,500
8,500
31 Land ........................................... 25,000 Cash.......................................
25,000
Feb. 13 Cash ........................................... 10,000 Land .......................................
10,000
28 Land ........................................... Cash.......................................
9,000 9,000
Mar. 14 Building...................................... Cash.......................................
38,000
31 Building...................................... Cash.......................................
15,000
Apr. 22 Building...................................... Cash.......................................
17,000
38,000
15,000
17,000
Sept. 26 Building...................................... 750,000 Cash....................................... Mortgage Payable ................. Sept. 30 Prepaid Insurance ..................... Cash.......................................
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150,000 600,000
4,500 4,500
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-1A (Continued) (a) (Continued) Oct. 20 Land Improvements .................... 45,000 Cash.......................................
45,000
Nov. 15 Land Improvements .................... 12,000 Cash.......................................
12,000
(b) Date 2017 Jan. 12 16 31 Feb. 13 28
Date 2017 Mar. 14 31 Apr. 22 Sept.26
Date 2017 Oct. 20 Nov. 15
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Explanation
Land Ref.
Debit
Credit Balance
420,000 8,500 25,000 9,000
420,000 428,500 453,500 443,500 452,500
Debit
Credit Balance
38,000 15,000 17,000 750,000
38,000 53,000 70,000 820,000
Land Improvements Explanation Ref. Debit
Credit Balance
45,000 12,000
45,000 57,000
10,000
Explanation
Building Ref.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-1A (Continued) (b) (Continued) The costs that will appear on Kadlec’s December 31, 2017 balance sheet will be: Land $452,500 Building 820,000 Land Improvements 57,000 Taking It Further: Companies should start to record depreciation when the asset is ready for use. In the case of Kadlec, the building was ready for use on September 26, 2017 and land improvements were completed on November 15, 2017 and so depreciation should be calculated from those dates. Kadlec should depreciate only the building and land improvements. Land has an indefinite useful life and therefore is not depreciated.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-2A (a)
Land Building Equipment
Appraised Value $275,000 343,750 68,750 $687,500
% of Total 40% 50% 10%
Cost Allocated $260,000 325,000 65,000 $650,000
(b) Building: Straight-line 1. To the nearest whole month
Year
Depreciable Amount* ×
Depr. Rate
=
Depr. Expense
2016 2017
$300,000 300,000
1/60 × 10/12 1/60
$4,167 5,000
End of Year Accum. Carrying Depr. Amount $325,000 $4,167 320,833 9,167 315,833
*$325,000 − $25,000 = $300,000 2. Half a year in the year of acquisition Depreciable Year Amount* × 2016 2017
$300,000 300,000
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Depr. Rate
=
Depr. Expense
1/60 × 6/12 1/60
$2,500 5,000
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End of Year Accum. Carrying Depr. Amount $325,000 $2,500 322,500 7,500 317,500
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-2A (Continued) (b) (Continued) Equipment: Double diminishing-balance 1. To the nearest whole month Carrying Amount Beginning Depr. Depr. Year of Year × Rate* = Expense 2016 2017
$65,000 51,458
25% × 10/12 25%
$13,542 12,865
End of Year Accum. Carrying Depr. Amount $65,000 $13,542 51,458 26,407 38,593
* 200% ÷ 8 = 25% 2. Half a year in the year of acquisition Carrying Amount Beginning Depr. Depr. Year of Year × Rate = Expense 2016 2017 (c)
$65,000 56,875
25% × 1/2 25%
$8,125 14,219
End of Year Accum. Carrying Depr. Amount $65,000 $8,125 56,875 22,344 42,656
Both options are acceptable. When deciding between adopting policy of recording depreciation to the nearest whole month or recording a half year of depreciation in the year of acquisition, ChalkBoard should consider, for purpose of consistency, the policy used in the past. Since this is the first year of business, ChalkBoard should consider what other categories or types of assets it will be purchasing in the current and future years that will be depreciated using this policy. If for example, the remaining categories of assets will be depreciated using the units-ofproduction method, the choice will not matter. The impact of the choice will not be significant in the long run, particularly if the assets are bought and sold frequently. Also, the impact is insignificant for assets with very long useful lives, as is demonstrated in part (b) for the building. No matter the choice taken by ChalkBoard, the policy must be followed consistently.
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PROBLEM 9-2A (Continued) Taking It Further: ChalkBoard should not consider depreciating to the exact day of acquisition as this level of precision is not relevant on the long-run particularly for assets with long useful lives, such as is the case for the building. Since the length of the useful life is an estimate, applying a policy of depreciating to the day will provide an amount for the depreciation expense that is insignificantly different from the amount arrived at using to the nearest month policy.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-3A (a)
Invoice price $210,000 Delivery cost 4,400 Installation and testing 5,600 Cost of the equipment $220,000 The $1,975 insurance policy is an annual operating expenditure and not included in the cost of the asset.
(b) 1. STRAIGHT-LINE DEPRECIATION
Depreciable Year Amount × 2016 2017 2018 2019 * **
$205,000* 205,000 205,000 205,000
End of Year Depr. Depr. Accum. Carrying Rate = Expense Depr. Amount $220,000 25%** $ 51,250 $ 51,250 168,750 25% 51,250 102,500 117,500 25% 51,250 153,750 66,250 25% 51,250 205,000 15,000
$220,000 − $15,000 = $205,000 100% ÷ 4= 25%
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-3A (Continued) (b) (Continued) 2. DOUBLE DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×
Depr. Rate
2016 2017 2018 2019
50%* 50% 50% 50%
$220,000 110,000 55,000 27,500
End of Year Depr. Accum. Carrying = Expense Depr. Amount $220,000 $110,000 $110,000 110,000 55,000 165,000 55,000 27,500 192,500 27,500 12,500** 205,000 15,000
* 200% ÷ 4 = 50% ** Limited to the amount that brings carrying amount to the residual value of $15,000. 3. UNITS-OF-PRODUCTION End of Year Units of Depr. Depr. Accum. Carrying Year Production × Amt/Unit* = Expense Depr. Amount $220,000 2016 16,750 $2.50* $ 41,875 $ 41,875 178,125 2017 27,600 2.50 69,000 110,875 109,125 2018 22,200 2.50 55,500 166,375 53,625 2019 16,350 2.50 38,625** 205,000 15,000 * Depreciable amount per unit is $2.50 per unit [($220,000 – $15,000) 82,000 = $2.50] ** Equal to the amount that brings the carrying amount to the residual value of $15,000 (actual production of 82,900 exceeded estimated total production of 82,000).
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PROBLEM 9-3A (Continued) (c)
The straight-line method of calculating depreciation provides the lowest amount of depreciation expense for 2017, which results in the highest amount of profit. Over the life of the asset, all three methods result in the same total depreciation expense (equal to the depreciable amount) and therefore the same amount of profit.
Taking It Further: The cost of recycling the equipment at the end of its useful life is an asset retirement cost and the amount must be estimated and added to the cost the equipment — part (a). These costs would consequently be added to the depreciable amount in the calculation of depreciation under all of the methods and would proportionately increase the amount of depreciation charge — part (b).
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PROBLEM 9-4A (a) Transaction
Land
Building
Equip. ment
Accum. Depr.
Jan. 12 Feb. 6 Apr. 24 May 17 July 19 Aug. 21 Sept. 20 Oct. 25 Dec. 31 Dec. 31
NE NE NE NE NE NE NE NE NE NE
NE NE +$75,000 NE NE NE NE NE NE NE
NE NE NE NE NE NE NE NE NE NE +$26,000 NE NE NE +$20,000 NE NE NE NE +$37,500
Total PP&E
Profit
NE −$2,200 NE −$5,400 +$75,000 NE NE −$3,100 NE −$5,900 +$26,000 NE NE −$2,700 +$20,000 NE NE NE −$37,500 −$37,500
(b) Jan. 12 Repairs Expense ....................... Cash.......................................
2,200
Feb.
6 Repairs Expense ....................... Cash.......................................
5,400
Apr. 24 Building...................................... Cash.......................................
75,000
2,200
5,400 75,000
Note: Possibly add to as a separate component of the building depending on the type of system, and whether it has the same useful life as the rest of the building. May. 17 Training Expense ...................... Cash.......................................
3,100
July 19 Repairs Expense ....................... Cash.......................................
5,900
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-4A (Continued) (b) (Continued) Aug. 21 Vehicles ..................................... 26,000 Cash.......................................
26,000
Sept. 20 Repairs Expense ....................... Cash.......................................
2,700
2,700
Oct. 25 Equipment.................................. 20,000 Cash....................................... Dec. 31
Impairment Loss ....................... 37,500 Accumulated Depreciation— Equipment ............................ [($150,000 − $62,500) − $50,000]
20,000
37,500
Note: ASPE does not allow the reversal of the impairment loss for the land.
Taking It Further: Given that the engine has to be replaced frequently, consideration should be given to depreciating this component of the equipment using a four year useful life and the remainder of the equipment the twelve year useful life. The major difficulty with this is determining how much of the cost of the equipment to allocate to the engine. One possibility is to use the value of a replacement motor to establish the cost of the original motor at the date of the purchase of the equipment.
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PROBLEM 9-5A (a) Depreciable Year Amount ×
Depr. Rate*
2013 2014 2015 2016 2017
10%** 10% 10% 10% 10%
$700,000** 700,000 700,000 700,000 700,000
=
Depr. Expense $70,000 70,000 70,000 70,000 70,000
End of Year Accum. Carrying Depr. Amount $750,000 $70,000 680,000 140,000 610,000 210,000 540,000 280,000 470,000 350,000 400,000
** 100% ÷ 10 years = 10% ** Depreciable amount = $750,000 − $50,000 = $700,000 (b) Dec. 31 Impairment Loss ....................... 2017 Accumulated Depreciation— Equipment ............................ ($400,000 − $320,000)
80,000 80,000
(c)
On Slope’s income statement will be reported depreciation expense in the amount of $70,000 and the impairment loss of $80,000. On Slope’s balance sheet, the equipment will be reported at its cost of $750,000 and accumulated depreciation of $430,000 ($350,000 + $80,000) so that the carrying amount will be $320,000 ($750,000-$430,000) and, equal to the impaired amount.
(d)
End of Year Depr. Depr. Accum. Carrying Rate = Expense Depr. Amount $430,000* $320,000 33.33%** $103,333 533,333 216,667 33.33% 103,333 636,666 113,334 33.33% 103,334 740,000 10,000
Depreciable Year Amount*** × 2018 2019 2020
$310,000 310,000 310,000
*Accumulated Depreciation = $350,000 end of year before impairment loss + $80,000 impairment loss ** 100% ÷ 3 years remaining (8 – 5 years) = 33.33% *** Carrying amount – revised res. value = $320,000 – $10,000 Solutions Manual .
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PROBLEM 9-5A (Continued) Taking It Further: One of the major differences between IFRS and ASPE concerns the measurement and reporting of depreciable assets. Under IFRS, it is possible to report these types of assets at their fair value, using the revaluation model, while under ASPE, no revaluation beyond a capital asset’s historical cost is possible. Consistent with this distinction, is the treatment of recoveries of previously recorded impairments. The basis for reporting depreciable assets at their fair value under IFRS is that the value used can be reliably measured. As well, under IFRS the frequency of the scrutiny of the assets to determine any impairment is greater and the measures taken more rigorous. Private companies reporting under ASPE typically do not have the same level of resources needed (as a public company reporting under IFRS) to determine if an impairment exists or if it has been reversed. Under ASPE, impairments are recorded less frequently and thus it is reasonable that ASPE does not allow the recording of reversals of impairment losses.
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PROBLEM 9-6A (a) 2015 Apr.
1 Land ........................................... 150,000 Building ...................................... 235,000 Cash....................................... Notes Payable .......................
Dec. 31
Depreciation Expense ............... 6,000 Accumulated Depreciation—Building ($235,000 - $35,000) × 4% × 9/12 = $6,000)
31 Interest Expense ......................... 10,125 Cash....................................... ($270,000 × 5% × 9/12 = $10,125) 2016 Feb. 17 Dec. 31
Repairs Expense ....................... Cash.......................................
115,000 270,000 6,000
10,125
225 225
Depreciation Expense ............... 8,000 Accumulated Depreciation—Building ($235,000 - $35,000) × 4% = $8,000)
8,000
31 Interest Expense.......................... 13,500 Cash....................................... ($270,000 × 5% = $13,500)
13,500
31 Impairment Loss.......................... 30,000 Land ....................................... ($150,000 − $120,000)
30,000
Building — no entry as carrying amount = $221,000; ($235,000 − $6,000 − $8,000 = $221,000) which does not exceed the recoverable amount of $240,000.
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PROBLEM 9-6A (Continued) (a) (Continued) 2017 Jan. 31 Depreciation Expense ............... 667 Accumulated Depreciation—Building ($200,000 × 4% × 1/12) 31 Cash ........................................... 320,000 Accumulated Depreciation— Building* ..................................... 14,667 Loss on Disposal (see below) .... 20,333 Land ....................................... Building ................................. * ($6,000 + $8,000 + $667) Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 14,667 Carrying amount .................. Proceeds ............................... Loss on disposal .................. Feb.
(b)
1 Interest Expense ($270,000 × 5% × 1/12).............. 1,125 Notes Payable............................ 270,000 Cash.......................................
667
120,000 235,000
$120,000 220,333 340,333 320,000 $ 20,333
271,125
The land may have been impaired due to contamination found on it or surrounding properties. It may also have been because plans for a proposed new development on adjacent land that would have increased the value of NW Tool Supply’s property at the date of purchase, have been permanently shelved.
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PROBLEM 9-6A (Continued) (c)
Oct. 31 Depreciation Expense ................... 6,667 Accumulated Depreciation—Building ($200,000 × 4% × 10/12) Oct. 31 Cash ........................................... 400,000 Accumulated Depreciation —Building*................................. 20,667 Land ....................................... Building ................................. Gain on Sale (see below)...... * ($6,000 + $8,000 + $6,667) Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 20,667 Carrying amount .................. Proceeds ............................... Gain on disposal (sale) ........
6,667
120,000 235,000 65,667
$120,000 214,333 334,333 400,000 $ 65,667
Taking It Further: For purposes of calculating and recording impairments, the recoverable amount of a property is based on the comparison of the carrying amount of the asset against the higher of the fair value of the asset less the cost to sell it, or its value in use. In this case, the property is made up of land and a building which are somewhat inseparable. Consequently, the value in use to NW Tool Supply would be the amount management expects to recover in operations by using the assets together. As for establishing the fair value of the combined assets, property of similar location and type that have been recently sold can be used to make comparisons of what would be obtained on sale. Management should be diligent about looking for possible causes for impairment.
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PROBLEM 9-6A (Continued) Taking It Further: (Continued) When considering impairment of the land on its own, uninsured damages or conditions uncovered during the year may require management to recalculate the value in use or the resale fair value of the land. Under ASPE the review of property, plant, and equipment for possible impairment need not be performed each year, but must be performed on a regular basis, particularly when changes in circumstance or conditions occur. If the company is using IFRS, annual impairment testing is required.
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PROBLEM 9-7A
(a)
1. STRAIGHT-LINE DEPRECIATION
Depreciable Year Amount × 2015 2016 2017
$97,000* 97,000 97,000
Depr. Rate
=
33.33%** 33.33% 33.33%
Depr. Expense $32,333 32,333 32,334
End of Year Accum. Carrying Depr. Amount $107,500 $32,333 75,167 64,666 42,834 97,000 10,500
* $107,500 − $10,500 = $97,000 ** 100% ÷ 3 years = 33.33% 2. DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×
Depr. Rate
2015 2016 2017
40% 40% 40%
$107,500 64,500 38,700
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=
Depr. Expense $43,000 25,800 15,480
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End of Year Accum. Carrying Depr. Amount $107,500 $43,000 64,500 68,800 38,700 84,280 23,220
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Accounting Principles, Seventh Canadian Edition
PROBLEM 9-7A (Continued) (a) (Continued) 3. UNITS-OF-PRODUCTION End of Year Units of Depr. Depr. Accum. Carrying Year Production × Amt/Unit* = Expense Depr. Amount $107,500 2015 10,000 $1.617* $ 16,170 $ 16,170 91,330 2016 20,000 1.617 32,340 48,510 58,990 2017 29,000 1.617 46,893 95,403 12,097 * Depreciable amount per unit is $1.617 per unit [($107,500 – $10,500) 60,000 = $1.617] (b)
(1) (2) Straight- DiminishingLine Balance
Cost ...................................... $107,500 Accumulated depreciation.. 97,000 Carrying amount ................. 10,500 Cash proceeds .................... 15,000 Gain (loss) on sale .............. $ 4,500 (c)
$107,500 84,280 23,220 15,000 $ (8,220)
(1) (2) Straight- DiminishingLine Balance
Depreciation expense ......... $97,000 Add loss (less gain) on sale (4,500) Net expense ......................... $92,500
$84,280 8,220 $92,500
(3) Unit –ofProduction $107,500 95,403 12,097 15,000 $ 2,903 (3) Unit –ofProduction $95,403 (2,903) $92,500
The net expense is the same under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in turn causes a different gain or loss on sale. Consequently, the total depreciation expense recognized over the life of the asset, plus the loss on sale (or less the gain on sale), results in the same net expense of $92,500 over the life of the asset.
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PROBLEM 9-7A (Continued) Taking It Further: I disagree. Experiencing a gain or loss on the disposal of a depreciable asset is not the result of an error or mistake. Rather, a gain or loss is an expected outcome due to the limitations of the cost allocation that has occurred for the asset up to the date of its disposal. Since estimates are involved in arriving at the factors used in calculating depreciation, such as the estimated useful life and the estimated residual value, it is natural that some differences between the carrying amount and proceeds of disposition will occur when the asset is ultimately disposed of. Depreciation is a cost allocation process and is not intended to ensure the carrying amount of the asset reflects fair value.
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PROBLEM 9-8A (a)
2015 Mar.
1 Equipment.................................... 95,000 Accounts Payable .................
(b) 2015 Aug. 31 Depreciation Expense ................... 9,500 Accumulated Depreciation —Equipment ......................... $95,000 × 20% × 6/12 months = $9,500 2016 Aug. 31 Depreciation Expense ................. 17,100 Accumulated Depreciation —Equipment ......................... ($95,000 − $9,500) × 20% = $17,100
95,000
9,500
17,100
2017 Aug. 31 Depreciation Expense ................. 13,680 Accumulated Depreciation —Equipment ......................... 13,680 ($95,000 − $9,500 − $17,100) × 20% = $13,680 (c)
2018 Feb.
1 Depreciation Expense ................... 4,560 Accumulated Depreciation —Equipment ......................... 4,560 ($95,000 − $9,500 − $17,100 − $13,680) × 20% × 5/12 = $4,560 Accumulated Depreciation at February 1, 2018: $9,500 + $17,100 + $13,680 + $4,560 = $44,840 Carrying Amount at February 1, 2018: Cost – Accumulated Depreciation $50,160 = $95,000 − $44,840
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PROBLEM 9-8A (Continued) (c) (Continued) 1.
Feb.
1 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal* ....................... 50,160 Equipment .............................
95,000
*Proceeds – Carrying Amount = Gain (loss) $0 – [$95,000 – $44,840] = ($50,160) 2.
3.
4.
Feb.
1 Cash ............................................. 55,000 Accumulated Depreciation —Equipment ................................ 44,840 Gain on Disposal** .................... Equipment ............................. ** $55,000 – [$95,000 – $44,840] = $4,840 1 Cash ............................................. 45,000 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal*** ...................... 5,160 Equipment ............................. *** $45,000 – [$95,000 – $44,840] = ($5,160)
4,840 95,000
Feb.
1 Equipment (new) ($47,000 + $45,000) .................... 92,000 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal**** ..................... 3,160 Cash ($97,000 − $52,000)...... Equipment (old) .................... **** $47,000 – [$95,000 – $44,840] = ($3,160)
95,000
Feb.
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PROBLEM 9-8A (Continued) Taking It Further: The following are the arguments in favour of recording gains and losses on disposal of property, plant, and equipment as: 1.
Part of profit from operations: Gains and losses are basically just adjustments to depreciation expense and should be recorded in the same section of the income statement. Classifying gains and losses as operations removes the potential for management bias in the selection of depreciation methods or in the estimates concerning useful lives and residual values of the assets. Bias might be at play concerning management’s unwillingness to show losses in operations because management bonuses may be based on the amount of profit from operations.
2.
Non-operating items: The same management bias described above would be applied for gains recognized by the business. A common view is that the disposal of property, plant, and equipment is not an everyday occurrence and gains or losses are not predictable. It can also be argued that selling property, plant, and equipment is not part of normal operations and thus gains or losses should not be reported as part of profit from operations.
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PROBLEM 9-9A (a)
April
1 Land ...........................................2,200,000 Cash....................................... 550,000 Notes Payable ....................... 1,650,000
May
1 Depreciation Expense .................. 46,667 Accumulated Depreciation—Equip. ($1,400,000 ÷ 10 × 4/12) ........
46,667
1 Cash .............................................150,000 Accumulated Depreciation —Equipment. ............................1,166,667 Loss on Disposal.......................... 83,333 Equipment ............................. 1,400,000 Cost Accumulated depreciation—equip. [($1,400,000 ÷ 10) × 8 + $46,667)] Carrying amount Cash proceeds Loss on disposal
$1,400,000 1,166,667 233,333 150,000 $ (83,333)
June 1 Cash .............................................450,000 Notes Receivable......................1,350,000 Land ....................................... 700,000 Gain on Disposal .................. 1,100,000 July
1 Equipment.................................1,100,000 Cash....................................... 1,100,000
Dec. 31 Depreciation Expense .................. 50,000 Accumulated Depreciation —Equipment ($500,000 ÷ 10)
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PROBLEM 9-9A (Continued) (a) (Continued) Dec. 31 Accum. Depr.—Equipment .........350,000 Loss on disposal* ........................150,000 Equipment ............................. 500,000 Cost $500,000 Accumulated depreciation—equipment ($500,000 ÷ 10 × 7) 350,000 Carrying amount 150,000 Cash proceeds 0 Gain (loss) on disposal $ (150,000)* (b) Dec. 31 Depreciation Expense .................974,000 Accumulated Depreciation —Building ($48,700,000 ÷ 50) 974,000 31 Depreciation Expense ..............7,365,000 Accumulated Depreciation —Equipment ......................... 7,365,000 $73,100,000* ÷ 10 $1,100,000 ÷ 10 × 6/12
$7,310,000 55,000 $7,365,000
*$75,000,000 − $1,400,000 − $500,000 = $73,100,000
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31 Interest Expense........................... 74,250 Interest Payable .................... ($1,650,000 × 6% × 9/12)
74,250
31 Interest Receivable....................... 39,375 Interest Revenue................... ($1,350,000 × 5% × 7/12)
39,375
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PROBLEM 9-9A (Continued) (c) HAMSMITH CORPORATION Balance Sheet (Partial) December 31, 2017 Property, plant, and equipment1 Land................................................ $11,500,000 Buildings .......................................... $48,700,000 Less: Accumulated depreciation.. 32,074,000 16,626,000 Equipment........................................ $74,200,000 Less: Accumulated depreciation.. 32,945,000 41,255,000 Total property, plant, and equipment $69,381,000 1
See T accounts that follow for balances.
Land Jan. 1, 2017 April 1, 2017
10,000,000 June 1, 2017 2,200,000
700,000
Dec.31, 2017 Bal. 11,500,000
Building J an. 1, 2017
48,700,000
D ec. 31, 2017 Bal. 48,700,000
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PROBLEM 9-9A (Continued) (c) (Continued) Equipment Jan. 1, 2017 July 1, 2017
75,000,000 1,100,000
May 1, 2017 Dec. 31, 2017
1,400,000 500,000
Dec.31, 2017Bal. 74,200,000 Accumulated Depreciation—Building Jan. 1, 2017 Dec. 31, 2017
31,100,000 974,000
Dec. 31, 2017 Bal. 32,074,000 Accumulated Depreciation—Equipment May 1, 2017 Dec. 31, 2017
1,166,667 350,000
Jan. 1, 2017 May 1, 2017 Dec. 31, 2017 Dec. 31, 2017
27,000,000 46,667 50,000 7,365,000
Dec. 31, 2017 Bal. 32,945,000
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PROBLEM 9-9A (Continued) Taking It Further: Although the use of the revaluation model is permitted for public companies following International Financial Reporting Standards (IFRS), its adoption is voluntary, and somewhat rare. The revaluation model results in more relevant information on the balance sheet, because the long-lived assets are revalued to fair value on a regular basis. An investor may be better able to assess the current economic position of the company with this information. However, the revaluation model increases the risk of error and bias in the financial statements because the revaluation model uses a fair value amount that is not necessarily supported by a transaction with an independent buyer.
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PROBLEM 9-69A 1.
2.
3.
Research Expense ($160,000 × 55%) ........ 88,000 Patents.................................................... Accumulated Amortization—Patents........ Amortization Expense ........................... $88,000 ÷ 15 years = $5,867
5,867
Goodwill ...................................................... Amortization Expense ........................... ($400,000 ÷ 40 years) × 6/12 = $5,000
5,000
88,000
5,867
Impairment Loss ($80,000 − $70,000)........ 10,000 Licence ...................................................
5,000
10,000
Taking It Further: The majority of intangible assets that are developed internally cannot be recognized as intangible assets on the balance sheet because the expenditures on internally developed intangibles cannot be distinguished from the cost of other research and development performed by the business. The costs cannot be separately measured and must be expensed as incurred.
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PROBLEM 9-11A (a)
Jan.
2 Patent #1 .................................... 23,200 Cash.......................................
23,200
June 30 Research Expense .................... 180,000 Cash.......................................
180,000
30 Patent #2 .................................... 60,000 Cash.......................................
60,000
Sept. 1 Advertising Expense ................. 12,000 Cash.......................................
12,000
Oct.
1 Copyright #2 .............................. 18,000 Cash.......................................
(b) Dec. 31 Amortization Expense............... 12,400 Accumulated Amortization— Patent #1* .............................. Accumulated Amortization— Patent #2**.............................
18,000
10,900 1,500
* [($80,000 × 1/10) + ($23,200 × 1/8)] At Jan. 1, 2017 Patent # 1 has been amortized 2 years ($16,000 ÷ $80,000 = 2/10) — remaining period to amortize is 8 years. ** [$60,000 × 1/20 × 6/12 = $1,500] 31 Amortization Expense............... Accumulated Amortization— Copyright #1* ........................ Accumulated Amortization— Copyright #2** ....................... *($48,000 × 1/10) **($18,000 × 1/6 × 3/12)
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PROBLEM 9-11A (Continued) (c) IP COMPANY (Partial) Balance Sheet December 31, 2017 Assets Intangible assets Patents1 ................................................ Less: Accumulated amortization2...... Copyrights3 .......................................... Less: Accumulated amortization4...... Total intangible assets ........................ Goodwill ....................................................
$163,200 28,400 66,000 34,350
$134,800 31,650 $166,450 $220,000
1
Cost: Patent #1 ($80,000 + $23,200) + Patent #2 ($60,000) = $163,200 2 Accumulated Amortization: Patent #1 ($16,000 + $10,900) + Patent #2 ($1,500) = $28,400 3 Cost: Copyright #1 ($48,000) + Copyright #2 ($18,000) = $66,000 4 Accumulated Amortization: Copyright #1 ($28,800 + $4,800) + Copyright #2 ($750) = $34,350
Taking It Further: Although intangible assets do not have physical substance, they have characteristics common to other assets in that they contribute to the revenue producing ability of a business that owns them. They are owned and controlled by the business and therefore fit the definition of assets.
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PROBLEM 9-12A (a)
2016 Mar. 31 Resource ................................... 2,860,000 Cash.................................. 2,860,000 ($2,600,000 + $260,000) Dec. 31 Inventory ................................. Accumulated Depletion — Resource ..........................
570,000 570,000
($2,860,000 − $200,000) ÷ 560,000 t = $4.75/t $4.75/t × 120,000 t = $570,000 Dec. 31 Cost of Goods Sold ................ Inventory .......................... 2017 Dec. 31 Inventory ................................. Accumulated Depletion — Resource ..........................
570,000 570,000 380,000 380,000
($2,860,000 − $570,000 − $200,000) ÷ 550,000 t = $3.80/t $3.80/t ×100,000 t = $380,000 Dec. 31 Cost of Goods Sold ................ Inventory ..........................
380,000 380,000
(b) RIVERS MINING COMPANY Income Statement (partial) Year Ended December 31, 2017 Cost of goods sold ........................................
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PROBLEM 9-12A (Continued) (b) (Continued) RIVERS MINING COMPANY (Partial) Balance Sheet December 31, 2017 Property, plant, and equipment Resource ................................................ $2,860,000 Less: Accumulated depletion* ........... 950,000 $1,910,000 * $570,000 + $380,000 = $950,000 Taking It Further: Due to its nature, it is expected that the estimate of the total amount of ore to be extracted from a mine would need to be adjusted as extraction occurs and better estimates can be made. Management should not be influenced by the need for changes in estimates when choosing the units-of-production method for recording depletion of the resource. It is the method that best allocates the cost of the mine to the units of ore that are recorded in inventory.
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PROBLEM 9-13A (a) (in thousands) Andruski Company
Brar Company
$552.0 [($702.5 + $662.8) ÷ 2]
$1,762.9 [($1,523.5 + $1,410.7) ÷2]
= 0.81 to 1
= 1.20 to 1
$515.9 [($662.8 + $602.5) ÷ 2]
$1,588.2 [($1,410.7 + $1,318.4) ÷2]
= 0.82 to 1
= 1.16 to 1
Return on assets 2017
$21.4 [($702.5 + $662.8) ÷ 2]
$96.5 [($1,523.5 + $1,410.7) ÷2]
= 3.13%
= 6.58%
Return on assets 2016
$20.6 [($662.8 + $602.5) ÷ 2]
$85.4 [($1,410.7 + $1,318.4) ÷2]
= 3.26%
= 6.26%
Asset turnover 2017
Asset turnover 2016
(b) Brar Company is far more efficient in using its assets to generate sales–its assets turnover of 1.20 times is higher than 0.82 times for Andruski Company and is increasing, while Andruski’s is decreasing. Brar is also more efficient in using assets to produce profit–with a return on assets of 6.58% compared to 3.13% for Andruski Company. Brar’s ratio is increasing while Andruski’s in decreasing.
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PROBLEM 9-13A (Continued) Taking It Further: Although the ability to compare two companies in the same industry using ratios is affected by the depreciation methods adopted by the companies being compared, absolute conclusions cannot be drawn from these differences. Brar uses the straight-line method of depreciation and Andruski uses the diminishing-balance method which results in higher charges of depreciation in the early years and lower amounts in the later years for Andruski. Assets are acquired throughout the life of a company as well so it is not possible to determine the impact of the different methods without more information. Notwithstanding this limitation, and assuming a normal turnover of assets, one could generally conclude that the amount of profit and total assets of Andruski would be lower than that of Brar, simply because of the accelerated method of depreciation being used, which generated a higher expense for depreciation and a lower carrying amount for the assets.
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PROBLEM 9-1B (a)
Feb.
7 Land ........................................... 575,000 Cash....................................... Notes Payable ....................... 9 Land ........................................... Cash.......................................
Mar.
115,000 460,000
7,500 7,500
15 Land ........................................... 19,000 Cash.......................................
19,000
17 Cash ........................................... Land .......................................
8,500
8,500
25 Land ........................................... 10,500 Cash.......................................
10,500
2 Building...................................... Cash.......................................
28,000 28,000
15 Building...................................... Cash.......................................
18,000 18,000
Aug. 31 Building...................................... 850,000 Cash....................................... Notes Payable .......................
170,000 680,000
Sept. 3 Land Improvements .................. 40,000 Cash.......................................
40,000
10 Prepaid Insurance ..................... Cash.......................................
3,750
3,750
Oct. 31 Land Improvements .................. 37,750 Cash.......................................
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PROBLEM 9-1B (Continued) (b) Date 2017 Feb. 7 9 15 17 25
Date 2017 Mar. 2 15 Aug. 31
Date 2017 Sept. 3 Oct. 31
Explanation
Land Ref.
Debit
Credit Balance
575,000 7,500 19,000 10,500
575,000 582,500 601,500 593,000 603,500
Debit
Credit Balance
28,000 18,000 850,000
28,000 46,000 896,000
Land Improvements Explanation Ref. Debit
Credit Balance
40,000 37,750
40,000 77,750
8,500
Explanation
Building Ref.
The costs that will appear on Weisman’s December 31, 2017 balance sheet will be: Land $603,500 Building 896,000 Land Improvements 77,750
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PROBLEM 9-1B (Continued) Taking It Further: Companies should start to record depreciation when the asset is ready for use. In the case of Weisman, the building was ready for use on August 31, 2017 and land improvements were completed on October 31, 2017 and so depreciation should be calculated from those dates. Weisman should depreciate only the building and land improvements. Land has an indefinite useful life and therefore is not depreciated.
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PROBLEM 9-2B (a)
Land Building Equipment
Appraised Value $262,500 337,500 150,000 $750,000
% of Total 35% 45% 20%
Cost Allocated $245,000 315,000 140,000 $700,000
(b) Building: Straight-line 1. To the nearest month
Year
Depreciable Amount* ×
Depr. Rate
=
Depr. Expense
2016 2017
$300,000 300,000
1/60 × 2/12 1/60
$833 5,000
End of Year Accum. Carrying Depr. Amount $315,000 $833 314,167 5,833 309,167
* $315,000 − $15,000 = $300,000 (2) Half a year in the year of acquisition Depreciable Year Amount* × 2016 2017
$300,000 300,000
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=
Depr. Expense
1/60 × 6/12 1/60
$2,500 5,000
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End of Year Accum. Carrying Depr. Amount $315,000 $2,500 312,500 7,500 307,500
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PROBLEM 9-2B (Continued) (b) (Continued) Equipment: Double diminishing-balance 1. To the nearest month Carrying Amount Beginning Depr. Depr. Year of Year × Rate* = Expense 2016 2017
$140,000 134,167
25% × 2/12 25%
$5,833 33,542
End of Year Accum. Carrying Depr. Amount $140,000 $5,833 134,167 39,375 100,625
* 200% ÷ 8 = 25% 2) Half a year in the year of acquisition Carrying Amount Beginning Depr. Depr. Year of Year × Rate = Expense 2016 2017 (c)
$140,000 122,500
25% × 6/12 25%
$17,500 30,625
End of Year Accum. Carrying Depr. Amount $140,000 $17,500 122,500 48,125 91,875
Both options are acceptable. When deciding between the two policies, Solinger should consider, for purpose of consistency, the policy used in the past. Since this is the first year of business, Solinger should consider what other categories or types assets it will be purchasing in the future that will be depreciated using this policy. If for example, the remaining categories of assets will be depreciated using the units-of-production method, the choice will not matter. The impact of the choice will not be significant in the long run, particularly if the assets are bought and sold frequently. Also, the impact is insignificant for assets with very long useful lives, as is demonstrated in part (b) for the building. No matter the choice taken by Solinger, the policy must be followed consistently.
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PROBLEM 9-2B (Continued) Taking It Further: If Solinger had decided to use the units-of-production method instead of the diminishing-balance method for depreciating its equipment, the decision between the adoption of a policy for depreciating to the nearest month or half a year in the year of acquisition would not matter. When using the units-ofproduction method, the calculation of depreciation is not calculated as a function of the time the asset is used but is based on the amount of use that is being made of the asset, which in turn is based on some units of output or production. There is no pro-ration for time used in the units-of-production method.
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PROBLEM 9-3B (a)
Cost: Cash price Delivery costs Installation and testing Total cost
$442,000 4,000 6,000 $452,000
The one-year insurance policy is not included as it is an operating expenditure, benefiting only the current period. (b) 1. STRAIGHT-LINE DEPRECIATION
Depreciable Year Amount ×
Depr. Rate
2016 2017 2018 2019
25% 25% 25% 25%
* **
$432,000* 432,000 432,000 432,000
End of Year Depr. Accum. Carrying = Expense Depr. Amount $452,000 $ 108,000 $ 108,000 344,000 108,000 216,000 236,000 108,000 324,000 128,000 108,000 432,000 20,000
$452,000 − $20,000 = $432,000 100% ÷ 4 years = 25%
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PROBLEM 9-3B (Continued) (b) (Continued) 2. DOUBLE DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×
Depr. Rate
2016 2017 2018 2019
50% 50% 50% 50%
$452,000 226,000 113,000 56,500
End of Year Depr. Accum. Carrying = Expense Depr. Amount $452,000 $226,000 $226,000 226,000 113,000 339,000 113,000 56,500 395,500 56,500 36,500** 432,000 20,000
* 200% ÷ 4 = 50% ** Use the amount that brings carrying amount to the residual value of $20,000. 3. UNITS-OF-PRODUCTION DEPRECIATION Units of Depr. Year Production × Amt./Unit* = 2016 2017 2018 2019
22,600 45,600 49,700 32,200
$2.88* 2.88 2.88 2.88
End of Year Depr. Accum. Carrying Expense Depr. Amount $452,000 $65,088 $ 65,088 386,912 131,328 196,416 255,584 143,136 339,552 112,448 92,448** 432,000 20,000
* Depreciation amount per unit: ($452,000 − $20,000) ÷ 150,000 units = $2.88 ** Use the amount that makes carrying amount equal to residual value (actual production exceeded estimated total production).
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PROBLEM 9-3B (Continued) (c)
The straight-line method provides the lowest amount of depreciation expense for 2017, thus resulting in the highest profit that year. Over the life of the asset, all three methods result in the same total depreciation expense (equal to the depreciable amount).
Taking It Further: The cost of recycling the equipment at the end of its useful life is an asset retirement cost which must added to the cost of the equipment — part (a). These costs would consequently be added to the depreciable amount in the calculation of depreciation under all of the methods and would proportionately increase the amount of depreciation expense — part (b).
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PROBLEM 9-4B (a) Transaction
Land
Building
Equip. ment
Accum. Depr.
Total PP&E
Profit
Jan. 22 NE NE NE NE NE −$4,600 Apr. 10 NE NE +$95,000 NE +$95,000 NE May 6 NE NE NE NE NE −$30,500 July 20 NE NE NE NE NE −$10,000 Aug. 7 NE NE +$35,000 NE +$35,000 NE Aug. 15 NE NE NE NE NE −$1,900 Oct. 25 NE NE +$18,200* NE +18,200 NE Nov. 6 NE +$120,000 NE NE +$120,000 NE Dec. 31 NE NE NE +$85,000** −$85,000 −$85,000 Dec. 31 +$75,000*** NE NE NE +$75,000 +$75,000
*$18,200 = $16,700 + $1,500 **$85,000 = [($250,000 − $75,000) − $90,000] ***$75,000 = $575,000 − $500,000 (b) Jan. 22
Repairs Expense ....................... Accounts Payable .................
4,600 4,600
Apr. 10 Equipment.................................. 95,000 Accounts Payable ................. May
95,000
6 Repairs Expense ....................... 30,500 Accounts Payable .................
30,500
July 20 Repairs Expense ....................... 10,000 Accounts Payable .................
10,000
Aug.
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35,000
15 Training Expense ...................... Accounts Payable .................
1,900
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PROBLEM 9-4B (Continued) (b) (Continued) Oct. 25 Equipment.................................. 16,700 Accounts Payable .................
16,700
25 Equipment.................................. Accounts Payable .................
1,500
Nov.
1.
2.
1,500
6 Building...................................... 120,000 Accounts Payable .................
120,000
Dec. 31 Impairment Loss ....................... 85,000 Accumulated Depreciation— Equipment .............................
85,000
Dec. 31 Land ........................................... 75,000 Impairment Loss ...................
75,000
Under IFRS, the reversal of the impairment loss is limited to the amount required to increase the asset’s carrying amount to what it would have been if the impairment loss had not been recorded. In this case the original cost of the land was $575,000 and the amount of the impairment recorded to date is $75,000 ($575,000 − $500,000). Since the current recoverable amount of $600,000 is greater than the original cost of the land, before impairment was recorded, the recovery entry is limited to $75,000. Taking It Further: Given that the engine has to be replaced frequently, consideration should be given to depreciating this component of the equipment using a five year useful life and the remainder of the equipment the fifteen year useful life. If the original equipment does not have an amount specified for the engine as a component, it would be reasonable to use the value of a replacement motor to establish the cost of the original motor at the date of the purchase of the equipment.
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PROBLEM 9-5B (a) Depreciable Year Amount ×
Depr. Rate
2013 2014 2015 2016 2017
10% 10% 10% 10% 10%
$575,000* 575,000 575,000 575,000 575,000
=
End of Year Depr. Accum. Carrying Expense Depr. Amount $600,000 $57,500 $ 57,500 542,500 57,500 115,000 485,000 57,500 172,500 427,500 57,500 230,000 370,000 57,500 287,500 312,500
* Depreciable amount = $600,000 − $25,000 = $575,000 ** 1 ÷ 10 years = 10% (b) Dec. 31 Impairment Loss ......................... 52,500 2017 Accumulated Depreciation— Equipment ............................ ($312,500 − $260,000) (c)
On Short Track’s income statement will be reported depreciation expense in the amount of $57,500 and the impairment loss of $52,500. On Short Track’s balance sheet the equipment will be reported at its cost of $600,000 and the accumulated depreciation of $340,000 ($287,500 + 52,500) so that the book value will be $260,000 equal to the impaired amount.
(d) Depreciable Year Amount × 2018 2019
52,500
$250,0002 250,000
Depr. Rate 50%3 50%
End of Year Accum. Carrying = Depr. Amount $340,000¹ $260,000 $125,000 465,000 135,000 125,000 590,000 10,000 Depr. Expense
¹ Accumulated Depreciation = $287,500 end of year before impairment loss + $52,500 impairment loss 2 Depreciable amount = Recoverable amount at date of impairment less revised residual value of $10,000 3 1 ÷ 2 years (7 – 5 years) remaining = 50% Solutions Manual .
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PROBLEM 9-5B (Continued)
Taking It Further: It is important to record impairment losses when they occur to ensure that the amount of benefit to be derived from long-lived assets is not overstated on the balance sheet. When assets lose their utility, they must be reduced to the recoverable amount expected to be obtained through their use. Postponing a loss until the asset is sold or disposed of would result in mismatching costs and their related revenues and an overstatement of assets.
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PROBLEM 9-6B (a)
2015 Jul.
1 Equipment ................................. 395,000 Cash....................................... Notes Payable .......................
Dec. 31 Depreciation Expense ................. 19,750 Accumulated Depreciation— Equipment ............................ [($395,000 x (200% ÷ 20)) x 6/12] 31 Interest Expense ........................... 7,375 Cash....................................... ($295,000 x 5% x 6/12 = $7,375) 2016 May 21 Software Expense ......................... 2,000 Cash....................................... Dec. 31 Depreciation Expense ................. 37,525 Accumulated Depreciation— Equipment ............................ ($395,000-$19,750) x 10% = $37,525) 31 Interest Expense ....................... 14,750 Cash....................................... ($295,000 × 5% = $14,750)
100,000 295,000
19,750
7,375
2,000
37,525
14,750
31 Impairment Loss ....................... 62,725 Accumulated Depreciation— 62,725 Equipment ............................ [$275,000 – ($395,000 - $19,750 - $37,525)] Carrying value of equipment: $337,725 ($395,000-$19,750$37,525) Impairment loss: $62,725 ($337,725-$275,000)
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PROBLEM 9-6B (Continued) (a) (Continued) 2017 Mar. 31 Depreciation Expense ................... 6,875 Accumulated Depreciation— Equipment ............................ $275,000 x 10% × 3/12 = $6,875 31 Cash ........................................... 240,000 Accumulated Depreciation— Equipment*............................ 126,875 Loss on Disposal......................... 28,125 Equipment ............................. * ($19,750+$37,525+$62,725+$6,875) Equipment ................................... Less: Accumulated depreciation Carrying amount ......................... Proceeds ...................................... Loss on disposal ......................... Apr. 1 Interest Expense ................... 3,688 Notes Payable ....................... 295,000 Cash ..................................
6,875
395,000 $395,000 126,875 268,125 240,000 $ 28,125
298,688
(b) The products made using the robot may not be as popular so revenue will be declining in the future. Or there could be new technology that will make the robot obsolete and of lower value to the company. Alternatively, there could have been physical damage to the robot that might be the cause of the impairment in value.
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PROBLEM 9-6B (Continued) (c)
Sept. 30 Depreciation Expense ................. 20,625 Accumulated Depreciation— Equipment ............................ ($275,000 x 10%) x 9/12 = 20,625 30 Cash ........................................... 260,000 Accumulated Depreciation— Equipment** ............................... 140,625 Gain on Disposal .................. Equipment .............................
20,625
5,625 395,000
** ($19,750+$37,525+$62,725+$20,625) Equipment ............................................... Less: Accumulated depreciation ........... Carrying amount ..................................... Proceeds ................................................. Gain on disposal .....................................
$395,000 140,625 254,375 260,000 $ 5,625
Taking It Further: The recoverable amount of an asset is the higher of the fair value of the asset less the cost to sell it or its value in use calculated using discounted cash flows. In this case, the industrial robot will be used in production. Consequently, the value in use to SE Parts Supply would be the amount management expects to recover in operations by using the asset. As for establishing the fair value of the asset, equipment of similar type that has been recently sold can be used to make estimates of what would be obtained on sale. Under ASPE, impairment tests of property, plant and equipment need not be done every year, particularly if the likelihood of impairment is remote. Management should be diligent about looking for possible causes for impairment when changes in circumstances or conditions occur. If the company is using IFRS, annual impairment tests are required regardless of circumstances. Solutions Manual .
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PROBLEM 9-7B (a)
Invoice price Less proceed from sale Cost of ownership
$125,000 21,000 $104,000
1. STRAIGHT-LINE DEPRECIATION Depreciable Year Amount × 2016 2017 2018
$107,000* 107,000 107,000
Depr. Rate
=
33.333%** 33.333% 33.333%
Depr. Expense $35,667 35,667 35,666
End of Year Accum. Carrying Depr. Amount $125,000 $35,667 89,333 71,334 53,666 107,000 18,000
* $125,000 − $18,000 = $107,000 ** 1 ÷ 3 years = 33.333% 2. DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×
Depr. Rate
2016 2017 2018
45% 45% 45%
$125,000 68,750 37,812
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Depr. Expense $56,250 30,938 17,015
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PROBLEM 9-7B (Continued) (a) (Continued) 3. UNITS-OF-PRODUCTION End of Year Units of Depr. Depr. Accum. Carrying Year Production × Amt/Unit* = Expense Depr. Amount $125,000 2016 6,000 $8.917* $ 53,502 $ 53,502 71,498 2017 2,000 8.917 17,834 71,336 53,664 2018 3,800 8.917 33,885 105,221 19,779 * Depreciable amount per unit is $8.917 per unit [($125,000 – $18,000) 12,000 = $8.917] (b)
(1) (2) Straight- DiminishingLine Balance
Cost ...................................... $125,000 Accumulated depreciation.. 107,000 Carrying amount .................... 18,000 Cash proceeds ..................... 21,000 Gain on sale......................... $ 3,000 (c)
(3) Unit –ofProduction
$125,000 104,203 20,797 21,000 $ 203
$125,000 105,221 19,779 21,000 $ 1,221
(1) (2) Straight- DiminishingLine Balance
(3) Unit –ofProduction
Depreciation expense ......... $107,000 Deduct Gain on sale ........... 3,000 Net expense ......................... $104,000
$104,203 203 $104,000
$105,221 1,221 $104,000
The net expense is the same under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in turn causes a different gain on sale. Consequently, the total depreciation expense recognized over the life of the asset, less the gain on sale, results in the same net expense of $104,000 over the life of the asset.
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PROBLEM 9-7B (Continued) Taking It Further: I disagree. Experiencing a gain or loss on the disposal of a depreciable asset is not the result of an error or mistake. Rather, a gain or loss is an expected outcome due to the limitations of the cost allocation that has occurred for the asset up to the date of its disposal. Since estimates are involved in arriving at the factors used in calculating depreciation, such as the estimated useful life and the estimated residual value, it is natural that some differences between the carrying amount and any proceeds of disposition will occur when the asset is disposed of.
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PROBLEM 9-8B (a)
2015 Feb.
4 Furniture ...................................... 70,000 Accounts Payable .................
(b) 2015 Sept. 30 Depreciation Expense ................... 9,333 Accumulated Depreciation —Furniture ............................ $70,000 × 20% × 8/12 months 2016 Sept. 30 Depreciation Expense ................. 12,133 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333) × 20% 2017 Sept. 30 Depreciation Expense ................... 9,707 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333 − $12,133) × 20% (c)
2018 Jan. 26 Depreciation Expense ................... 2,588 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333 − $12,133 − $9,707) × 20% × 4/12
70,000
9,333
12,133
9,707
2,588
Accumulated Depreciation at January 26, 2018: $9,333 + $12,133 + $9,707 + $2,588 = $33,761 Carrying Amount at January 26, 2018: Cost – Accumulated Depreciation $70,000 − $33,761 = $36,239
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PROBLEM 9-8B (Continued) (c) (Continued) (1)
(2)
(3)
(4)
Jan. 26 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal* ....................... 36,239 Furniture................................ * $0 – [$70,000 – $33,761] = ($36,239)
Jan. 26 Cash ............................................. 30,000 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal** ........................ 6,239 Furniture................................ ** $30,000 – [$70,000 – $33,761] = ($6,239) Jan. 26 Cash ............................................. 40,000 Accumulated Depreciation— Furniture ...................................... 33,761 Gain on Disposal*** .............. Furniture................................ *** $40,000 – [$70,000 – $33,761] = $3,761
70,000
70,000
3,761 70,000
Jan. 26 Furniture ($55,000 + $30,000) .................... 85,000 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal**** ..................... 6,239 Cash ($100,000 − $45,000).... 55,000 Furniture................................ 70,000 **** $30,000 – [$70,000 – $33,761] = ($6,239)
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PROBLEM 9-8B (Continued) Taking It Further: The following are the arguments in favour of recording gains and losses on disposal of property, plant, and equipment as: 1.
Part of profit from operations: Gains and losses are basically just adjustments to depreciation expense and should be recorded in the same section of the income statement. Classifying gains and losses as operations removes the potential for management bias in the selection of depreciation methods or in the estimates concerning useful lives and residual values of the assets. Bias might be at play concerning management’s unwillingness to show losses in operations because management bonuses may be based on the amount of profit from operations.
2.
Non-operating items: The same management bias described above would be applied for gains recognized by the business. A common view is that the disposal of property, plant, and equipment is not an everyday occurrence and gains or losses are not predictable. It can also be argued that selling property, plant, and equipment is not part of normal operations and thus gains or losses should not be reported as part of profit from operations.
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PROBLEM 9-9B
(a)
April
1 Land ...........................................1,900,000 Cash....................................... 475,000 Notes Payable ....................... 1,425,000
May
1 Depreciation Expense ................. 25,000 Accumulated Depreciation —Equipment ($750,000 ÷ 10 × 4/12) ..........
25,000
1 Cash ........................................... 350,000 Accumulated Depreciation— Equipment ................................. 550,000 Gain on Disposal .................. Equipment .............................
150,000 750,000
Cost $750,000 Accumulated depreciation—equipment 550,000 [($750,000 ÷ 10) × 7 + $25,000)] Carrying amount 200,000 Cash proceeds 350,000 Gain on disposal $150,000 June 1 Cash ........................................... 380,000 Notes Receivable ...................... 820,000 Land ....................................... Gain on Disposal .................. July
1 Equipment .................................1,000,000 Accounts Payable ................. 1,000,000
Dec. 31 Depreciation Expense ............... 47,000 Accumulated Depreciation —Equipment ($470,000 ÷ 10)
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PROBLEM 9-9B (Continued) (a) (Continued) Dec. 31 Accumulated Depreciation— Equipment.................................. 376,000 Loss on disposal ......................... 94,000 Equipment .............................
470,000
Accumulated Depreciation on equipment: $376,000 [($470,000 ÷ 10) x 8 years] (b) Dec. 31 Depreciation Expense ............... 570,000 Accumulated Depreciation— Building ($28,500,000 ÷ 50) ..
570,000
31 Depreciation Expense ...............4,728,000 Accumulated Depreciation— Equipment ............................. 4,728,000 $46,780,000* ÷ 10 $1,000,000 ÷ 10 × 6/12
$4,678,000 50,000 $4,728,000
*$48,000,000 − $750,000 − $470,000 = $46,780,000
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31 Interest Expense ......................... 64,125 Interest Payable .................... ($1,425,000 × 6% × 9/12) = $64,125
64,125
31 Interest Receivable...................... 28,700 Interest Revenue................... ($820,000 × 6% × 7/12) = $28,700
28,700
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PROBLEM 9-9B (Continued) (c)
JAINA COMPANY Balance Sheet (Partial) December 31, 2017
Property, plant, and equipment* Land ............................................. $ 5,600,000 Building........................................... $28,500,000 Less: Accumulated depreciation . 12,670,000 15,830,000 Equipment ...................................... $47,780,000 Less: Accumulated depreciation . 18,874,000 28,906,000 Total property, plant, and equipment $50,336,000 *See T accounts that follow for balances Land Jan. 1, 2017 April 1, 2017
4,000,000 1,900,000
June 1, 2017
300,000
Dec. 31, 2017 Bal. 5,600,000 Building Jan. 1, 2017
28,500,000
Dec. 31, 2017 Bal. 28,500,000 Equipment Jan. 1, 2017 July 1, 2017
48,000,000 1,000,000
May 1, 2017 Dec. 31, 2017
750,000 470,000
Dec. 31, 2017 Bal. 47,780,000
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PROBLEM 9-9B (Continued) (c) (Continued) Accumulated Depreciation—Building Jan. 1, 2017 Dec. 31, 2017
12,100,000 570,000
Dec. 31, 2017 Bal. 12,670,000 Accumulated Depreciation—Equipment May 1, 2017 Dec. 31, 2017
550,000 376,000
Jan. 1, 2017 May 1, 2017 Dec. 31, 2017 Dec. 31, 2017
15,000,000 25,000 47,000 4,728,000
Dec. 31, 2017 Bal. 18,874,000 Taking It Further: Although the use of the revaluation model is permitted for those companies adopting the International Financial Reporting Standards (IFRS), its adoption is voluntary, and somewhat rare. Once adopted, the business will need to be consistent with the application of the model in the future. Additional evidence will be required each year to support the values that are being used in the revaluation. This could become expensive and the costs may exceed the benefits of implementing the revaluation model. Comparability with other companies might also be affected. Because the revaluation model is not acceptable under ASPE and most companies are private, this would be the primary reason why most companies use the cost model.
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PROBLEM 9-10B 1.
2.
3.
Research Expense ..................................... 70,000 Patents....................................................
70,000
Patents ........................................................ 21,000 Professional Fees Expense ..................
21,000
Amortization Expense................................ 7,450 Accumulated Amortization—Patents ... {[($45,000 + $21,000) ÷ 5 years] − $5,750}
7,450
Taking It Further: The majority of intangible assets that are developed internally cannot be recognized as intangible assets on the balance sheet because the expenditures on internally developed intangibles cannot be distinguished from the costs of other research and development performed by the business. The costs cannot be separately measured and are expensed as incurred.
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PROBLEM 9-11B (a)
Jan.
July
Aug.
Oct.
2 Trademark................................ Cash.....................................
7,000 7,000
1 Research Expense .................. 275,000 Cash.....................................
275,000
1 Patents ..................................... Cash.....................................
50,000 50,000
1 Prepaid Advertising ................ Cash.....................................
45,000
1 Copyright #2 ............................ 168,000 Cash.....................................
Dec. 31 Amortization Expense............. 1,250 Accumulated Amortization— Patents ................................ [($50,000 ÷ 20) × 6/12] = $1,250]
45,000
168,000
1,250
Dec. 31 Amortization Expense ................. 19,000 Accumulated Amortization— Copyrights........................... 19,000 [($36,000 × 1/3) + ($168,000 × 1/6 × 3/12)]
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PROBLEM 9-11B (Continued)
(b) GHANI CORPORATION Balance Sheet (Partial) December 31, 2017 Assets Intangible assets Patents ................................................. $ 50,000 Less: Accumulated amortization ....... 1,250 $ 48,750 1 Copyrights .......................................... $204,000 Less: Accumulated amortization ....... 43,000 161,000 2 Trademark ........................................... 59,000 Total intangible assets ............................................. $268,750 Goodwill ............................................................................. $150,000 1
Copyright: Cost $36,000 + $168,000 = $204,000 Copyright: Amortization $24,000 + $19,000 = $43,000 2 Trademark: $52,000 + $7,000 = $59,000 Taking It Further: Although intangible assets do not have physical substance, they have characteristics common to other assets in that they contribute to the revenue producing ability of a business that owns them. They are owned and controlled by the business and therefore fit the definition of assets.
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PROBLEM 9-12B (a)
2016 June 7 Resource (Timber Land) ..... 50,000,000 Cash................................ 10,000,000 Mortgage Payable .......... 40,000,000 26 Equipment.............................. Cash...................................
196,000 196,000
Dec. 31 Inventory ................................ 5,280,000 Accumulated Depletion— 5,280,000 Resource ........................... ($50,000,000 − $2,000,000) ÷ 1,000,000 t = $48/t $48/t × 110,000 t = $5,280,000 31 Cost of Goods Sold ................ 5,280,000 Inventory ........................... 5,280,000 31 Depreciation Expense ........... Accumulated Depreciation —Equipment ..................... $196,000 ÷ 7 × 6/12 = $14,000
14,000 14,000
31 Interest Expense ($40,000,000 × 7% × 7/12)...... 1,633,333 Cash................................... 1,633,333
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PROBLEM 9-12B (Continued) (a) (Continued) 2017 Dec. 31 Inventory ($48/t × 240,000 t) .................. 11,520,000 Accumulated Depletion .— Resource ........................... 11,520,000 31 Cost of Goods Sold ............... 11,520,000 Inventory ........................... 11,520,000 31 Depreciation Expense ........... Accumulated Depreciation —Equipment ..................... ($196,000 ÷ 7) = $28,000
28,000 28,000
31 Interest Expense ($40,000,000 × 7%)................. 2,800,000 Cash................................... 2,800,000
(b) CYPRESS TIMBER COMPANY Income Statement (partial) Year Ended December 31, 2017 Cost of goods sold .................................
$11,520,000
Operating expenses: Depreciation expense.........................
$
Other expenses: Interest expense .................................
$ 2,800,000
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PROBLEM 9-12B (Continued) (b) (Continued) CYPRESS TIMBER COMPANY (Partial) Balance Sheet December 31, 2017
Property, plant, and equipment Resource ............................................. $50,000,000 Less: Accumulated depletion1 ........... 16,800,000 $33,200,000 Equipment ........................................... $196,000 2 Less: Accumulated depreciation ...... 42,000.. 154,000 Total property, plant, and equipment..................$33,354,000 1 2
$5,280,000 + $11,520,000 = $16,800,000 $14,000 (2016) + $28,000 (2017) = $42,000
Taking It Further: Due to its nature, it is expected that the estimate of the total amount of units to be extracted from a timber tract would need to be adjusted as extraction occurs and better estimates can be made. Management should not be influenced by the need for changes in estimates when choosing the units-of-production method for recording depreciation of the timber tract. It is the depreciation method that best allocates the cost of the tract to the units of timber that are recorded to inventory.
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PROBLEM 9-13B (a) (in thousands) Mock Orange Company
Cotoneaster Company
$9,428.0 [($5,829.1 + $5,771.4) ÷ 2]
$3,839.8 [($2,754.5 + $2,504.1) ÷ 2]
= 1.63 to 1
= 1.46 to 1
$8,894.3 [($5,771.4 + $5,343.9) ÷ 2]
$3,656.9 [($2,504.1 + $2,340.3) ÷ 2]
= 1.60 to 1
= 1.51 to 1
Return on assets 2017
$627.7 [($5,829.1 + $5,771.4) ÷ 2]
$143.4 [($2,754.5 + $2,504.1) ÷ 2]
= 10.82%
= 5.45%
Return on assets 2016
$597.8 [($5,771.4 + $5,343.9) ÷ 2]
$137.9 [($2,504.1 + $2,340.3) ÷ 2]
= 10.76%
= 5.69%
Asset turnover 2017
Asset turnover 2016
(b) Mock Orange Company is more efficient in using its assets to generate sales–its asset turnover of 1.63 times is higher than the turnover of 1.46 for Cotoneaster Company and its ratio is increasing while Cotoneaster’s in decreasing. Mock Orange is also much more efficient in using assets to produce profit–with a return on assets of 10.82% compared to 5.45% for Cotoneaster Company. Moreover, Mock Orange's ratio is increasing while Cotoneaster’s is decreasing.
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PROBLEM 9-13B (Continued) Taking it Further: Although the ability to compare two companies in the same industry using ratios is affected by the depreciation methods adopted by the companies being compared, absolute conclusions cannot be drawn from these differences. In this particular comparison, in the early years of the useful lives of depreciable assets owed by Mock Orange will have lower amounts of depreciation recorded compared to Cotoneaster and will also have higher carrying amounts for the assets. This is the case because Mock Orange uses the straight-line method of depreciation and Cotoneaster uses the diminishing-balance method which results in high charges of depreciation in the early years and lower amounts in the later years. The opposite effect would occur in the amount of depreciation recorded in the later years of the useful lives of the assets being depreciated.
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BYP 9-1 FINANCIAL REPORTING PROBLEM (a)
(in thousands)
Land Broadcasting and computer equipment Buildings and Leasehold improvements Furniture and fixtures Other
Cost $5,539
(2) Accumu lated Deprecia tion
(3) Net Carrying Amount $5,539
146,115
$95,908
50,207
107,430 18,575 4,560 $282,219
30,198 11,193 1,302 $138,601
77,232 7,382 3,258 $143,618
(b) (1)
Broadcast licenses Goodwill (c)
(2)
Cost Impairments $997,435 $17,451 $1,000,408
65,549
(3) Net Carrying Amount $979,984 $934,859
As part of the disclosure provided in note 9 to the financial statements, no disposals or retirements were recorded for Broadcast licenses or Goodwill. On the other hand, impairment losses were recorded in the amount of $65,549,000 for Goodwill and $17,451,000 for Broadcast licenses.
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BYP 9-1 (Continued)
(d) The amount of depreciation and amortization expense for the fiscal year ending August 31, 2014 was $24,068,000. These expenses were outlined in the Consolidated Statement of Income and Comprehensive Income.
(e)
1)
Corus use the cost model
2)
Corus uses the straight-line method of depreciation for property and equipment.
3)
The estimated useful lives for property and equipment and intangibles are: Buildings—Structure 20 to 30 years Buildings—Components 10 to 20 years Fixtures and equipment 7 years Leasehold improvements lease term Computer equipment 3 to 5 years Broadcasting equipment 5 to 10 years Other 4 to 10 years 4)
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BYP 9-2 INTERPRETING FINANCIAL STATEMENTS
(a)
Westjet could use unit-of-production method of depreciation for engine, airframe and landing gear overhaul. For safety reasons, the overhaul costs are done at fixed points following the use of the specific overhauled equipment. These fixed points are likely based on the number of hours this equipment is used in flight. If the use of the assets varied over time, or were seasonal, the unitof-production method would provide a better measure of the charge for depreciation against the revenue produced. It is likely that the amount of use of these assets does not vary a great deal over time, which justifies Westjet’s choice of the straight-line method. If the amount of use varies greatly over time Westjet should use the unit-ofproduction method.
(b) Major overhaul expenditures involve equipment that must be overhauled as a function of amount of use, typically hours in flight. These overhauls must be performed for safety reasons. The expected life between overhauls is very predictable, and likely dictated by safety associations or regulators. Since the timing of the benefit is easily measured, the best match of the major overhaul costs to the revenues is achieved by capitalizing the costs and then depreciating the capitalized overhauls over the benefiting periods. This is an appropriate technique as it is the best and fairest way to deal with major overhaul costs. Other fleet maintenance is minor and less predictable and Westjet’s policy to expense these costs immediately is appropriate.
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BYP 9-2 (Continued) (c)
Leasehold improvements frequently have physical lives that are longer than the terms of the lease. But since the control and enjoyment of leasehold improvements is limited to the term of a lease, it is appropriate to use the term of the lease for purposes of calculating depreciation. Consequently, the maximum length of benefit to the lessee is the term of lease, which is appropriate in the calculation of depreciation. If, on the other hand, the leasehold improvements have a physical life shorter than the term of the lease, the shorter period should be used for purposes of calculating depreciation.
(d) Westjet uses component depreciation for engine, airframe and landing gear overhaul. Engines, in particular are constantly being overhauled, and so spares are needed to ensure that the airplane can be used during the period needed to perform the overhaul. Since the period of benefit of these major overhauls is considerably shorter than the useful life of the aircraft, this technique is a good example of where component depreciation is very appropriate.
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BYP 9-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP 9-4 COMMUNICATION ACTIVITY Memorandum To: From:
Jason Long, Owner Ken Bond, Controller
Re:
Exchange of Long-Lived Assets
I am writing to you about the proposed exchange of one of our semi-trucks for a garage we could use as a branch of our repair operations. The truck we intend to exchange has a carrying value on our books of $100,000 but its fair value in its current condition is $75,000. The garage we would get in exchange has a fair value of $90,000. Consequently we would need to pay, in cash, in the amount of $15,000 ($90,000 less $75,000), the difference in the fair values of the two assets exchanged. (1) Because the fair value of the semi-truck is not the same as the carrying amount on our books, a gain or loss has to be recorded at the date of the exchange. The exchange transaction is a disposal combined with a purchase. In our case, the fair value is lower than the carrying amount and a loss of $25,000 ($100,000 carrying amount less $75,000 fair value) would have to be recorded. This loss will reduce profit for the period. The garage we obtain would be recorded at its fair value of $90,000. Because these are different types of assets with different useful lives, the garage will be depreciated at a different rate than the semi-truck. We will be consistent in our methods of depreciation with other assets in the same group. It is likely the depreciation on the garage will be lower than the depreciation we were recording on the semi-truck. As well, the garage is not likely to need frequent repairs as is the current case for the semi-truck.
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BYP 9-4 (Continued) (2)
The exchange of assets would be recorded as follows: Building .......................................... 90,000 Accumulated Depreciation— Vehicles.......................................... 65,000 Loss on Disposal .......................... 25,000 Vehicles .................................... 165,000 Cash .......................................... 15,000
(3) As I mentioned earlier, we will be consistent and use the same depreciation method for the garage as already use for buildings. Once we have established what our intentions are concerning how long we want to use the garage for operations and what the physical life of the garage, we will be able to calculate and record depreciation as soon as the garage is available for use.
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BYP 9-5 “ALL ABOUT YOU” ACTIVITY (a)
Generally, copyright means the sole right to produce or reproduce a work or a substantial part of it in any form. It also includes the right to perform a work, or in the case of a lecture to deliver it, and the right to publish an unpublished work. Copyright applies to all original literary, dramatic, musical, and artistic works. These include books, other writings, music, sculptures, paintings, maps, photographs, films, plays, television and radio programs, and computer programs. Copyright also applies to other subject matter including recordings (such as records, cassettes, DVDs, videos and tapes), performer's performances, and communication signals.
(b) A person acquires a copyright automatically when he or she creates an original work or other subject matter, provided the conditions set out in the Copyright Act have been met. Since you automatically obtain copyright, the law automatically protects you. You do not have to register your copyright in order to be protected. (c)
The Copyright Act provides that a certificate of registration is evidence that the copyright exists and that the person registered is the owner of the copyright. Being on the Register of Copyrights may also assist those wishing to seek permission to use the work.
(d) Registration of a copyright is done by completing an application and sending it to the Copyright Office, along with the appropriate fee.
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BYP 9-5 (Continued) (e)
The fee for filing on-line is $50 and is so small that it is not material. Consequently, most businesses decide to expense the fee immediately. It is possible that with several copyrights, a meaningful amount can be recorded as an asset as the fees have been incurred to protect the right to the works and will bring benefit to the business in the future.
(f)
Copyright infringement refers to unlawful use of copyright material. Plagiarism—passing off someone else's work as your own—is a form of infringement.
(g) A copyright generally lasts for the life of the author, plus 50 year following the calendar year the author dies.
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Accounting Principles, Seventh Canadian Edition
BYP 9-6 Santé Smoothie Saga
(a)
Purchase price ........................................................ Painting .................................................................... Shelving ................................................................... Cost of van...............................................................
$28,400 3,000 1,600 $33,000
(b) 1. STRAIGHT-LINE METHOD Depreciable Year Amount × 2018 2019 2020 2021 2022 2023 Total
$28,000* 28,000 28,000 28,000 28,000 28,000
Depr. Rate
=
20% × 5/12 20% 20% 20% 20% 20% × 7/12
Depr. Expense $ 2,333 5,600 5,600 5,600 5,600 3,267 $28,000
End of Year Accum. Carrying Depr. Amount $33,000 $ 2,333 30,667 7,933 25,067 13,533 19,467 19,133 13,867 24,733 8,267 28,000 5,000
* ($33,000 − $5,000 = $28,000) 2. DIMINISHING-BALANCE AT DOUBLE THE STRAIGHTLINE RATE METHOD Carrying End of Year Amount (Beg. Depr. Depr. Accum. Carrying Year of Year × Rate = Expense Depr. Amount $33,000 2018 $33,000 40%* × 5/12 $ 5,500 $ 5,500 27,500 2019 27,500 40% 11,000 16,500 16,500 2020 16,500 40% 6,600 23,100 9,900 2021 9,900 40% 3,960 27,060 5,940 2022 5,940 40% 940** 28,000 5,000 $28,000 * 40% = 20% × 2 [double the straight-line rate] **amount required for carrying amount to equal residual value
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Chapter 9
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Accounting Principles, Seventh Canadian Edition
BYP 9-6 (Continued) (b) (Continued) 3. UNITS-OF-PRODUCTION METHOD Units of Depreciable Year Production × Cost/Unit =
Depr. Expense
2018 2019 2020 2021 2022 2023
$ 4,200 5,250 5,600 6,650 4,900 1,400 $28,000
30,000 37,500 40,000 47,500 35,000 10,000
$0.14* 0.14 0.14 0.14 0.14 0.14
End of Year Accum. Carrying Depr. Amount $33,000 $ 4,200 28,800 9,450 23,550 15,050 17,950 21,700 11,300 26,600 6,400 28,000 5,000
* ($33,000 − $5,000) ÷ 200,000 km = $0.14 per km (c)
The units-of-production method of depreciation will result in the greatest amount of profit reported for the year ended May 31, 2019 because it has the lowest depreciation expense for the year. There will be no difference in the total profit over the life of the asset.
(d) As indicated in the three different schedules prepared in part (b), the carrying amount on the balance sheet at May 31, 2019 would be the highest if the straight-line method were used. By the end of the useful life the carrying amount will be the same under all depreciation methods. (e)
I recommend the unit-of-production method of depreciation because this method will provide Natalie with the best pattern to match the economic benefits of the van. It will provide the fairest charge for each year.
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Accounting Principles, Seventh Canadian Edition
CHAPTER 10 Current Liabilities and Payroll ASSIGNMENT CLASSIFICATION TABLE Brief Exercises
Problems Set A
Problems Set B
1, 2, 3, 4, 5
1, 2, 3, 4, 5
8, 9, 10, 11, 12, 13, 16 14, 15, 16
11, 12, 13, 1, 2, 5, 6, 14, 15 7, 8,
1, 2, 5, 6, 7, 8,
1, 16, 17, *20
5, 9, 10,
5, 9, 10,
21, 22, 23
16, 17, 18
10, 18, 19
3, 4, 5, 8, 11, 12,
3, 4, 5, 8, 11, 12,
*24, *25
*19, *20
*20, *21
*13
*13
Learning Objectives
Questions
1. Account for determinable or certain current liabilities.
1, 2, 3, 4, 5, 6, 7, 12
1, 2, 3, 4, 1, 2, 3, 4, 5, 6, 7, 16, 5, 6, 7, 8, 17 9, 10, 14
2. Account for uncertain liabilities.
8, 9, 10, 11, 12, 13, 14, 15, 16 17, 18, 19, 20
3. Determine payroll costs and record payroll transactions. 4. Prepare the current liabilities section of the balance sheet. *5. Calculate mandatory payroll deductions (Appendix 10A).
Solutions Manual .
10-1
Exercises
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A
Description Prepare current liability entries and adjusting entries.
Difficulty Level Moderate
Time Allotted (min.) 15-25
2A
Prepare current liability entries, adjusting entries and current liability section.
Moderate
25-35
3A
Calculate current and non-current portion of notes payable, and interest payable.
Moderate
15-25
4A
Record note transactions; show financial statement presentation.
Moderate
30-40
5A
Record current liability transactions; prepare current liabilities section.
Moderate
30-40
6A
Record warranty transactions.
Moderate
15-25
7A
Record customer loyalty program and gift card transactions; determine impact on financial statements.
Moderate
15-25
8A
Discuss reporting of contingencies and record provisions.
Moderate
15-25
9A
Prepare payroll register and record payroll.
Moderate
25-35
10A
Record payroll transactions and calculate balances in payroll liability accounts.
Moderate
25-35
11A
Prepare current liabilities section; calculate and comment on ratios.
Moderate
25-35
12A
Prepare current liabilities section; calculate and comment on ratios.
Moderate
25-35
*13A
Calculate payroll deductions; prepare payroll register.
Moderate
25-35
1B
Prepare current liability entries and adjusting entries.
Moderate
15-25
2B
Prepare current liability entries, adjusting entries and current liability section.
Moderate
25-35
3B
Calculate current and non-current portion of notes payable, and interest payable.
Moderate
15-25
4B
Record note transactions; show financial statement presentation.
Moderate
30-40
5B
Record current liability transactions; prepare current liabilities section.
Moderate
30-40
Solutions Manual .
10-2
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 6B
Description Record warranty transactions.
Difficulty Level Moderate
Time Allotted (min.) 15-25
7B
Record customer loyalty program and gift card transactions; determine impact on financial statements.
Moderate
15-25
8B
Discuss reporting of contingencies and record provisions.
Moderate
15-25
9B
Prepare payroll register and record payroll.
Moderate
25-35
10B
Record payroll transactions and calculate balances in payroll liability accounts.
Moderate
25-35
11B
Prepare current liabilities section; calculate and comment on ratios.
Moderate
25-35
12B
Prepare current liabilities section; calculate and comment on ratios.
Moderate
25-35
*13B
Calculate payroll deductions; prepare payroll register.
Moderate
25-35
Solutions Manual .
10-3
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Learning Objectives
Knowledge Comprehension
1. Account for determinable or certain current liabilities.
Q10-1 Q10-2 Q10-4 Q10-5 Q10-12 BE10-16
Q10-6 Q10-7 E10-14
2. Account for uncertain liabilities.
Q10-12 BE10-16
Q10-8 Q10-9 Q10-10 Q10-11 Q10-13 Q10-14 Q10-15 Q10-16 BE10-12 E10-14
3. Determine payroll costs and record payroll transactions.
Q10-19 BE10-13
Q10-17 Q10-18 Q10-20
4. Prepare the current liabilities section of the balance sheet.
Q10-21 Q10-22 Q10-23 BE10-16
*5. Calculate mandatory payroll deductions (Appendix 10A).
*Q10-24 *Q10-25
Broadening Your Perspective
Solutions Manual .
Application Q10-3 BE10-1 BE10-2 BE10-3 BE10-4 BE10-5 BE10-6 BE10-7 BE10-17 E10-1 E10-2 E10-3 E10-4 E10-5 E10-6 BE10-8 BE10-9 BE10-10 BE10-11 BE10-13 E10-11 E10-12 E10-13 E10-15 P10-1A P10-2A
E10-7 E10-8 E10-9 E10-10 P10-1A P10-2A P10-3A P10-4A P10-5A P10-1B P10-2B P10-3B P10-4B P10-5B
BE10-14 BE10-15 BE10-16 E10-1 E10-16 E10-17 *E10-20
P10-5A P10-9A P10-10A P10-5B P10-9B P10-10B
BE10-17 BE10-18 E10-10 E10-18 E10-19 P10-3A P10-4A P10-5A P10-8A *BE10-19 *BE10-20 *E10-20 *E10-21
P10-10A P10-11A P10-12A P10-3B P10-4B P10-5B P10-8B P10-11B P10-12B *P10-13A *P10-13B
Synthesi s
BYP10-1
BYP10-2 BYP10-5
P10-5A P10-6A P10-7A P10-8A P10-1B P10-2B P10-5B P10-6B P10-7B P10-8B
Santé Smoothie Saga Cumulative Coverage Chapters 3 – 10 BYP10-3 BYP10-4
10-4
Analysis
Chapter 10
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
A determinable liability is also referred to as a certain liability or a known liability. Examples include accounts payable, salaries payable, HST payable, and CPP and EI payable.
2.
The transaction does not meet the definition of a liability. A liability is defined as a present obligation, arising from past events, to make future payments of assets or services. A commitment to purchase is usually not an obligation and no past event (a purchase) has occurred since goods have not been delivered or services received.
3.
(a)
(b)
Cash .......................................................... Unearned Revenue .............................. (5,000 × $80)
400,000
Unearned Revenue ................................... Service Revenue .................................. ($400,000 ÷ 6)
66,667
400,000
66,667
4.
Interest payable is calculated as the product of the principal, the interest rate, and the fraction of the year in the accrual. The amount of interest payable at the fiscal year end is calculated with reference to the amount of time since the last interest payment if regular interest payments are required.
5.
An operating line of credit is a pre-authorized bank loan that allows a company to borrow up to a pre-set limit, and repay the loan, as needed. When the company borrows against its line of credit, the cash account balance is increased and notes payable are increased. A bank overdraft occurs when a bank account is overdrawn due to withdrawals and cheques in excess of deposit amounts. In this case, the cash account will show a credit balance. There is no separate liability shown, as the overdraft is itself a liability.
6.
The roommate is confusing different taxes. Incorporated businesses pay income tax on profits. Those taxes do appear as expenses on the income statement. Sales taxes, on the other hand, do not appear on the income statement. Merchants are directed by law to charge sales taxes on the selling price of most goods and services. In doing so, the merchant is acting as an agent of the federal and provincial governments when the business is charging, collecting, and remitting the sales taxes when due. Until the sales taxes are remitted, they appear as current liabilities on the balance sheet.
7.
Laurel is not correct. Some long-term debts have portions that will be due in the coming year. This portion is classified as a current liability since it will be paid within one year of the balance sheet date.
Solutions Manual .
10-5
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 8.
I don’t agree. Although you don’t know which specific appliances will be returned for repair, you can estimate the cost of repairs that will be required under warranty based on past experience or industry information. If repair costs are not recorded until units are brought in, liabilities on the balance sheet will be understated and the expenses will not be properly matched with revenue on the income statement. If sales are increasing, this will probably result in an overstatement of income.
9.
Future savings provided to customers through customer loyalty programs produces a future performance obligation. This future performance obligation results in unearned revenue, in that the entity has promised to deliver goods or services in the future. When the promised goods or services are delivered, the performance obligation is met, and this results in the recognition of the related revenue.
10.
The company should estimate the number of vouchers that will likely be used and the stand-alone value of these vouchers. The total of the standalone value of the vouchers and the stand-alone value of the restaurant meals sold should be used to allocate the revenue to current sales and unearned revenue. When the vouchers are redeemed, the restaurant has satisfied its future performance obligation and it can then recognize this unearned revenue as earned.
11.
Gift cards are similar to unearned revenues in that they represent cash received from customers for future products or services. They are classified as a liability because they are an obligation for the issuing company to provide assets or services in the future. Unearned passenger revenue usually has a determinable time at which the flight will be taken and the unearned revenue becomes earned. Gift cards however do not have a fixed date at which the obligation will be satisfied, and frequently are not used at all. In some cases, a portion or the entire amount of the gift card is not used at all. Over time, companies need to determine if a portion of this unearned revenue can be considered earned since the likelihood of redemption becomes more remote.
12.
A determinable liability has a known amount, payee, and due date. An estimated liability is an obligation that exists but whose amount and timing are uncertain. There is no uncertainty about the existence of a determinable liability and an estimated liability. Under ASPE, a contingent liability is an obligation that is uncertain with respect to existence, timing, and amount. The existence of a contingent liability depends on the resolution of a future event outside of the company’s control. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities. Contingent liabilities are possible obligations that the company probably will not have to settle, or obligations for which the amount cannot be reliably measured.
Solutions Manual .
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Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 13.
Under ASPE, a contingent liability is defined as a possible obligation that will be confirmed by the occurrence or non-occurrence of an uncertain future event. An estimated liability is an obligation that exists but whose amount and timing are uncertain. A contingent liability may be recognized as an estimated liability if it is likely that a present obligation exists and the amount can be reliably estimated. Under IFRS, a contingent liability is a possible obligation that does not meet the criteria for recognition and does not meet the definition of a liability. Under IFRS, situations where it is probable an obligation exists and the amount can be reasonably estimated are treated as estimated liabilities.
14.
Under ASPE, if a contingent liability is both likely to occur and reasonably estimable, it is recorded in the accounts. If its likelihood is not determinable, or if it is not reasonably estimable, it is not recorded in the accounts but disclosed in a note. If it is unlikely to occur, but could have a substantial negative effect on the company’s financial position, it should be disclosed. Otherwise, contingent liabilities are neither recorded nor disclosed.
15.
Under IFRS, a contingent liability is never recorded because it is a possible liability that does not meet the criteria for recognition, either because it is not probable or the amount cannot be reliably measured. The criteria for recognition of an estimated liability are that it is probable a present obligation exists and that the amount can be reliably estimated. Under IFRS, the threshold for recognizing liabilities is “probable” rather than “likely” as used under ASPE. This threshold is generally considered lower.
16.
If the chance of a contingency occurring is considered small, it should still be disclosed if the occurrence could have a substantial effect on the company’s financial position.
17.
Gross pay is the amount an employee actually earns. Net pay, the amount an employee is paid, is gross pay reduced by both mandatory and voluntary deductions, such as income tax, union dues, etc. Gross pay should be recorded as wages or salaries expense.
18.
Employee payroll deductions are the amounts subtracted from an employee’s gross pay in determining net pay. Mandatory employee payroll deductions include federal and provincial income taxes, Canada Pension Plan, and Employment Insurance. When an employer withholds these amounts from an employee pay cheque, the employer is merely acting as a collection agent for the taxing body. Since the employer holds employees' funds, these withholdings are a liability for the employer until they are remitted to the government. Employee payroll deductions also include voluntary deductions for things such as insurance, pensions, union dues, and donations to charities.
Solutions Manual .
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Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 18. (Continued) Employer payroll deductions are amounts the employer is expected to pay. These include CPP where the employer is expected to pay the same amount as the employee and EI where the employer is expected to pay 1.4 times the amount the employee has paid. These are expenses for the employer over and above gross pay. 19.
The employee earnings record is used in (1) determining when an employee has earned the maximum earnings subject to CPP and EI deductions, (2) filing information returns with the CRA, and (3) providing each employee with a statement of gross earnings and tax withholdings for the year on the T4 form. The payroll register accumulates gross earnings, deductions, and net pay for all employees for each pay period. It provides the documentation to support the preparation of the paycheque for each employee.
20.
Income tax, CPP, and EI deductions are remitted to the Receiver General, usually on a monthly basis. Workplace, Health, Safety, and Compensation is remitted quarterly (or monthly depending on the province) to the Workplace, Health, Safety and Compensation Commission (or similar body depending on the province). Other deductions are paid to different organizations, such as the United Way, and would normally be made on a monthly basis.
21.
Current liabilities are usually listed in order of their liquidity, by maturity date. It may not be possible to list current liabilities in order of liquidity because of the varying maturity dates that may exist for certain specific obligations. They are also often listed in order of magnitude with the largest items listed first.
22.
If companies have used their line of credit and are overdrawn or show a negative cash balance, the amount is included in current liabilities and called bank indebtedness, bank overdraft, or bank advances. Note disclosure will include security or collateral that was required by the bank, the maximum amount that can be withdrawn, as well as the interest rate charged on the bank overdraft. Terms associated with notes payable are also disclosed.
23.
A company can determine if its current liabilities are too high by monitoring the relationship of current assets to current liabilities and calculating the current ratio (current assets ÷ current liabilities). This relationship is critical in evaluating a company’s short-term ability to repay debt.
Solutions Manual .
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Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) *24. Contribution rates for CPP are set by the federal government (Quebec government for QPP) and are adjusted every January if applicable. Employee contributions under the Canada Pension Plan Act are set at a percentage of pensionable earnings (currently 4.95%). Pensionable earnings are gross earnings less a basic yearly exemption (currently $3,500). A maximum ceiling or limit is imposed on pensionable earnings ($53,600 for 2015). The exemption and ceiling are prorated to the relevant pay period (e.g., weekly, biweekly, semimonthly, monthly). Contribution rates for EI are based upon a percentage (currently 1.88%) of insurable earnings, to a maximum earnings ceiling ($49,500 for 2015). In most cases, insured earnings are gross earnings plus any taxable benefits. *25.
The amount deducted from an employee’s salary for income tax is determined by using payroll accounting software programs, CRA payroll deduction tables easily accessible online, or using the payroll deductions online calculator. The income tax that should be withheld from gross salary is based on the number of personal tax credits claimed by an employee as shown on their TD1 form.
Solutions Manual .
10-9
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) (b) (c) (d) (e) (f)
No Yes Yes for $30,000 Yes Yes Yes
BRIEF EXERCISE 10-2 (a)
(b)
Cash ............................................... Unearned Revenue.................... (2,000 × $120)
240,000
Unearned Revenue ........................ Service Revenue ....................... ($240,000 ÷ 6)
40,000
240,000
40,000
BRIEF EXERCISE 10-3 (a)
(b)
Solutions Manual .
Cash ............................................... Unearned Revenue.................... (15,000 × $18)
270,000
Unearned Revenue ........................ Revenue ..................................... ($270,000 ÷ 12)
22,500
10-10
270,000
22,500
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 10-4 (a) 2017 July 1 Cash ............................................... Notes Payable ........................... (b) 2017 Dec. 31 Interest Expense ($60,000 × 4% × 6/12) ..................... Interest Payable ........................ (c) 2018 July 1 Interest Expense ($60,000 × 4% × 6/12) ..................... Interest Payable ............................. Notes Payable ................................ Cash ...........................................
60,000 60,000
1,200 1,200
1,200 1,200 60,000 62,400
BRIEF EXERCISE 10-5 (a) Calculation of sales tax payable – Ottawa store: HST payable = $7,200 × 13% = $936 Calculation of sales tax payable – Regina store: GST payable = $8,400 × 5% = $420 PST payable = $8,400 × 5% = $420
Solutions Manual .
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Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 10-5 (Continued) (b) Ottawa store: Mar. 12 Cash ................................................... Sales .............................................. HST Payable .................................. Regina store: Mar. 12 Cash ................................................... Sales .............................................. GST Payable .................................. PST Payable ..................................
8,136 7,200 936 9,240 8,400 420 420
BRIEF EXERCISE 10-6 (a) May 10, 2017: Calculation of sales tax collected: HST: $1,800 × 13% × 40 =
$9,360
May 17, 2017: Calculation of sales tax collected: HST: $1,800 x 13% x 95 =
$22,230
(b) May. 10 Cash ................................................... Sales ($1,800 × 40) ........................ HST Payable ..................................
81,360
May 17 Cash ................................................... 193,230 Sales ($1,800 x 95) ....................... HST Payable ..................................
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72,000 9,360 171,000 22,230
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 10-7 Mar. 31
Property Tax Expense ($9,600 × 3/12) Property Tax Payable....................
2,400
June 30 Property Tax Payable ........................ Property Tax Expense ($9,600 × 3/12) Prepaid Property Tax ($9,600 × 6/12) Cash ...............................................
2,400 2,400 4,800
Dec. 31 Property Tax Expense ....................... Prepaid Property Tax ....................
4,800
2,400
9,600 4,800
BRIEF EXERCISE 10-8 Dec. 31 Warranty Expense ................................ 18,700 Warranty Liability .......................... [(4,400 units × 5%) × $85/unit]
18,700
BRIEF EXERCISE 10-9 July 3
Unearned Revenue–Loyalty Program Sales ............................................. To recognize the loyalty program redemption.
50 50
Note: Each time One-Stop has a point redemption it satisfies the related performance obligation and therefore the unearned revenue becomes earned.
Solutions Manual .
10-13
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 10-10 (a) Stand-alone book sales (50,000 novels × $8) Stand-alone value of coupons = 50,000*10%*$2 Total Value .................................................. Allocate as follows: Earned revenue= ($400,000/$410,000)*$400,000 Unearned revenue= ($10,000/$410,000)*$400,000 (b) July Cash .................................................. 400,000 Sales............................................ Unearned Revenue–Loyalty Program
= $400,000 = 10,000 $ 410,000 = 390,244 = 9,756 390,244 9,756
BRIEF EXERCISE 10-11 Dec. 2017 Cash ................................................. Unearned Revenue.....................
4,750
Jan. 2018 Unearned Revenue .......................... Sales............................................
2,425
Cost of Goods Sold ......................... Merchandise Inventory ..............
1,070
4,750
2,425 1,070
BRIEF EXERCISE 10-12 (a)
(2) Disclosed: This liability should be disclosed. The outcome is neither likely nor unlikely (not determinable). The treatment would be the same under both IFRS and ASPE.
(b)
(1) Recorded: This liability is likely and can be reasonably estimated. The treatment would be the same under both IFRS and ASPE.
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Chapter 10
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 10-12 (Continued) (c)
(1) Recorded under IFRS: This liability is “probable” and can be reasonably estimated. (2) Disclosed under ASPE: The outcome is not “likely”; the chance of occurrence is not considered sufficiently high.
BRIEF EXERCISE 10-13 The arguments for recording this liability are that the outcome is probable and the amount can be estimated. Since the company is public, IFRS applies. In this case, the lawsuit is considered an estimated liability and is recorded since the loss is considered probable. Management may be reluctant to disclose this information separately on the financial statements for fear it will be taken as an admission of guilt.
BRIEF EXERCISE 10-14 (a) Gross pay: Regular pay (40 × $12.50).................................. $500.00 Overtime pay (6 × $18.75) ................................. 112.50
$612.50
Less: CPP contributions .................................. $26.99 EI premiums ........................................... 11.21 Income tax withheld ............................... 94.56 132.76 Net pay ................................................................................. $479.74
(b) Employer costs: CPP contributions ................................................ $26.99 EI premiums ($11.21 × 1.4) .................................... 15.69 $42.68 The employer does not bear any costs for employee income taxes.
Solutions Manual .
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Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 10-15 Aug. 22 Employee Benefits Expense ............. CPP Payable .................................. EI Payable ($1,281 × 1.4) ...............
5,123 3,330 1,793
BRIEF EXERCISE 10-16 (a) (b) (c) (d) (e) (f) (g)
Current liability Current liability Current liability Current liability Current liability Current asset Disclosed in the notes to the financial statements as a contingent liability (h) Current liability (i) Current asset (j) Current liability ($5,000) and long-term liability ($70,000)
BRIEF EXERCISE 10-17 (a)
Current liability: $12,000 Non-current liability: $48,000 Only the portion of principal to be repaid in 2018 would be shown as a current liability.
(b) Current liability: $24,000 ($2,000 per month × 12 months) Non-current liability: $66,000 ($96,000 – [$2,000 × 3] – $24,000) The principal repayments of $2,000 per month to be repaid in 2018 would be shown as a current liability.
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Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 10-18 (a) SUNCOR ENERGY INC. (Partial) Balance Sheet December 31, 2014 (in millions) Liabilities Current liabilities Accounts payable and accrued liabilities ................. Income taxes payable ................................................. Current portion of provisions .................................... Short-term debt ........................................................... Current portion of long-term debt.............................. Total current liabilities ...........................................
$5,704 1,058 752 806 34 $8,354
Note: This presentation lists the accounts in order of size, with the largest one (accounts payable and accrued liabilities) listed first. Other alternatives are also possible, such as listing the accounts in order of liquidity, by estimated maturity date. (b) Current Ratio = Current Assets ÷ Current Liabilities $13,916* ÷ $8,354 = 1.67 to 1 * $4,275 + $5,495 + $680 + $3,466 = $13,916 Acid-Test Ratio = (Cash + AR + Income Tax Recoverable) ÷ Current Liabilities ($4,275 + $5,495 + $680) ÷ $8,354 = 1.25 to 1
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Chapter 10
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Accounting Principles, Seventh Canadian Edition
*BRIEF EXERCISE 10-19 Monthly Pay = ($60,100/year ÷ 12 months) = $5,008.33 (a)
January 2015: CPP deduction = ($5,008.33 – [$3,500 ÷ 12]) × 4.95% = $233.47 EI deduction = $5,008.33 × 1.88% = $94.16
(b) December 2015: No deductions for CPP or EI. The cumulative salary up to November 30, 2015 is $55,091.63 ($5,008.33 × 11). The cumulative salary exceeds the annual maximum pensionable earnings of $53,600 and maximum insurable earnings of $49,500.
*BRIEF EXERCISE 10-20 Gross salary for the week = $1,075 (a) CPP [($1,075.00 − $67.31) × 4.95%] EI ($1,075 × 1.88%) (b) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions
Solutions Manual .
10-18
$49.88 20.21 130.95 65.20 $266.24
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 10-1 March 1 Supplies .................................... Accounts Payable ................
350
5 Cash .......................................... Unearned Revenue ..............
200
12 Unearned Revenue ................... Service Revenue ..................
200
15 Salaries Expense ...................... CPP Payable ......................... EI Payable ............................. Income Tax Payable............. Cash ......................................
5,000
30 Accounts Payable..................... Cash ......................................
350
Solutions Manual .
10-19
350
200
200 230 94 1,400 3,276 350
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-2 2017 July 1
Cash .................................................... 50,000 Notes Payable ...............................
50,000
Nov. 1 Cash .................................................... 60,000 Notes Payable ...............................
60,000
Dec. 31 Interest Expense ................................ Interest Payable ............................ ($50,000 × 8% × 6/12) = $2,000 + ($60,000 × 6% × 2/12) = $600
2,600 2,600
2018 Feb. 1 Notes Payable..................................... 60,000 Interest Payable.................................. 600 Interest Expense ................................ 300 Cash .............................................. ($60,000 × 6% × 1/12) = $300
60,900
Apr. 1 Notes Payable..................................... 50,000 Interest Payable.................................. Interest Expense ................................ Cash .............................................. ($50,000 × 8% × 3/12) = $1,000
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10-20
2,000 1,000 53,000
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-3 (a) June 1 Cash .................................................... 90,000 Notes Payable ............................... (b) June 30 Interest Expense ................................ Interest Payable ............................ ($90,000 × 6% × 1/12) = $450
90,000
450
(c) Dec. 1 Notes Payable..................................... 90,000 Interest Payable.................................. 2,700 Cash ..............................................
450
92,700
(d) Total financing cost was $2,700 ($90,000 × 6% × 6/12)
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Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-4 Novack Company 2017 June 1
Equipment................................. Accounts Payable ................
50,000
1 Accounts Payable..................... Notes Payable ......................
50,000
1 Interest Expense....................... Cash ...................................... ($50,000 × 7% × 1/12)
292
Aug. 31 Interest Expense....................... Interest Payable ...................
292
Sep.
292
July
Aug.
Oct.
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1 Interest Payable ........................ Cash ...................................... 1
Interest Expense....................... Notes Payable ........................... Cash ......................................
10-22
50,000
50,000
292
292
292 292 50,000 50,292
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-5 (a)
Tundra Trees Mar. 1 Equipment................................. Notes Payable ......................
30,000 30,000
July 31 Interest Expense....................... Interest Payable ................... ($30,000 × 8% × 5/12)
1,000
Oct.
400 1,000 30,000
1 Interest Expense* ..................... Interest Payable ........................ Notes Payable ........................... Cash ...................................... * ($30,000 × 8% × 2/12)
(b) Edworthy Equipment Mar. 1 Notes Receivable...................... Sales .....................................
1,000
31,400
30,000 30,000
1 Cost of Goods Sold .................. Merchandise Inventory ........
18,000
May 31 Interest Receivable ................... Interest Revenue .................. ($30,000 × 8% × 3/12)
600
Oct.
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1 Cash .......................................... Interest Receivable .............. Interest Revenue*................. Notes Receivable ................. * ($30,000 × 8% × 4/12)
10-23
18,000
600
31,400 600 800 30,000
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-6 1.
Sainsbury
April 10
2.
13,200 1,716
Montgomery
April 21
3.
Cash .......................................... 14,916 Sales ..................................... HST Payable ($13,200 × 13%)
Cash .......................................... Sales ..................................... GST Payable ($30,000 × 5%)
31,500
Cash .......................................... Sales ..................................... GST Payable ($25,100 × 5%) PST Payable ($25,100 × 7%)
28,112
30,000 1,500
Winslow
April 27
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25,100 1,255 1,757
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-7 (a)
Quebec
April 10
Cash ................................................. Sales ($80,000) ........................... GST Payable ($80,000 x 5%) ...... QST Payable ($80,000 x 9.975%)
91,980 80,000 4,000 7,980
(b) Nova Scotia April 10
(c)
Cash ................................................. Sales............................................ HST Payable ($80,000x 15%) .....
92,000 80,000 12,000
Alberta
April 10
Solutions Manual .
Cash ................................................. Sales ........................................... GST Payable ($80,000 x 5%) ......
10-25
84,000 80,000 4,000
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-8 2017 (a) Oct. 31 Cash .................................................... 21,000 Unearned Revenue ....................... (100 × $210) (b) 1. Nov. 30 Unearned Revenue............................. Admission Revenue ..................... ($21,000 × 1/6)
3,500
2018 2. Mar. 31 Unearned Revenue ................................ 3,500 Admission Revenue ..................... ($21,000 × 1/6)* 3. Apr. 30 Unearned Revenue ................................ 3,500 Admission Revenue ..................... ($21,000 × 1/6)* *
21,000
3,500
3,500
3,500
Charleswood adjusts its accounts on a monthly basis. There would be a similar entry at December 31, 2017, January 31, 2018, and February 28, 2018.
(c) Parts 1, 2 and 3.
Date 2017 Oct. 31 Nov. 30 Dec. 31 2018 Jan. 31 Feb. 28 Mar. 31 Apr. 30
Solutions Manual .
Unearned Revenue Explanation Ref. Debit
Credit Balance 21,000
Adjusting entry Adjusting entry
3,500 3,500
21,000 17,500 14,000
Adjusting entry Adjusting entry Adjusting entry Adjusting entry
3,500 3,500 3,500 3,500
10,500 7,000 3,500 0
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-9 2017 (a) Nov.
Cash .................................................... 270,000 Unearned Revenue ....................... 270,000 (15,000 × $18)
(b) Dec. 31 Unearned Revenue............................. 22,500 Revenue ........................................ ($270,000 × 1/12) 2018 (c) Mar. 31 Unearned Revenue............................. 67,500 Revenue ........................................ ($270,000 × 3/12)
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22,500
67,500
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-10 (a)
May 31 Property Tax Expense ($24,000 × 1/12) ......................... Property Tax Payable...........
2,000 2,000
The company would have accrued property tax expense on a monthly basis using the 2016 monthly expense of $2,200 per month. An adjustment would be required when the property tax bill is received for the over accrual: May 31 Property Tax Payable .............. 800 Property Tax Expense ......... [($24,000 × 1/12) – $2,200] × 4 months
800
The company accrues property tax expense on June 30, 2017 for one month. July 31 Property Tax Payable ($24,000 × 6/12) ......................... Property Tax Expense ($24,000 × 1/12) ........................ Prepaid Property Tax ($24,000 × 5/12) ......................... Cash ......................................
12,000 2,000 10,000 24,000
The company makes monthly adjusting entries for property tax expense on from August to December, as follows: Property Tax Expense .............. 2,000 Prepaid Property Tax ........... 2,000 (b) Since the company’s fiscal year matches the annual property tax bill, there are no prepaid property taxes or property taxes payable. Income Statement, Year Ended December 31, 2017 (Partial) Operating expenses Property tax expense .................................................. $24,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-10 (Continued) (b) (Continued)
Date Jul. 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31
Date Jan. 31 Feb. 28 Mar. 31 Apr. 30 May 31 May 31 June 30 July 31 Aug. 31 Sep. 30 Oct. 31 Nov. 30 Dec. 31
Solutions Manual .
Prepaid Property Tax Explanation Ref. Debit 10,000
Property Tax Expense Explanation Ref. Debit 2,200 2,200 2,200 2,200 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
10-29
Credit Balance 10,000 2,000 8,000 2,000 6,000 2,000 4,000 2,000 2,000 2,000 0
Credit Balance 2,200 4,400 6,600 8,800 10,800 800 10,000 12,000 14,000 16,000 18,000 20,000 22,000 24,000
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-11 (a)
Estimated warranty costs for November and December sales: Number of units sold (30,000 + 32,000) Estimated rate of defective units Total estimated defective units Average warranty repair cost Estimated warranty costs for Nov. and Dec.
62,000 × 2.5% 1,550 × $20 $31,000
Dec. 31 Warranty Expense............................ 31,000 Warranty Liability ....................
31,000
(b) Dec. 31 Warranty Liability ............................. 21,600 Repair Parts Inventory, Salaries Payable, Cash, etc. ... (450 + 630) x $20 = $21,600 .........
21,600
(c) Income Statement, Year Ended December 31, 2017 (Partial) Operating expenses Warranty expense ........................................................ $31,000 Balance Sheet, at December 31, 2017 (Partial) Current Liabilities Warranty liability ($31,000 – $21,600).....................
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$9,400
Chapter 10
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-12 (a)
Warranty expense: 2015: ($2,000 × 500 units sold × 5%) = 2016: ($2,000 × 600 units sold × 5%) = 2017: ($2,000 × 525 units sold × 5%) =
$50,000 $60,000 $52,500
(b) Warranty liability at the end of the year: Estimated warranty expense for 2015: Less: Cost incurred in 2015 Warranty liability at end of 2015:
$50,000 (30,000) 20,000
Add: Estimated warranty expense for 2016: Less: Cost incurred 2016 Warranty liability at end of 2016:
60,000 (46,000) 34,000
Add: Estimated warranty expense for 2017: Less: Cost incurred 2017 Warranty liability at end of 2017:
52,500 (53,500) $33,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-13 (a)
2016: 900,000 × 35% × $0.01 = $3,150 2017:1,200,000 × 35% × $0.01 = $4,200
(b)
2016- Stand-alone sales= $300,000 Total value of goods =$300,000 + $3,150= $303,150
Amount to allocate to revenue = $300,000*($300,000/$303,150) = $296,883 Amount to allocate to unearned revenue–rewards program = = $300,000* ($3,150/$303,150) = $3,117 2016
Cash .................................................. 300,000 Sales............................................ Unearned Revenue–Loyalty Program
296,883 3,117
2017- Stand-alone sales= $400,000 Total value of goods = $400,000 + $4,200 = $404,200 Amount to allocate to revenue= $400,000 X ($400,000/$404,200) = $395,844 Amount to allocate to unearned revenue–rewards program = $400,000 X ($4,200/$404,200) = $4,156 2017
Solutions Manual .
Cash .................................................. 400,000 Sales............................................ Unearned Revenue–Loyalty Program
395,844 4,156
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-13 (Continued) (c) When the points are redeemed, the following entry would be done: Unearned Revenue–Loyalty Program Cash ................................................. Sales............................................
XXX XXX
Cost of Goods Sold ......................... Inventory .....................................
XXX
XXX XXX
The redemption of the points increases net income as the unearned revenue is now recognized as earned. There is no impact on cash when the points are redeemed as the entry is to debit Unearned Revenue–Loyalty Program and credit Sales.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-14 (1)
(a) Estimable. The amount and timing with respect to brake replacement is uncertain. The existence of the liability to replace the brakes is certain and the amount can be reasonably estimated. The liability should be recorded in the financial statements. (b)
(2)
Not required.
(a) Estimable. The amount and timing with respect to “money back, no questions asked” guarantee is uncertain. The existence of the money back guarantee is certain. (b)
Not required.
(3)
Same as (2) above.
(4)
(a) Determinable. The timing with respect to the prizes to be distributed is uncertain. The existence of the liability and the cost of the trip are certain. The liability should be recorded in the financial statements. (b)
(5)
Not required.
(a) Contingent Liability under both IFRS and ASPE. The contingent liability is neither likely nor unlikely and the amount cannot be reasonably estimated. (b)
Solutions Manual .
Under both IFRS and ASPE, the contingent liability would be disclosed in the notes to the financial statements because the outcome and the amount are both unknown.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-15 (a)
The company should record an estimate of the cost of replacing the cribs in its financial statements. This liability is probable and can be reasonably estimated. The company also has a contingent liability with respect to the lawsuit. If the probability of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either possible (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is probable the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be accrued as an estimated liability.
(b)
If Sleep-a-Bye Baby Company’s lawyers advise that it is likely that the company will have to pay damages of $100,000, then a journal entry should be recorded. The liability is likely and the amount can be reasonably estimated. The journal entry would be as follows: Loss due to Damages .................................... 100,000 Liability for Damages Due to Unsafe Cribs
(c)
100,000
If Sleep-a-Bye Baby Company is a private company, the answer to part (a) will be changed to assess the likelihood of loss from the lawsuit as “likely” rather than “probable”. If the likelihood of loss of the lawsuit is remote, the company does not have to report or disclose anything else. If it is either “likely” (and the loss cannot be estimated) or if it cannot be determined if the lawsuit will be successful, the lawsuit should be disclosed in the notes as a contingent liability. If it is “likely” the lawsuit will be successful and the $1,500,000 is a reasonable estimate, it should be recorded. Part (b) stays the same, since the higher threshold of “likely” was applied.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 10-16 (a) Apr. 30 Salaries Expense .................................. 46,600 CPP Payable .................................. EI Payable ...................................... Income Tax Payable ...................... Cash ............................................... (b) Apr. 30 Employee Benefits Expense ............. 5,686 CPP Payable .................................. EI Payable ($853 × 1.4).................. Workers’ Compensation Payable ($46,600 × 1%) ......................... Vacation Pay Payable ($46,600 × 4%) (c) May 15 CPP Payable ($2,162 + $2,162).......... EI Payable ($853 + $1,194) ................ Income Tax Payable .......................... Cash ..............................................
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2,162 853 9,011 34,574
2,162 1,194 466 1,864
4,324 2,047 9,011 15,382
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 10-17 (a)
AHMAD COMPANY Payroll Register Week Ended May 31 Gross Earnings
Total Employee Hours Regular Overtime A. Kassam H. Faas G. Labute Totals
47 45 46
$ 520.00 560.00 600.00 $1,680.00
Gross Pay
$136.50 $ 656.50 105.00 665.00 135.00 735.00 $376.50 $2,056.50
Deductions CPP
EI
Income Health Tax Insurance
$29.17 $12.34 $ 85.55 29.59 12.50 87.10 33.05 13.82 102.55 $91.81 $38.66 $275.20
Total
$10.00 $137.06 15.00 144.19 15.00 164.42 $40.00 $445.67
(b) May 31 Salaries Expense......................................................... 2,056.50 CPP Payable............................................................ EI Payable................................................................ Income Tax Payable ............................................... Health Insurance Payable ...................................... Salaries Payable .....................................................
91.81 38.66 275.20 40.00 1,610.83
31 Employee Benefits Expense....................................... CPP Payable ($91.81 × 1) ....................................... EI Payable ($38.66 × 1.4) ........................................ Workers’ Compensation Payable ($2,056.50 × 2%) Vacation Pay Payable ($2,056.50 × 4%)................. Health Insurance Payable ......................................
91.81 54.12 41.13 82.26 40.00
10-37
309.32
Net Pay $ 519.44 520.81 570.58 $1,610.83
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
EXERCISE 10-18 Date Issued
Rate
Term
Current Portion
$60,000 3/31/16 $30,000 7/1/16 $120,000 9/1/16
6% 4% 5%
6 yrs. 7 mo. 30 mo.
$10,000 $30,000 $48,000
Principal 1. 2. 3.
NonCurrent Portion $50,000 $0 $60,000
Interest Payable $2,700 $600 $450
Current Portion: Note 1: One payment of $10,000 will be made in the coming year. Note 3: $48,000 = 12 monthly payments × $4,000 Non-Current Portion: Note 1: $50,000 = $60,000 – $10,000 Note 3: $60,000 = $120,000 – (3 payments in 2016 × $4,000) – $48,000 Interest Payable: Note 1: $2,700 = $60,000 × 6% × 9/12 Note 2: $600 = $30,000 × 4% × 6/12 Note 3: $450 = [$120,000 – (3 payments in 2016 × $4,000)] × 5% × 1/12
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EXERCISE 10-19 MEDLEN MODELS (Partial) Balance Sheet December 31, 2017 Current liabilities Accounts payable ....................................................... $ 63,000 Salaries payable.......................................................... 32,000 Unearned revenue ...................................................... 70,000 Notes Payable ............................................................ 40,000 Litigation liability ........................................................ 25,000 Mortgage payable—current portion .......................... 90,000 Total current liabilities ........................................... $320,000
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*EXERCISE 10-20 (a)
Gross Pay = (40 hours × $22.60) + (4 hours × [$22.60 × 1.5]) = $904.00 + $135.60 = $1,039.60 Deductions (using Illustration 10A-3): CPP [($1,039.60 – ($3,500 ÷ 52)) × 4.95%] EI ($1,039.60 × 1.88%) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions
$48.13 19.54 123.05 61.70 $252.42
(b) June 15 Salaries Expense .......................1,039.60 CPP Payable.......................... 48.13 EI Payable.............................. 19.54 Income Tax Payable ($123.05 + $61.70) 184.75 Cash....................................... 787.18 (c)
June 15 Employee Benefits Expense ......... 75.49 CPP Payable.......................... EI Payable ($19.54 × 1.4) ......
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
*EXERCISE 10-21
Month
Gross Salary
Jan. – Oct. November December Totals
$47,500.00 4,750.00 4,750.00 $57,000.00
Cumulative Salary
CPP 4.95%
$47,500.00 $ 2,206.90 2 52,250.00 220.69 1 57,000.00 52.36 3 $2,479.95
EI 1.88% $893.00 4 37.60 5 0 $930.60
1. CPP = ($4,750 – [$3,500 ÷ 12]) × 4.95% = $220.69 2. CPP = $220.69/month × 10 months = $2,206.90 3. CPP = $52.36 (annual CPP maximum – CPP to end of November = maximum to be deducted in November [$2,479.95 – ($220.69 × 11) 4. EI = $4,750 × 1.88% = $89.30 EI = $86.93/month × 10 months = $893.00 5. EI = ($49,500 maximum insurable earnings – $47,500) × 1.88% = $37.60
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SOLUTIONS TO PROBLEMS PROBLEM 10-1A
Feb. 2 Supplies.............................................. Accounts Payable ........................
2,500 2,500
10 Cash .................................................... 48,816 Sales.............................................. GST Payable ................................. PST Payable..................................
43,200 2,160 3,456
15 Cash .................................................... 35,000 Notes Payable...............................
35,000
21 Salaries Expense ............................... 50,000 CPP Payable ................................. EI Payable ..................................... Income Tax Payable ..................... Salaries Payable ...........................
2,308 940 8,900 37,852
21 Employee Benefits Expense ............. CPP Payable ................................. EI Payable ($940 x 1.4) .................
3,624 2,308 1,316
28 Interest Expense ................................ Interest Payable............................ ($35,000 x 6% x 1/12 X .5)
87.50 87.50
28 Warranty Expense.............................. 14,000 Warranty Liability .........................
14,000
28 Salaries Payable................................. 37,852 Cash ..............................................
37,852
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PROBLEM 10-1A (Continued) Mar.
1 GST Payable ....................................... PST Payable ....................................... Cash ..............................................
2,160 3,456
2 Accounts Payable .............................. Cash ..............................................
2,500
15 CPP Payable ($2,308 x 2) ................... EI Payable ($940 + $1,316)................. Income Tax Payable........................... Cash ..............................................
4,616 2,256 8,900
5,616
2,500
15,772
Taking It Further: Some additional mandatory employee benefits paid entirely by the employer include payments to fund the workplace health, safety, and compensation plan. Vacations are also mandatory and the amounts and limits vary among provinces. The remaining benefits are not mandatory and have more to do with the negotiated employment package with employees. The latter could include full or partial payments into pension plans, savings plans, and medical or life insurance related coverage. Finally, again based on a business’ practice, paid absences for sick leave, for example, are additional employee benefits paid by the employer. Mandatory and negotiated employee benefit accounted for as expenses when incurred.
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costs
are
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Seventh Canadian Edition
PROBLEM 10-2A
(a) Jan.
2 Cash .................................................... 27,000 Notes Payable...............................
27,000
5 Cash .................................................... 23,165 Sales.............................................. HST Payable ($20,500 x 13%) ......
20,500 2,665
12 Unearned Revenue ............................ 10,000 Service Revenue .......................... HST Payable .................................
8,849 1,151
14 HST Payable ....................................... Cash ..............................................
7,700
7,700
20 Accounts Receivable ......................... 50,850 Sales (900 X $50) .......................... HST Payable ($45,000 x 13%) ......
45,000 5,850
25 Cash .................................................... 14,125 Sales.............................................. HST Payable ($12,500 x 13%) ......
12,500 1,625
(b) 31 Interest Expense ................................ Interest Payable............................ ($27,000 x 6% x 1/12)
135
31 Warranty Expense.............................. Warranty Liability ......................... ($45,000 x 7%)
3,150
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3,150
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PROBLEM 10-2A (Continued)
(c) ACCARDO COMPANY (Partial) Balance Sheet January 31, 2017 Current liabilities Accounts payable ....................................................... HST payable ($2,665 + $1,151+ $5,850 + $1,625) ...... Interest payable .......................................................... Warranty liability ......................................................... Unearned revenue ($16,000 - $10,000) ...................... Notes payable ............................................................. Total current liabilities ...........................................
$52,000 11,291 135 3,150 6,000 27,000 $99,576
Taking It Further: Warranty liabilities and the related expenses are accrued at the time of the sale of the product on which the warranty applies. Merchants accrue the expenses before a customer has any issues with the product in order to recognize the expense in the same accounting period as the sale. This fulfills the matching principle in the conceptual framework of accounting. Doing so also honours the accrual basis of accounting. Failing to do so could result in the benefit of the sale occurring in one accounting period and the related expenses being incurred in a subsequent accounting period. This latter treatment would provide financial information that would be misleading to the financial statement users.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 10-3A
1 2 3 4 5 6 1 2 3 4 5 6
Original Principal $ 35,000 $ 15,000 $ 26,000 $ 60,000 $ 100,000 $ 40,000
Date issued Rate Aug. 1/17 5.0% Sept. 1/17 4.0% Nov. 1/17 4.5% Mar. 31/17 3.5% Oct. 1/17 5.0% Jan. 31/16 5.0%
Term 10 months 4 months 6 months 5 years 6 years 4 years
$145.83 = $35,000 × 5.0% × 1/12 $200.00 = $15,000 × 4.0% × 4/12 $195.00 = $26,000 × 4.5% × 2/12 $1,575.00 = $60,000 × 3.5% × 9/12 $400.00 = $96,000 × 5.0% × 1/12 Interest was paid on December 31, 2017
7
(a)
(b)
(c)
Current Portion $ 35,000 $ 15,000 $ 26,000 $ 12,000 $ 24,000 $ 10,000
Noncurrent Portion $ $ $ $ 48,000 $ 72,000 $ 20,000
Interest Payable $ 145.83 $ 200.00 $ 195.00 $1,575.00 $ 400.00 $ -
7
8 9
1 2 3 4 5 6
8
current: $24,000 = $2,000 × 12 months non-current: $72,000 = $100,000 – $24,000 – $4,000
9
non-current: $20,000 = $40,000 – ($10,000 × 2)
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PROBLEM 10-3A (Continued) Taking It Further: For the maker, a note payable bears interest which is an additional cost. Some liabilities, such as accounts payable to suppliers are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal. For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.
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PROBLEM 10-4A (a)
Jan. 12 Merchandise Inventory ............. 25,000 Accounts Payable .................
25,000
31 Accounts Payable ..................... 25,000 Notes Payable .......................
25,000
Feb. 28 Interest Expense ....................... ($25,000 × 7% × 1/12) Cash....................................... Mar. 31
146 146
Notes Payable............................ 14,000 Interest Payable......................... 490 Interest Expense 245 ($14,000 × 7% × 3/12)................. Cash.......................................
Mar. 31 Interest Expense ....................... ($25,000 × 7% × 1/12) Cash.......................................
146 146
Apr. 30 Notes Payable............................ 25,000 Interest Expense 146 ($25,000 × 7% × 1/12)................. Cash....................................... Aug.
14,735
25,146
1 Equipment.................................. 41,000 Cash....................................... Notes Payable .......................
11,000 30,000
Sept. 30 Cash ........................................... 100,000 Notes Payable .......................
100,000
Dec. 31
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Interest Expense ....................... ($100,000 × 5% × 3/12) Cash.......................................
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PROBLEM 10-4A (Continued) (a) (Continued) Dec. 31
Interest Expense ....................... ($30,000 × 6% × 5/12) Interest Payable ....................
750 750
(b) LEARNSTREAM COMPANY (Partial) Balance Sheet December 31, 2017 Current liabilities Notes payable ............................................................. Current portion of long-term notes payable ............. Interest payable .......................................................... Long-term liabilities Notes payable ............................................. $100,000 Less current portion .................................. (10,000)
$30,000 10,000 750 40,750
90,000
(c) LEARNSTREAM COMPANY (Partial) Income Statement Year Ended December 31, 2017 Other expense Interest expense ......................................................... ($146 X 3) + $245 +$1,250 +$ 750) = $2,683
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PROBLEM 10-4A (Continued) Taking It Further: Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the portion of long-term debt that is repayable in the current term. This classification is important because it represents amounts that must be settled within the next year and is an important factor in assessing the company’s liquidity.
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PROBLEM 10-5A (a) Jan. 2 Cash................................................ 46,000 Notes Payable ..........................
46,000
5 Cash................................................ Sales ......................................... HST Payable ($8,600 × 13%) ....
9,718 8,600 1,118
Cost of Goods Sold ....................... Merchandise Inventory ............
4,100
12 Unearned Revenue ........................ Service Revenue ..................... HST Payable .............................
8,000
14 HST Payable ................................... Cash ..........................................
8,630
15
1,320 680 3,340
CPP Payable................................... EI Payable....................................... Income Tax Payable....................... Cash ..........................................
4,100 7,080 920
8,630
5,340
17 Accounts Payable .......................... 14,800 Cash ..........................................
14,800
20 Accounts Receivable ..................... 118,085 Sales (1,900 × $55) ................... HST Payable ($104,500 × 13%)
104,500 13,585
Cost of Goods Sold (1,900 × $25) . 47,500 Merchandise Inventory ............
47,500
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PROBLEM 10-5A (Continued) (a) (Continued) Jan. 29 Unearned Revenue–Loyalty Program ......................................... 2,300 HST Payable ............................. Revenue from Rewards Program ($2,300 − $265) 31 Cash................................................ 250,000 Sales ......................................... Unearned Revenue–Loyalty Program Stand-alone sales ............................. Stand-alone value of loyalty points (30,000 × $1 × 20%)........................... Total Value
265 2,035
244,141 5,859 $250,000 6,000 $256,000
Allocate as follows: Earned revenue= ($250,000/$256,000) X $250,000 = $244,141 Unearned revenue= ($6,000/$256,000) X $250,000 = $5,859 31 Salaries Expense ........................... 18,750 CPP Payable ............................. EI Payable ................................. Income Tax Payable ................. Salaries Payable.......................
764 343 3,481 14,162
31 Salaries Payable ............................ 14,162 Cash ..........................................
14,162
(b) (1) Jan. 31 Interest Expense ............................ Interest Payable ....................... ($46,000 × 7% × 1/12)
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PROBLEM 10-5A (Continued) (b) (Continued) (2) Jan. 31 Warranty Expense (1,900 × 9% × $10) .......................... Warranty Liability ..................... (3) Jan. 31 Employee Benefits Expense ......... CPP Payable ............................. EI Payable ($343 × 1.4) ............. Vacation Pay Payable .............. ($18,750 x 4%) = $750
1,710 1,710 1,994
(4) Jan. 31 Property Tax Expense ($8,820 ÷ 12) ................................... 735 Property Tax Payable............... (c) SHUMWAY SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2017
764 480 750
735
Current liabilities Notes payable ............................................................. $ 46,000 Accounts payable ($40,000 – $14,800) ...................... 25,200 Unearned revenue ($15,300 – $8,000......................... 7,300 Unearned revenue–loyalty program ($3,700 - $2,300 + $5,859) ........................................... 7,259 HST payable ($8,630 + $1,118 + $920 – $8,630 + $13,585 + $265) .. 15,888 Income tax payable ($3,340 – $3,340 + $3,481) ......... 3,481 CPP payable ($1,320 – $1,320 + $764 + $764) ........... 1,528 EI payable ($680 – $680 + $343 + $480) ..................... 823 Vacation pay payable ($8,660 + $750) ....................... 9,410 Property tax payable .................................................. 735 Warranty liability ......................................................... 1,710 Interest payable .......................................................... 268 Total current liabilities ........................................... $ 119,602
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PROBLEM 10-5A (Continued) Taking It Further: Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries payable are credited.
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PROBLEM 10-6A (a)
Warranty expense 2015 – (1,500 × 5% × $30) = $2,250 2016 – (1,700 × 5% × $30) = $2,550 2017 – (1,800 × 5% × $30) = $2,700 Warranty liability at year end 2015 – ($0 – $2,250 + $2,250) = $0 2016 – ($0 – $2,400 + $2,550) = $150 2017 – ($150 – $2,640 + $2,700) = $210
Note: See analysis of Warranty Liability account in (b) below. (b) 2015
2016
2017
Warranty Liability ................................. Repair Parts Inventory .....................
2,250
Warranty Expense (1,500 × 5% × $30) . Warranty Liability .............................
2,250
Warranty Liability ................................. Repair Parts Inventory .....................
2,400
Warranty Expense (1,700 × 5% × $30) . Warranty Liability .............................
2,550
Warranty Liability ................................. Repair Parts Inventory .....................
2,640
Warranty Expense (1,800 × 5% × $30) . Warranty Liability .............................
2,700
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2,250
2,250
2,400
2,550
2,640 2,700
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PROBLEM 10-6A (Continued) (b) (Continued)
Date 2015 During Dec. 31 2016 During Dec. 31 2017 During Dec. 31 (c)
Warranty Liability Explanation Ref. Debit
Credit Balance
2,250
2,250 Dr 2,250 0
2,400
2,400 Dr 2,550 150
2,640
2,490 Dr 2,700 210
Percentage of units returned for repair = Number of units returned ÷ Number of units sold Returned 2015 75 2016 90 2017 105 270
Sold 1,500 1,700 1,800 5,000
Percentage returned = 270 ÷ 5,000 = 5.4% Average actual warranty cost per unit = Total actual warranty costs ÷ Total units returned Actual costs 2015 $2,250 2016 2,400 2017 2,640 $7,290 Average warranty cost per unit over the three-year period: $7,290 ÷ 270 = $27
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PROBLEM 10-6A (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $150. The revised warranty expense for 2017 is calculated as follows: Warranty expense 2017: 1,800 × 7% × $27 = $3,402 Warranty liability at December 31, 2017: $150 – $2,640 + $3,402 = $912
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PROBLEM 10-7A (a)
1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues. 2. Increases revenues and profit (form of unearned revenue) 3. No effect on revenues, expenses, and profit 4. Increases revenues, expenses (cost of goods sold), and profit
(b) 2016: 1.
Cash ............................................... 4,560,000 Sales ................................... 4,447,334 Unearned Revenue–Loyalty Program 112,666
Stand-alone gas sales........................................ Stand-alone value of loyalty coupons ((3,800,000 x $0.038 x 80%) ................................ Total Value ...................................................
$4,560,000 115,520 $4,675,520
Allocate as follows: Earned revenue= ($4,560,000/$4,675,520) X $4,560,000 = $4,447,334 Unearned revenue = ($115,520/$4,675,520) X $4,560,000 = $112,666 2.
Unearned Revenue-Loyalty Program . Revenue from Rewards Program
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46,000 46,000
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PROBLEM 10-7A (Continued) (b) (Continued) 2017: 3.
Cash ...............................................6,045,000 Sales ................................... 5,906,870 Unearned Revenue–Loyalty Program 138,130
Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (4,650,000 x $0.038 x 80%) ................................. Total Value ...................................................
$6,045,000 141,360 $6,186,360
Allocate as follows: Earned revenue= ($6,045,000/$6,186,360) x $6,045,000 =$5,906,870 Unearned revenue= ($141,360 /$6,186,360) x $6,045,000 = $138,130
4.
5.
Unearned Revenue–Loyalty Program Revenue from Rewards Program
53,500
Cash ...................................................... Unearned Revenue .......................
82,000
Unearned Revenue .............................. Sales .............................................
45,000
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53,500
82,000 45,000
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PROBLEM 10-7A (Continued) (c) Date 2016 During Dec. 31
Unearned Revenue–Loyalty Program Explanation Ref. Debit Credit Balance 112,666
112,666 66,666
138,130 53,500
204,796 151,296
Unearned Revenue Explanation Ref. Debit
Credit Balance
46,000
2017 During Dec. 31
Date 2017 During Dec. 31
82,000 45,000
82,000 37,000
Taking It Further: Management should consider the following factors: The historical rate of redemption on the grocery coupons. Some coupons will never be redeemed and management needs to determine over time, if the estimated redemption rate should be revised. Factors to consider for the gift cards include long periods of inactivity by customers, or low residual balances. These factors increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where there is a remote chance they will be used can be transferred to a revenue account.
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PROBLEM 10-8A 1.
Note disclosure: It does not appear that it is probable that the company will lose the lawsuit. If the possibility of loss is considered remote, Mega Company would not need to disclose the lawsuit.
2.
Note disclosure: Since it is likely that the company will lose the lawsuit, but the amount of the liability cannot be reliably measured, the lawsuit should be disclosed.
3.
Accrue in the financial statements: Because Mega has negotiated a settlement, it now has a liability and the amount is measurable.
Taking It Further: Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Thus a benefit of recording the accrual is that it allows users of financial statements to make better informed decisions. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios. The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are probable and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.
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PROBLEM 10-9A (a) SURE VALUE HARDWARE Payroll Register Week Ended March 14, 2017 Gross Earnings Employee Hours Regular I. Dahl F. Gualtieri G. Ho A. Israeli Totals
37.5 42.5 43.5 45
Overtime
Gross Pay
$637.50 0 $637.50 660.00 $61.88 721.88 620.00 81.38 701.38 600.00 112.50 712.50 $2,517.50 $255.76 $2,773.26
Deductions CPP
EI
Income United Tax Way
$27.80 $11.83 $82.25 $ 7.50 32.40 13.57 91.20 8.00 31.39 13.19 97.50 5.00 31.94 13.40 107.75 10.00 $123.53 $51.99 $378.70 $30.50
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Total
Net Pay
$129.38 $508.12 145.17 576.71 147.08 554.30 163.09 549.41 $584.72 $2,188.54
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PROBLEM 10-9A (Continued) (b) Mar.14 Salaries Expense ......................... 2,773.26 CPP Payable ......................... 123.53 EI Payable ............................. 51.99 Income Tax Payable............. 378.70 United Way Contributions Payable 30.50 Salaries Payable................... 2,188.54 14 Employee Benefits Expense ..... 307.25 CPP Payable ($123.53 × 1) ... EI Payable ($51.99 × 1.4)...... Vacation Pay Liability .......... Vacation pay liability = $2,773.26 × 4%
123.53 72.79 110.93
(c) Mar.14 Salaries Payable ........................ 2,188.54 2,188.54 Cash ...................................... (d) Apr. 15 CPP Payable ($123.53 + $123.53) .................... EI Payable ($51.99 + $72.79) ..... Income Tax Payable .................. Cash ......................................
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PROBLEM 10-9A (Continued) Taking It Further: The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll. A proprietor is not required, nor able, to pay EI on business profit for purposes of collecting employment insurance if he or she is not working. However, a proprietor can choose to pay EI for special benefits such as sickness or maternity benefits. Business profit is considered pensionable earnings for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.
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PROBLEM 10-10A (a) Feb. 4 Union Dues Payable ........................... Cash................................................ 7
13
Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................
1,450 1,450 1,280 855 2,135
CPP Payable ....................................... 7,887 EI Payable ........................................... 3,755 Income Tax Payable ........................... 16,252 Cash................................................
20 Workers’ Compensation Payable ...... Cash................................................
27,894
4,275 4,275
28 Salaries Expense................................ 92,600 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable ........ Salaries Payable ............................
4,281 1,695 17,595 1,574 1,380 66,075
28 Salaries Payable ................................. 66,075 Cash................................................
66,075
28 Employee Benefits Expense.............. 15,914 CPP Payable................................... EI Payable ($1,695 × 1.4) ............... Workers’ Compensation Payable ($92,600 × 5%) ................................ Vacation Pay Payable ($92,600 × 4%) Life Insurance Payable ($92,600 × 1%)
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PROBLEM 10-10A (Continued) (b)
Date Feb. 1 13 28 28
Date Feb. 1 13 28 28
Date Feb. 1 13 28
Date Feb. 1 20 28
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Canada Pension Plan Payable Explanation Ref. Debit Credit Balance Balance
7,887 4,281 4,281
7,887 0 4,281 8,562
Employment Insurance Payable Explanation Ref. Debit Credit Balance Balance
3,755 1,695 2,373
Income Tax Payable Explanation Ref. Debit Balance
3,755 0 1,695 4,068
Credit Balance
16,252 17,595
16,252 0 17,595
Workers’ Compensation Payable Explanation Ref. Debit Credit Balance Balance
4,275 4,630
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PROBLEM 10-10A (Continued) (b) (Continued)
Date Feb. 1 4 28
Date Feb. 1 7 28
Date Feb. 1 28
Date Feb. 1 7 28
Date Feb. 28 28
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Union Dues Payable Explanation Ref. Debit Balance
Credit Balance
1,450 1,574
Life Insurance Payable Explanation Ref. Debit Balance
Credit Balance
855 926
Vacation Pay Payable Explanation Ref. Debit Balance
1,450 0 1,574
855 0 926
Credit Balance
3,704
20,520 24,224
Disability Insurance Payable Explanation Ref. Debit Credit Balance Balance
1,280 1,380
Salaries Payable Explanation Ref. Debit
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Credit Balance 66,075
66,075
1,280 0 1,380
66,075 0
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PROBLEM 10-10A (Continued) Taking It Further: The employee earning record is required to determine the employee’s total earnings for the year and total deductions. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits. The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.
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PROBLEM 10-11A (a) LIGHTHOUSE DISTRIBUTORS (Partial) Balance Sheet September 30, 2017 Current liabilities Bank indebtedness ............................................... Accounts payable ................................................. Warranty liability .................................................... Property taxes payable.......................................... CPP payable ........................................................... EI payable............................................................... Workers’ compensation payable .......................... Vacation pay payable ............................................ Income tax payable................................................ HST payable ........................................................... Interest payable ..................................................... Unearned revenue–loyalty program ..................... Unearned card revenue ......................................... Current portion of notes payable ......................... Current portion of mortgage payable ................... Total current liabilities ...................................... (b)
$ 62,500 90,000 22,500 10,000 7,500 3,750 1,250 13,500 35,000 15,000 10,000 5,000 30,000 12,000 10,000 $328,000
Current assets: $182,000 + $275,000 + $12,500 = $469,500 Current ratio: $469,500 ÷ $328,000 = 1.43:1 Acid-test ratio: $182,000 ÷ $328,000 = 0.55:1
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PROBLEM 10-11A (Continued) (c)
LightHouse Distributors did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to LightHouse from the bank. LightHouse is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but LightHouse still has $75,000 available in its line of credit for immediate cash needs.
Taking It Further: The accountant is not correct. Recording a full year of property tax expense when the payment is made, on the basis that the payment is unavoidable is not proper accounting. The property taxes are paid for a full calendar year of services to be delivered by the municipality or city. These services are not obtained at the time of the tax payment. The payment should be allocated to property tax expense in all accounting periods that benefit from the services provided during the year. The expense for property taxes is recognized through the passage of time, evenly over the fiscal year.
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PROBLEM 10-12A (a) MAPLE LEAF FOODS INC. (Partial) Balance Sheet December 31, 2014 (in thousands) Current liabilities Accounts payable and accruals .............................. Income taxes payable............................................... Current portion of long-term debt ........................... Other current liabilities............................................. Provisions ................................................................. Total current liabilities .........................................
$275,249 26,614 472 24,383 60,443 $387,161
(b) Current assets = $496,328 + $60,396 + $105,743 + $270,401 + $110,209 + $20,157 = $1,063,234 Current ratio: $1,063,234 ÷ $387,161 = 2.75:1 Acid-test ratio: ($496,328 + $60,396 + $110,209) ÷ $387,161 = 1.72:1 (c)
Current ratio Dec. 31, 2013: $1,183,171 ÷ $966,522 = 1.22:1 Acid-test ratio Dec. 31, 2013: ($506,670 + $111,034+ 115,514) ÷ $966,522 = 0.76:1 Both the current ratio and the asset test ratio improved considerably in 2014.
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PROBLEM 10-12A (Continued) Taking It Further: In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory. We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those that can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of Maple Leaf Foods Inc. the acid-test ratio is less than the current ratio indicating that the company has a high proportion of less liquid current assets. Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.
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*PROBLEM 10-13A (a) WESTERN ELECTRIC COMPANY Payroll Register Week Ended June 9, 2015
Employee C. Tanm T. Ng O. Stavtech A. Mandell Totals
Gross Pay $945.00 1,130.00 1,130.00 1,067.00 $4,272.00
CPP $43.45 52.60 52.60 49.48 $198.13
1 2 2 3
Deductions Federal Ontario Total EI Income Tax Income Tax Deductions Net Pay 4 $99.85 $52.10 $213.17 $731.83 $17.77 5 125.90 64.45 264.19 865.81 21.24 5 141.50 69.60 284.94 845.06 21.24 6 128.30 64.10 261.94 805.06 20.06 $495.55 $250.25 $1,024.24 $3,247.76 $80.31
1. CPP = ($945.00 – [$3,500 ÷ 52]) × 4.95% = $43.45 2. CPP = ($1,130.00 – [$3,500 ÷ 52]) × 4.95% = $52.60 3. CPP = ($1,067.00 – [$3,500 ÷ 52]) × 4.95% = $49.48 4. EI = $945.00 × 1.88% = $17.77 5. EI = $1,130.00 × 1.88% = $21.24 6. EI = $1,067.00 × 1.88% = $20.06
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*PROBLEM 10-13A (Continued) (b) Semi-monthly Payroll Ended June 15, 2015:
Employee
Annual Salary
Gross Pay
CPP 4.95%
EI 1.88%
S. Goodspeed M. Giancarlo H. Ridley
$43,440 64,770 76,880
$1,810.00 2,698.75 3,203.33
$ 82.38 1 126.37 2 151.35 3
$34.03 4 50.74 5 60.22 6
1. CPP = ($1,810.00 – [$3,500 ÷ 24]) × 4.95% = $82.38 2. CPP = ($2,698.75 – [$3,500 ÷ 24]) × 4.95% = $126.37 3. CPP = ($3,203.33 – [$3,500 ÷ 24]) × 4.95% = $151.35 4. EI = $1,810.00 × 1.88% = $34.03 5. EI = $2,698.75 × 1.88% = $50.74 6. EI = $3,203.33 × 1.88% = $60.22 (c) Pay period in which CPP maximum is reached = Maximum annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period). S. Goodspeed: His annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. He will not reach the maximum CPP and EI payments for 2015. M. Giancarlo: Pay period in which CPP maximum is reached = $2,479.95 ÷ $126.37 = 19.6; rounded up to pay period 20 (October 31).
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*PROBLEM 10-13A (Continued) (c) (Continued) Pay period in which EI maximum is reached = $930.60 ÷ $50.74 = 18.34; rounded up to pay period 19 (October 15). H. Ridley: Pay period in which CPP maximum is reached = $2,479.95 ÷ $151.35 = 16.39; rounded up to pay period 17 (September 15). Pay period in which EI maximum is reached = $930.60 ÷ $60.22 = 15.45; rounded up to pay period 16 (August 31). Taking It Further: The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company. The amounts of CPP, EI, and income tax to be deducted are all dependent upon the length of the pay period, thus different tables are required.
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PROBLEM 10-1B
Feb. 1 Cash .................................................... 30,000 Notes Payable...............................
30,000
8 Accounts Receivable ......................... 16,385 Sales.............................................. HST Payable .................................
14,500 1,885
14 Salaries Expense ............................... 15,000 CPP Payable ................................. EI Payable ..................................... Income Tax Payable ..................... Salaries Payable ...........................
692 282 2,700 11,326
14 Employee Benefits Expense ............. CPP Payable ................................. EI Payable ($282 x 1.4) .................
1,087
15 Furniture ............................................. Accounts Payable ........................
1,975
692 395
1,975
21 Salaries Payable................................. 11,326 Cash .............................................. 28 Interest Expense ................................ Interest Payable............................ ($30,000 x 5% x 1/12)
125
28 Warranty Expense.............................. Warranty Liability .........................
500
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PROBLEM 10-1B (Continued) Taking It Further: The accountant is mostly correct. Accounts payable are an example of a current liability that can be expected to be paid within the next year. However, unearned revenue is a current liability that will not be paid within the year, but can be expected to be extinguished by goods or services being provided.
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PROBLEM 10-2B (a)Jan. 1
Cash ......................................................30,000 Notes Payable...............................
30,000
5 Cash .................................................... 11,648 Sales.............................................. GST Payable ($10,400 x 5%) ........ PST Payable ($10,400 x 7%) ........
10,400 520 728
12 Unearned Revenue ............................ Service Revenue ................................ GST Payable ................................. PST Payable..................................
9,000 8,036 402 562
14 GST Payable ....................................... Cash ..............................................
5,800 5,800
20 Accounts Receivable ......................... 52,416 Sales (900 X $52) .......................... GST Payable ($46,800 x 5%) ........ PST Payable ($46,800 x 7%) ........
46,800 2,340 3,276
25 Cash .................................................... 20,966 Sales.............................................. GST Payable ($18,720 x 5%) ........ PST Payable ($18,720 x 7%) ........
18,720 936 1,310
(b) 31 Interest Expense ................................ Interest Payable............................ ($30,000 x 8% x 1/12)
200
31 Warranty Expense.............................. Warranty Liability ......................... ($46,800 x 5%)
2,340
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PROBLEM 10-2B (Continued) (c) EDMISTON SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2017 Current liabilities Accounts payable ....................................................... GST payable ($520 + $402 + $2,340 + $936) .............. PST payable ($728 + $562 + $3,276 + $1,310) ........... Interest payable .......................................................... Warranty liability ......................................................... Unearned revenue ($15,000 - $9,000) ........................ Notes payable ............................................................. Total current liabilities ...........................................
$42,500 4,198 5,876 200 2,340 6,000 30,000 $91,114
Taking It Further: James is incorrect. The payroll taxes withheld are amounts that belong to the employee. The employer is instructed by law to take from the gross pay of employees and remit these amounts for income taxes, CPP, and EI to the Receiver General. By doing so, these amounts reach the CPP and EI funds to finance the benefits to which employees are entitled. As well, the remittances represent instalments on individual employees’ tax liability accounts for federal and provincial income taxes withheld. The employer has already recognized the expense as part of the gross salaries paid to the employees. The gross amount of the salaries is debited to Salaries Expense. The employee benefits are paid by the employer to the Receiver General along with the employer’s portion of CPP and EI payments, which are over and above what has been deducted from the employee’s pay.
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PROBLEM 10-3B
1 2 3 4 5 6 1 2 3 4 5 6
Principal $ 25,000 $ 10,000 $ 40,000 $ 80,000 $ 126,000 $ 50,000
Date issued July 1/17 Sept. 1/17 Nov. 1/17 May 31/17 Oct. 1/17 Mar. 31/16
Rate 5.00% 4.00% 4.50% 3.75% 4.25% 5.00%
Term 9 months 6 months 7 months 5 years 3 years 4 years
(a)
(b)
(c)
Current Portion $ 25,000 $ 10,000 $ 40,000 $ 16,000 $ 42,000 $ 12,500
Noncurrent Portion $ $ $ $ 64,000 $ 77,000 $ 25,000
Interest Payable $ 104.17 $ 133.33 $ 300.00 $1,750.00 $ 421.46 $ -
7 9
8 9
1 2 3 4 5 6
7 $104.17 = $25,000 × 5.0% × 1/12 current: $42,000 = $3,500 × 12 months 8 $133.33 = $10,000 × 4.0% × 4/12 non-current: $77,000 = $126,000 – ($3,500 × 2) $300.00 = $40,000 × 4.5% × 2/12 – $42,000 9 $1,750.00 = $80,000 × 3.75% × 7/12 non-current: $25,000 = $50,000 – ($12,500 × 2) $421.46 = ($126,000 – [2 × $3,500]) × 4.25% × 1/12 Interest was paid on December 31, 2017
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PROBLEM 10-3B (Continued) Taking It Further: For the maker, a note payable bears interest, which is an additional cost. Some liabilities, such as accounts payable to suppliers, are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal. For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.
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PROBLEM 10-4B (a)
2016: Dec. 1 Interest Expense ($15,000 × 6% × 1/12)................. 75 Interest Payable......................... 375 Notes Payable............................ 15,000 Cash....................................... 2017: Apr. 1 Land ........................................... 75,000 Notes Payable ....................... Apr. 30 Equipment.................................. Accounts Payable .................
8,000
May 31 Accounts Payable ..................... Notes Payable .......................
8,000
July
1,313
1 Interest Expense ....................... ($75,000 × 7% × 3/12) Cash.......................................
Aug. 31 Interest Expense ($8,000 × 8% × 3/12)................... Note Payable.............................. Cash....................................... Oct.
Oct.
1 Interest Expense ($75,000 × 7% × 3/12)................ Cash....................................... 1 31
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15,450
75,000 8,000 8,000
1,313 160 8,000 8,160
1,313 1,313
Cash ........................................... 90,000 Notes Payable .......................
90,000
Interest Expense ....................... 888 [($90,000 × 6% × 1/12) + ($1,313 × ⅓)] Interest Payable ....................
888
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PROBLEM 10-4B (Continued) (b) MILEHI MOUNTAIN BIKES (Partial) Balance Sheet October 31, 2017 Current liabilities Notes payable ............................................................. Current portion of long-term notes payable ............. Interest payable .......................................................... Total current liabilities ...........................................
$75,000 18,000 888 93,888
Long-term liabilities Notes payable .......................................... Less current portion ................................
72,000
$90,000 (18,000 )
(c) MILEHI MOUNTAIN BIKES (Partial) Income Statement Year ended October 31, 2017 Other expenses Interest expense ......................................................... *($75 + $1,313 + $160 + $1,313 + $888)
$3,749*
Taking It Further: Notes payable are classified according to their maturity dates as being either current or non-current. This classification is also extended to the current maturity of the portion of long-term debt that is repayable in the current term. This classification is important because it shows the amount that must be settled within one year, which is an important factor in evaluating the company’s liquidity.
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PROBLEM 10-5B (a) Jan. 5 Cash............................................... 17,854 Sales ....................................... HST Payable ($15,800 × 13%) .
15,800 2,054
12 Unearned Revenue ....................... HST Payable ............................ Service Revenue .....................
805 6,195
7,000
14 HST Payable.................................. 11,390 Cash .........................................
11,390
15 CPP Payable.................................. EI Payable ..................................... Income Tax Payable ..................... Cash .........................................
7,734
2,152 1,019 4,563
16 Cash............................................... 18,000 Notes Payable .........................
18,000
17 Accounts Payable......................... 35,000 Cash .........................................
35,000
20 Accounts Receivable.................... 33,900 Sales (500 × $60) ..................... HST Payable ($30,000 × 13%) .
30,000 3,900
30
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Unearned Revenue- Loyalty Program...................................... 1,750 HST Payable ($1,549 × 13%) ... Service Revenue ($1,750 ÷ 1.13)
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PROBLEM 10-5B (Continued) (a) (Continued) Jan.
31 Cash ............................................500,000 Sales ........................................ Unearned Revenue–Loyalty Program
495,050 4,950
Stand-alone sales ................................... $500,000 Stand-alone value of loyalty points 5,000 (50,000 × 10% × $1) ................................. Total Value .............................................. $505,000 Allocate as follows: Earned revenue = ($500,000/$505,000) x $500,000 = $495,050 Unearned revenue = ($5,000/$505,000) x $500,000 = $4,950 31 Warranty Liability ...................... Repair Parts Inventory .........
875 875
31 Salaries Expense....................... 25,350 CPP Payable.......................... EI Payable ............................. Income Tax Payable ............. Salaries Payable ...................
1,183 464 4,563 19,140
31 Salaries Payable ........................ 19,140 Cash.......................................
19,140
(b) Jan. 31 Interest Expense ....................... Interest Payable .................... [($18,000 × 6% × 1/12) × 1/2]
45
31 Warranty Expense ..................... Warranty Liability ................. (500 × 6% × $10)
300
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45
300
31 Employee Benefits Expense..... 2,847 CPP Payable.......................... EI Payable ($464 × 1.4) ......... Vacation Pay Payable ($25,350 × 4%)
1,183 650 1,014
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PROBLEM 10-5B (Continued) (c) ZAUR COMPANY (Partial) Balance Sheet January 31, 2017 Liabilities Current liabilities Accounts payable ($63,700 – $35,000) ...................... Notes payable ............................................................. Vacation pay liability ($9,120 + $1,014) ..................... Unearned revenue ($16,000 – $7,000)........................ Unearned revenue–loyalty program ($2,150 – $1,750 + $4,950).................................................................. HST payable ($11,390 + $2,054 + $805 – $11,390 + $3,900 + $201)...................................................... Warranty liability ($5,750 – $875 + $300) ................... Income tax payable ($4,563 – $4,563 + $4,563) ......... CPP payable ($2,152 – $2,152 + $1,183 + $1,183) ..... EI payable ($1,019 – $1,019 + $464 + $650) ............... Interest payable .......................................................... Total current liabilities ...........................................
$28,700 18,000 10,134 9,000 5,350 6,960 5,175 4,563 2,366 1,114 45 $91,407
Taking It Further: Most companies require employees to take their vacation as soon as possible after it is earned, usually after a year of work when the full annual entitlement is earned. This prevents the accumulation of vacation pay liability for the company, and ensures staff is rotated and cross-trained for other functions. Ensuring staff take vacation on a regular basis also results in stronger internal controls and reduces the likelihood of fraud and theft by ensuring one staff member’s work is performed by another staff member. When employees take their vacation, the Vacation Pay Payable account is debited. The credit side of the entry is the same as for regular payroll: CPP Payable, EI Payable, Income Taxes Payable, and Salaries Payable are credited.
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PROBLEM 10-6B (a)
Warranty expense 2015 – (1,200 × 5% × $25) = $1,500 2016 – (1,320 × 5% × $25) = $1,650 2017 – (1,420 × 5% × $25) = $1,775 Warranty liability at year end 2015 – ($0 – $1,275 + $1,500) = $225 2016 – ($225 – $1,600 + $1,650) = $275 2017 – ($275 – $1,960 + $1,775) = $90
Note: See analysis of Warranty Liability account in (b) below. (b) 2015 Warranty Liability ................................ Repair Parts Inventory...................
1,275
Dec. 31 Warranty Expense (1,200 × 5% × $25) Warranty Liability...........................
1,500
1,275
1,500
2016 Warranty Liability ................................ Repair Parts Inventory...................
1,600
Dec. 31 Warranty Expense (1,320 × 5% × $25) Warranty Liability...........................
1,650
1,600
1,650
2017 Warranty Liability ................................ Repair Parts Inventory...................
1,960
Dec. 31 Warranty Expense (1,420 × 5% × $25) Warranty Liability...........................
1,775
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PROBLEM 10-6B (Continued) (b) (Continued)
Date 2015 During Dec. 31 2016 During Dec. 31 2017 During Dec. 31 (c)
Warranty Liability Explanation Ref. Debit
Credit
Balance
1,500
1,275 Dr 225
1,650
1,375 Dr 275
1,775
1,685 Dr 90
1,275
1,600
1,960
Percentage of units returned for repair = Number of units returned ÷ Number of units sold Returned 2015 60 2016 70 2017 80 210
Sold 1,200 1,320 1,420 3,940
Percentage returned = 210 ÷ 3,940 = 5.3% Average actual warranty cost per unit = Total actual warranty costs ÷ Total units returned 2015 2016 2017
Actual costs $1,275 1,600 1,960 $4,835
Average warranty cost over the three-year period: $4,835 ÷ 210 = $23
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PROBLEM 10-6B (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2017 only. The January 1, 2017 opening balance in the Warranty Liability account remains at $275. The revised warranty expense for 2017 is calculated as follows: Warranty expense 2017: 1,420 × 7% × $25 = $2,485 Warranty liability at December 31, 2017: $275 – $1,960 + $2,485 = $800
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PROBLEM 10-7B (a) 1. Will reduce revenues and profit as a portion of the sales are allocated to the future performance obligation and therefore recorded as unearned revenues 2. Increases revenues and profit 3. No effect on revenues, expenses, and profit 4. Increases revenues, expenses (cost of goods sold), and profit 2016: 1.
Cash ............................................... 1,050,000 Sales .................................. 1,037,037 Unearned Revenue–Loyalty Program 12,963
Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (750,000 × $0.025 x 70%) .................................... Total Value ...................................................
$1,050,000 13,125 $1,063,125
Allocate as follows: Earned revenue= ($1,050,000/$1,063,125) x $1,050,000 = $1,037,037 Unearned revenue= ($13,125/$1,063,125) x $1,050,000 = $12,963
2. Unearned Revenue–Loyalty Program Revenue from Rewards Program
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PROBLEM 10-7B (Continued) (b) (Continued) 2017: 3. Cash ............................................... 1,255,000 Sales .................................. 1,240,983 Unearned Revenue–Loyalty Program 14,017 Stand-alone gas sales........................................ Stand-alone value of loyalty coupons (810,000 × $0.025 x 70%) .................................... Total Value ...................................................
$1,255,000 14,175 $1,269,175
Allocate as follows: Earned revenue= ($1,255,000/$1,269,175) x $1,255,000 = $1,240,983 Unearned revenue= ($14,175 /$1,269,175) x $1,255,000 = $14,017
4. Unearned Revenue–Loyalty Program Revenue from Rewards Program
9,500
5. Cash ...................................................... Unearned Revenue .......................
3,950
Unearned Revenue .............................. Sales .............................................
1,500
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PROBLEM 10-7B (Continued) (c) Date 2016 During Dec. 31 2017 During Dec. 31
Date 2017 During Dec. 31
Unearned Revenue–Loyalty Program Explanation Ref. Debit Credit Balance 12,963
12,963 7,013
14,017 9,500
21,030 11,530
Unearned Revenue Explanation Ref. Debit
Credit Balance
5,950
3,950 1,500
3,950 2,450
Taking It Further: Management should consider the following factors: The historical rate of redemption on the service coupons should be reviewed and revised as needed to ensure an appropriate amount of revenue is being recorded and an appropriate amount of revenue is being deferred. The likelihood of redemption of the gift cards. Factors such as long periods of inactivity by customers, or low residual balances increase the likelihood that the cards will not be used. Unearned revenue linked to gift cards where the likelihood of use is remote should be transferred to a revenue account.
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PROBLEM 10-8B 1.
Note disclosure: Since the amount of the liability cannot be reliably measured, the lawsuit cannot be recorded, but it should be disclosed.
2.
It appears that it is unlikely that Big Fork will lose the lawsuit; therefore the company does not need to record or report it in the notes to the financial statements. If the loss from the lawsuit could have a substantial negative effect on the company’s financial position, then note disclosure is still desirable.
3.
Accrue in the financial statements: It appears likely that the company will lose this claim as it was at fault and the claim of $250,000 appears to be a reasonable estimate.
Taking It Further: Making an accrual for a contingency reflects the impact of the loss on the current year’s profit. This allows users of financial statements to make better informed decisions. If the contingency is only reflected in the notes and not accrued, its impact on the financial results is not as readily visible. Also, by reflecting the amounts in the financial statements, this improves the ability of users to generate meaningful ratios. The cost of accruing a contingency is that companies must be very careful in wording the information in order to avoid the appearance of admitting culpability in matters that are not fully resolved. In addition, until the loss and liability are likely and measurable, the company risks damaging its ability to attract investors or obtain credit by portraying weaker financial results if the loss and liability are not realized in a later period.
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PROBLEM 10-9B (a) SCOOT SCOOTERS Payroll Register Week Ended February 17, 2015 Earnings Gross Employee Hours Regular Overtime Pay CPP P. Kilchyk 40 $610.00 0 $610.00 $26.86 B. Quon 42 600.00 $45.00 645.00 28.60 C. Pospisil 40 650.00 0 650.00 28.84 B. Verwey 44 580.00 87.00 667.00 29.68 Totals $2,440.00 $132.00 $2,572.00 $113.98
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Deductions Income United EI Tax Way Total Net Pay $11.16 $76.60 $5.00 $119.62 $490.38 11.80 83.70 7.25 131.35 513.65 11.90 84.10 5.50 130.34 519.66 12.21 87.10 8.25 137.24 529.76 $47.07 $331.50 $26.00 $518.55 $2,053.45
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PROBLEM 10-9B (Continued) (b) Feb.15
Salaries Expense ..........................2,572.00 CPP Payable.......................... 113.98 EI Payable.............................. 47.07 Income Tax Payable ............. 331.50 United Way Contributions Payable 26.00 Salaries Payable ................... 2,053.45
15 Employee Benefits Expense ........ 282.76 CPP Payable.......................... EI Payable ($47.07 × 1.4) ...... Vacation Pay Payable ........... ($2,572.00 × 4%)
113.98 65.90 102.88
(c) Feb.17
Salaries Payable ...........................2,053.45 Cash....................................... 2,053.45
(d) Mar.15
CPP Payable ($113.98 + $113.98). 227.96 EI Payable ($47.07 + $65.90)........... 112.97 Income Tax Payable ....................... 331.50 Cash.......................................
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PROBLEM 10-9B (Continued) Taking It Further: The owner of a proprietorship is not considered an employee for income tax purposes. Since the business is not a separate legal entity, the owner is considered to own all of the profit of the business and is taxed on his/her personal income tax return for the profit of the business and not on the drawings. Income tax payments are usually made through the payment of instalments rather than through monthly remittances with the employees’ payroll. Business profit is not considered insurable profit for EI purposes, so no EI is deducted from business profit or drawings. Business profit is considered pensionable profit for CPP and the owner must make CPP remittances on the business profit. This is accomplished through the owner’s personal income tax return and is not calculated or remitted as part of the payroll function.
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PROBLEM 10-10B (a) Apr. 4 Union Dues Payable ........................... Cash................................................ 7
13
Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................
1,285 1,285 1,134 756 1,890
CPP Payable ....................................... 6,907 EI Payable ........................................... 3,320 Income Tax Payable ........................... 14,364 Cash................................................
20 Workers’ Compensation Payable ...... Cash................................................
24,591
3,780 3,780
28 Salaries Expense................................ 83,160 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable ........ Salaries Payable ............................
3,799 1,522 15,800 1,414 1,247 59,378
28 Salaries Payable ................................. 59,378 Cash................................................
59,378
28 Employee Benefits Expense.............. 14,246 CPP Payable................................... EI Payable ($1,522 × 1.4) ............... Workers’ Compensation Payable ($83,160 × 5%) ................................ Vacation Pay Payable ($83,160 × 4%) Life Insurance Payable ($83,160 × 1%)
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PROBLEM 10-10B (Continued) (b)
Date Apr. 1 13 28 28
Date Apr. 1 13 28
Date Apr. 1 13 28 28
Date Apr. 1 20 28
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Canada Pension Plan Payable Explanation Ref. Debit Credit Balance Balance
6,907 3,799 3,799
Income Tax Payable Explanation Ref. Debit Balance
6,907 0 3,799 7,598
Credit Balance
14,364 15,800
14,364 0 15,800
Employment Insurance Payable Explanation Ref. Debit Credit Balance Balance
3,320 1,522 2,131
3,320 0 1,522 3,653
Workers’ Compensation Payable Explanation Ref. Debit Credit Balance Balance
3,780 4,158
10-98
3,780 0 4,158
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PROBLEM 10-10B (Continued) (b) (Continued)
Date Apr. 1 4 28
Date Apr. 1 7 28
Date Apr. 1 28
Date Apr. 1 7 28
Date Apr. 1 28 28
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Union Dues Payable Explanation Ref. Debit Balance
Credit Balance
1,285 1,414
1,285 0 1,414
Disability Insurance Payable Explanation Ref. Debit Credit Balance Balance
1,134 1,247
Vacation Pay Payable Explanation Ref. Debit Balance
Credit Balance
3,326
Life Insurance Payable Explanation Ref. Debit Balance
756 832
Balance
59,378
10-99
756 0 832
Credit Balance
59,378
3,024 6,350
Credit Balance
Salaries Payable Explanation Ref. Debit
1,134 0 1,247
0 59,378 0
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PROBLEM 10-10B (Continued) Taking It Further: The employee earning record is required to determine the employee’s total earnings and total deductions for the year. This document is used to prepare the annual T4 slip that is required for the employee’s income tax filing requirement. This information is also filed with CRA by the employer. The employee earning record also helps the employer determine when the employee has reached maximum pensionable and insurable earnings for CPP and EI purposes. The earning record is also used for other requirements such as the statement of earnings for EI benefits purposes. The payroll register contains the current pay information for all employees for a particular pay period. It allows the company to accumulate gross pay, CPP, EI, Income tax, and other amounts withheld from the employees’ pay. The summary information can then be used to prepare the journal entry and paycheques for each employee.
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PROBLEM 10-11B (a) CREATIVE CARPENTRY (Partial) Balance Sheet March 31, 2017 Current liabilities Bank indebtedness ............................................... Accounts payable ................................................. Warranty liability .................................................... CPP payable ........................................................... EI payable............................................................... Vacation pay payable ............................................ Income tax payable................................................ HST payable ........................................................... Interest payable ..................................................... Unearned revenue ................................................. Notes payable ........................................................ Current portion of mortgage payable ................... Total current liabilities ...................................... (b)
$ 55,200 60,000 12,500 2,300 1,750 1,200 25,000 12,250 8,000 9,385 30,000 50,000 $267,585
Current assets: $184,000 + $120,600 + $500 = $305,100 Current ratio: $305,100 ÷ $267,585 = 1.14:1 Acid-test ratio: $184,000 ÷ $267,585 = 0.69:1
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PROBLEM 10-11B (Continued) (c)
Creative Carpentry did not show any cash on the trial balance because the bank account is in overdraft which represents a loan to Creative from the bank. Creative is using its line of credit to pay off its current liabilities, until its accounts receivable are collected and can provide cash for use in operations. The current ratio is low, but Creative still has $25,000 available in its line of credit for immediate cash needs.
Taking It Further: When customers purchase gift cards from Creative Carpentry, no goods or services have yet been delivered by the business to earn the cash obtained. Consequently, the amount received for the gift cards is initially recorded to the Unearned Revenue account. Later on, when the card is redeemed, the Unearned Revenue account is reduced for the value redeemed and revenue is recorded, along with sales taxes if applicable. This fulfills the revenue recognition principle of accounting and provides a fair reporting of when revenue is being earned.
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PROBLEM 10-12B
(a) BCE INC. (Partial) Balance Sheet December 31, 2014 (in millions of dollars) Current liabilities Trade payables and other liabilities ..................... Current tax liabilities ............................................. Dividends payable ................................................. Interest payable ..................................................... Debt due within one year ...................................... Total current liabilities ...................................... (b)
$4,398 269 534 145 3,743 $9,089
Current assets: $142 + $424 + $333 + $198 + $379 + $3,069 = $4,545 Current ratio: $4,545 ÷ $9,089 = 0.50:1 Acid-test ratio: ($142 + $424 + $3,069) ÷ $9,089 = 0.40:1
(c)
Current ratio Dec. 31, 2013: $5,070 ÷ $7,890 = 0.64:1 Acid-test ratio Dec. 31, 2013: ($335 + $3,043) ÷ $7,890 = 0.43:1 Both the current and acid-test ratios weakened in 2014.
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PROBLEM 10-12B (Continued) Taking It Further: In assessing liquidity, we should also look at the receivables and inventory turnover ratios to ensure that the current assets are liquid. A slow-down in the turnover ratios of receivables and inventory would trigger an increase in current assets and in the current ratio, but would signal a decrease in the liquidity of receivables and inventory. We should also look at the difference between the acid-test ratio and the current ratio. The acid-test ratio uses only the liquid current assets (those than can be converted to cash readily). A significant difference between the current ratio and the acid-test ratio may indicate that the company has less short-term liquidity. In the case of BCE Inc. the acid-test and current ratios are relatively close, indicating that the company has a high proportion of liquid current assets. Other factors to consider include general economic and industry conditions, as well as comparisons with ratios from other companies in the same or related industries.
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Accounting Principles, Seventh Canadian
*PROBLEM 10-13B (a) SLOVAK PLUMBING COMPANY Payroll Register Week Ended May 12, 2015
Employee D. Quinn K. Holub A. Lowhorn I. Kostra Totals
Gross Pay $985.00 1,037.00 1,080.00 950.00 $4,052.00
CPP $45.43 1 48.00 2 50.13 3 43.69 4 $187.25
Deductions Federal Ontario Total EI Income Tax Income Tax Deductions Net Pay 5 $111.45 $56.70 $232.10 $752.90 $18.52 6 113.65 57.90 239.05 797.95 19.50 7 130.95 65.20 266.58 813.42 20.30 8 87.40 48.70 197.65 752.35 17.86 $443.45 $228.50 $935.38 $3,116.62 $76.18
1. CPP = ($985.00 – [$3,500 ÷ 52]) × 4.95% = $45.43 2. CPP = ($1,037.00 – [$3,500 ÷ 52]) × 4.95% = $48.00 3. CPP = ($1,080.00 – [$3,500 ÷ 52]) × 4.95% = $50.13 4. CPP = ($950.00 – [$3,500 ÷ 52]) × 4.95% = $43.69 5. EI = $985.00 × 1.88% = $18.52 6. EI = $1,037.00 × 1.88% = $19.50 7. EI = $1,080.00 × 1.88% = $20.30 8. EI = $950.00 × 1.88% = $17.86
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*PROBLEM 10-13B (Continued) (b) Semi-monthly Payroll Ended May 15, 2015:
Employee B. Dolina H. Koleno A. Krneta
Annual Salary
Gross Pay
CPP 4.95%
$80,700 62,500 44,120
$3,362.50 $159.23 1 2,604.17 121.69 2 1,838.33 83.78 3
EI 1.88% $63.22 4 48.96 5 34.56 6
1. CPP = ($3,362.50 – [$3,500 ÷ 24]) × 4.95% = $159.23 2. CPP = ($2,604.17 – [$3,500 ÷ 24]) × 4.95% = $121.69 3. CPP = ($1,838.33 – [$3,500 ÷ 24]) × 4.95% = $83.78 4. EI = $3,362.50 × 1.88% = $63.22 5. EI = $2,604.17 × 1.88% = $48.96 6. EI = $1,838.33 × 1.88% = $34.56 (c) Pay period in which CPP maximum is reached = Maximum annual employee CPP contribution ÷ semi-monthly contribution for the employee (the answer is rounded up since the maximum is reached in the next pay period). Pay period in which EI maximum is reached = Maximum annual employee EI premium ÷ semi-monthly premium for the employee (the answer is rounded up since the maximum is reached in the next pay period). B. Dolina: Pay period in which CPP maximum is reached = $2,479.95 ÷ $159.23 = 15.57; rounded up to pay period 16 (August 31). Pay period in which EI maximum is reached = $930.60 ÷ $63.22 = 14.72; rounded up to pay period 15 (August 15).
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*PROBLEM 10-13B (Continued) (c) (Continued) H. Koleno: Pay period in which CPP maximum is reached = $2,479.95 ÷ $121.69 = 20.38; rounded up to pay period 21 (November 15). Pay period in which EI maximum is reached = $930.60 ÷ $48.96 = 19.01; rounded up to pay period 20 (October 31). A. Krneta: Her annual salary is less than the maximum pensionable earnings and the maximum insurance earnings. She will not reach the maximum CPP and EI payments for 2015. Taking It Further: The payroll tables are prepared for various pay periods used by different companies, or for different groups of employees of the same company. The amounts deducted for CPP, EI, and income taxes depends on the length of the pay period, thus different tables are necessary.
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CUMULATIVE COVERAGE: CHAPTERS 3 TO 10 (a) 1.
July 31 Operating Expenses.................. Accounts Receivable ................ Cash.......................................
2.
3.
4.
5.
50 650 700
31 Bad Debt Expense ..................... 1,850 Allowance for Doubtful Accounts ($3,850 − $2,000) ................... 31 Interest Receivable.................... Interest Revenue ($10,000 × 8% × 1/12 months)
1,850
67 67
31 Cost of Goods Sold ....................... 6,700 Merchandise Inventory ($45,900 − $39,200) ...............
6,700
31 Operating Expenses...................... 5,500 Prepaid Expenses .................
5,500
6.
31 Depreciation Expense ($5,600 + $5,120) ........................ 10,720 Amortization Expense ................. 15,000 Accumulated Depreciation —Building.............................. Accumulated Depreciation —Equipment ......................... Accumulated Amortization —Patent ................................. Calculations Building ($155,000 − $15,000) ÷ 25 years = $5,600 Equipment ($25,000 − $12,200) × 40%* = $5,120 *(2 × 1 ÷ 5 years) Patent $75,000 ÷ 5 years = $15,000
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CUMULATIVE COVERAGE (Continued) (a) (Continued) 7.
July 31 Interest Expense ....................... Interest Payable ($124,200 × 6% × 1/12) ..........
621
31 Operating Expenses.................. Warranty Liability..................
1,975
8.
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CUMULATIVE COVERAGE (Continued) (b) LEBRUN COMPANY Adjusted Trial Balance July 31, 2017 Debit $ 15,850 200 39,150
Credit
Cash .......................................................... Petty cash ................................................. Accounts receivable ................................ Allowance for doubtful accounts ............ $ 3,850 Note receivable ........................................ 10,000 Interest receivable.................................... 67 Merchandise inventory ............................ 39,200 Prepaid expenses..................................... 10,500 Land .......................................................... 50,000 Building..................................................... 155,000 Accumulated depreciation—building ..... 16,400 Equipment................................................. 25,000 Accumulated depreciation—equipment . 17,320 Patent ........................................................ 75,000 Accumulated amortization—patent ........ 30,000 Accounts payable..................................... 78,900 Interest payable ........................................ 621 Warranty liability ...................................... 7,975 Note payable ............................................. 124,200 S. LeBrun, capital ..................................... 124,700 S. LeBrun, drawings................................. 54,000 Sales.......................................................... 750,000 Cost of goods sold ................................... 456,700 Bad debt expense..................................... 1,850 Operating expenses ................................. 188,745 Amortization expense .............................. 15,000 Depreciation expense .............................. 10,720 Interest revenue ....................................... 467 Interest expense ......................................... 7,451 Total ............................................................. $1,154,433 $1,154,433 See the following page for calculations.
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CUMULATIVE COVERAGE (Continued) (b) This format not required but is presented to show calculations. Account
Cash Petty cash Accounts receivable Allowance for doubtful accounts Note receivable Interest receivable Merchandise inventory Prepaid expenses Land Building Accumulated depreciation —building Equipment Accumulated depreciation —equipment Patent Accumulated amortization —patent Accounts payable
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Adjustments
Unadjusted Trial Balance Dr. Cr. 16,550 200
Dr
38,500
Cr. (1) 700
(1) 650
2,000
Adjusted Trial Balance Dr. Cr. 15,850 200 39,150
(2) 1,850
10,000
3,850 10,000
(3) 67
67
45,900
(4) 6,700
39,200
16,000 50,000 155,000
(5) 5,500
10,500 50,000 155,000
10,800
(6) 5,600
25,000
16,400 25,000
12,200
(6) 5,120
75,000
17,320 75,000
15,000
(6)15,000
30,000
78,900
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CUMULATIVE COVERAGE (Continued) (b) (Continued) Account Interest payable Warranty liability Note payable S. LeBrun, capital S. LeBrun, drawings Sales Cost of goods sold Bad debt expense Operating expenses Amortization expense Depreciation expense Interest revenue Interest expense Total
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Unadjusted Trial Balance Dr. Cr.
Adjusted Trial Balance Dr. Cr.
Adjustments Dr. Cr.
6,000 124,200
(7) 621
621
(8) 1,975
7,975 124,200
124,700
124,700
54,000
54,000 750,000
750,000
450,000
(4) 6,700
456,700 1,850
181,220
(2) 1,850 (5) 5,500 (8) 1,975 (1) 50
188,745
(6)15,000
15,000
(6)10,720
10,720
400
(3)
67
467
6,830 (7) 621 1,124,200 1,124,200 43,133
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7,451 43,133 1,154,433 1,154,433
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CUMULATIVE COVERAGE (Continued) (c) LEBRUN COMPANY Income Statement Year Ended July 31, 2017 Sales revenues Sales .............................................................................. $750,000 Cost of goods sold ....................................................... 456,700 Gross profit ..................................................................... 293,300 Operating and other expenses Operating expenses .................................... $188,745 Amortization expense................................. 15,000 Depreciation expense................................. 10,720 Bad debt expense ........................................ 1,850 Total expenses .......................................................... 216,315 Profit from operations..................................................... 76,985 Other revenues Interest revenue .......................................... 467 Other expenses Interest expense ......................................... 7,451 ... 6,984 Profit..................................................................................... $70,001
LEBRUN COMPANY Statement of Owner’s Equity Year Ended July 31, 2017 S. LeBrun, capital, August 1, 2016 ................................. $124,700 Add: Profit........................................................................ 70,001 194,701 Less: Drawings................................................................ 54,000 S. LeBrun, capital, July 31, 2017 .................................... $140,701
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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet July 31, 2017 Assets Current assets Cash ($15,850 + $200)................................................. $ 16,050 Accounts receivable ...................................... $39,150 Less: Allowance for doubtful accounts ...... 3,850 35,300 Note receivable ........................................................... 10,000 Interest receivable ...................................................... 67 Merchandise inventory............................................... 39,200 Prepaid expenses ....................................................... 10,500 Total current assets ............................................... 111,117 Property, plant, and equipment Land ............................................................. 50,000 Building .........................................$155,000 Less: Accumulated depreciation 16,400 138,600 Equipment ................................. 25,000 Less: Accumulated depreciation 17,320 7,680
196,280
Intangible assets Patent .......................................................... Less: Accumulated amortization ...............
45,000
75,000 30,000
Total assets ....................................................................... $352,397
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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet (Continued) July 31, 2017 Liabilities and Owner’s Equity Current liabilities Accounts payable ....................................................... Interest payable .......................................................... Warranty liability......................................................... Current portion of note payable ................................ Total current liabilities ...........................................
$ 78,900 621 7,975 1,680 89,176
Long-term liabilities Note payable ($124,200 − $1,680) ................................. 122,520 Total liabilities ............................................................ 211,696 Owner’s equity S. LeBrun, capital ......................................................... 140,701 Total liabilities and owner’s equity ............................. $352,397
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BYP10-1 FINANCIAL REPORTING PROBLEM (a)
Total current liabilities at August 31, 2014, were $175,725,000. There was a $7,341,000 increase from the previous year ($175,725,000 – $168,384,000), which was equivalent to a 4.4% increase ($7,341,000 ÷ $168,384,000).
(b) The first of two components of total current liabilities on August 31, 2014 was accounts payable and accrued liabilities for the lion’s share of the total followed by a modest amount for provisions. Since provisions usually involve estimates, the order used by Corus was liquidity order. (c)
Current ratio: 2014 $217,394,000 ÷ $175,725,000 = 1.24:1 Current ratio: 2013 $310,070,000 ÷ $168,384,000 = 1.84:1 Receivables turnover: 2014 $833,016,000 ÷ [($183,009,000 + $164,302,000) ÷ 2] = 4.8 times Receivables turnover: 2013 $751,536,000 ÷ [($164,302,000 + $163,345,000) ÷2] = 4.6 times While the current ratio has deteriorated substantially, showing poor liquidity, the receivables turnover is very similar and slightly better than 2013.
(d)
As footnoted at the bottom of the Consolidated Statement of Financial Position, Corus directs us to the discussion of contingencies in note 27 to its financial statements. A very short paragraph describes litigation matters arising out of the ordinary course and conduct of the business. In management’s opinion, the exposure from these matters is considered not material to the financial statements.
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BYP10-2 INTERPRETING FINANCIAL STATEMENTS Loblaw does not accrue legal proceedings, as they are not expected to have a material impact on the reported results. It also does not accrue the class action proceedings as the company cannot predict the outcome with certainty. These class action proceedings however, if successful, would result in material losses for the company and it is desirable to disclose these items because they would have a substantial negative effect on the company’s financial position.
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BYP10-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.
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BYP10-4 COMMUNICATION ACTIVITY
RE: TO: FROM: DATE:
Accounting for Gift Certificates Show_Time_Movie_Theatre@gmail.com Student@gmail.com
In response to your request, I wish to answer your questions regarding the accounting for gift certificates in your theatre. (a)
A liability is recorded when these certificates are sold because there is still a service to be provided by the theatre. The certificates sold are considered unearned revenue until they are redeemed and the service provided. At this point, the theatre's obligation is fulfilled and the amounts can be transferred from a liability account to a revenue account. The foregoing applies even though the gift certificates may, as you suggest, also generate additional revenues for the theatre.
(b) Since the gift certificates have no expiry date, the theatre will always have a liability for any gift certificates produced and redeemed. However, based upon the experience of your theatre and the theatre industry in general, estimates could be developed for the proportion of gift certificates that will never be redeemed. An entry would be made to reduce the liability related to unearned revenue, and to record the estimated amount that will never be redeemed as earned (or perhaps as a gain), rather than carrying an unlikely liability on your books in perpetuity.
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BYP10-5 “ALL ABOUT YOU” ACTIVITY (a)
Some of the factors to consider in determining if a worker is an employee or self-employed include: the level of control the payer has over the worker; whether or not the worker provides the tools and equipment; whether the worker can subcontract the work or hire assistants; the degree of financial risk taken by the worker; the degree of responsibility for investment and management held by the worker; the worker’s opportunity for profit; and any other relevant factors, such as written contracts.
(b) The amount of cash received each month is the gross pay less the payroll deductions: Gross pay: Less: $134.06 CPP Contribution EI Contribution 54.90 Income taxes 409.35 Cash received (net pay)
$3,000.00
598.31 $2,401.69
The total amount of cash received in a year: Annual salary ($3,000 × 12) Less deductions: CPP Contribution ($134.06 × 12) EI Contribution ($54.90 × 12) Income tax ($409.35 × 12) Cash received (net pay)
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BYP 10-5 (Continued) (c)
The total CPP paid in the year will be $134.06 × 12 = $1,608.72. Since the employee’s annual salary of $36,000 is less than the 2015 maximum pensionable earnings of $53,600, the employee will not reach the maximum annual contribution. The total EI paid in the year will be $54.90 × 12 = $658.80. The employee’s annual salary is less than the 2015 maximum insurable earnings of $49,500, so the maximum annual employee EI premium will not be reached.
(d) If you are self-employed, you will receive the full $3,000 each month. As a self-employed individual, you will be responsible for making periodic instalmentt payments to CRA for personal income tax. The amount paid in income taxes may differ depending on the expenses that you may be able to claim as a self-employed individual. If no expenses are claimed, the amount of CPP paid in a year will include the employee and the employer portion as follows: $1,608.72 × 2 = $3,217.44 If no expenses are claimed, and the individual has chosen to pay EI, the amount of EI paid in a year will include only the employee’s contribution of $658.80.
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BYP 10-5 (Continued) (e)
(f)
Consulting revenue ($3,000 × 12) Less deductions: Income tax ($409.35 × 12) CPP Contribution ($134.06 × 12 × 2) Net pay
$36,000.00 4,912.20 3,217.44 $27,870.36
Based on the calculations in (c) and (e), it is preferable to be an employee because the net pay is higher.
(g) The answer to (f) may change if there is more than one client. It would be likely that additional expenses, such as travelling to the client’s location would be incurred. As a self-employed consultant, these costs could be deductible for income tax purposes and could decrease the amount of taxes paid.
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BYP10-6 Santé Smoothie Saga
1.
The cash from the sale of gift certificates must be recorded as unearned revenue. Unearned revenue represents cash payments received in advance of earning the revenue because the service or goods has not been provided to the customer. With a gift certificate, Natalie’s business owes a recipe book and all of the supplies needed to create two cups of smoothies. This is the same rationale as deposits received for pre-made smoothies.
2.
If the sale of gift certificates is recorded as revenue, revenues on the income statement will be overstated and profit will also be overstated. The revenue is not earned until the recipe book and supplies are provided to customers. The gift certificate does not represent a good or service but rather an entitlement to receive goods in the future when they are redeemed. If the gift certificates are never used, Natalie will need to use her past experience to determine what her liability is and the likelihood of the older gift certificates being redeemed. She can then recognize revenue on gift certificates unlikely to be redeemed.
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CHAPTER 11 Financial Reporting Concepts ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Brief Problems Questions Exercises Exercises Set A
1. Explain the 1 importance of having a conceptual framework of accounting, and list the key components.
Problems Set B
1
9
1
1
2. Explain the objective of financial reporting, and define the elements of the financial statements.
2, 3, 4, 20
2
1, 10
1, 2, 4, 7
1, 2, 4, 7
3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting.
5, 6, 7, 8, 3 9, 10, 11, 21
2, 3,
1, 2, 7
1, 2, 7
4. Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.
11, 12, 13, 14, 15, 16, 17, 18, 19,
4, 5, 6, 7, 4, 5, 6, 7, 1, 2, 3, 4, 1, 2, 3, 4, 8, 9, 10, 8, 10, 11, 5, 6, 7 5, 6, 7 11 12
5. Apply the foundational concepts, assumptions and constraints of the conceptual framework to financial reporting situations.
20, 21, 22, 23, 24
11, 12, 13, 14
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1, 7, 8
1, 7, 8
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A
3A
4A 5A 6A
7A 8A 1B 2B 3B
4B 5B 6B
7B 8B
Identify violations of the components of the conceptual framework. Identify objective of financial reporting, identifying elements, and revenue and expense recognition – earnings approach. Identify contract components and prepare journal entries– revenue recognition contract based approach, multiple performance obligations. Identify elements of the financial statements – contract-based approach revenue transactions. Identify revenue recognition criteria and prepare journal entries–earnings approach. Identify contract components and prepare journal entries – revenue recognition contract-based approach, right of return. Identify concept or assumption violated and prepare entries. Explain assumptions and concepts – going concern, full disclosure. Identify violations of the components of the conceptual framework. Identify objective of financial reporting, identifying elements, and revenue and expense recognition. Identify contract components and prepare journal entries– revenue recognition contract based approach, multiple performance obligations. Identify elements of the financial statements – contract-based approach revenue transactions. Identify revenue recognition criteria and prepare journal entries–earnings approach. Identify contract components and prepare journal entries – revenue recognition contract-based approach, right of return. Identify elements, assumptions, constraints and measurement criteria. Comment on application of accounting assumptions and concepts.
Solutions Manual .
Complex
Time Allotted (min.) 45-50
Moderate
35-40
Moderate
20-25
Moderate
15-20
Moderate
20-25
Moderate
25-30
Moderate
30-35
Moderate
15-20
Complex
45-50
Moderate
35-40
Moderate
20-25
Moderate
15-20
Moderate
20-25
Moderate
25-30
Moderate
30-35
Moderate
15-20
Difficulty Level
Description
11-2
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Objectives 1. Explain the importance of having a conceptual framework of accounting, and list the key components.
Knowledge
Comprehension
Application
Analysis
BE11-1
Q11-1 E11-9
P11-1A P11-1B
2. Explain the objective of financial reporting, and define the elements of the financial statements.
Q11-2 Q11-4 BE11-2
Q11-3 Q11-11 Q11-20 E11-1 E11-2 E11-4
E11-5 E11-10 P11-1A P11-2A P11-4A P11-1B P11-2B P11-4B
P11-7A P11-7B
3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting.
Q11-5 Q11-7 Q11-10 BE11-3
Q11-6 Q11-8 Q11-9 Q11-11 Q11-21 E11-2 E11-4
E11-3 P11-1A P11-2A P11-1B P11-2B
P11-7A P11-7B
4. Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations.
Q11-13 Q11-14 Q11-17 E11-5
Q11-11 Q11-12 Q11-18 BE11-11 E11-7 E11-11
BE11-4 BE11-5 BE11-6 BE11-7 BE11-8 BE11-9 BE11-10 E11-4 E11-8 E11-10 E11-12
5. Apply the foundational concepts, assumptions and constraints of the conceptual framework to financial reporting situations. Broadening Your Perspective
Solutions Manual .
Q11-20 Q11-21 Q11-22 Q11-23 Q11-24 BE11-11 BE11-12
BE11-13 BE11-14 E11-9 E11-11
BYP11-3
11-3
P11-1A P11-2A P11-3A P11-4A P11-5A P11-6A P11-1B P11-2B P11-3B P11-4B P11-5B P11-6B
Synthesis
Q11-15 Q11-16 Q11-19 BE11-15 BE11-16 E11-6 P11-7A P11-7B
E11-10 E11-12 P11-1A P11-8A P11-1B P11-8B
E11-6 P11-7A P11-7B
BYP11-4 BYP11-5
BYP11-1 BYP11-2
Chapter 11
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
The conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribe the nature, function, and limits of financial accounting statements. It guides choices about what to present in financial statements, how to report economic events, and how to communicate such information.
2.
(a) The main objective of financial reporting is to provide information that is useful for decision-making. More specifically, the conceptual framework states that the objective of general purpose financial reporting is to provide financial information that is useful to present and potential investors, lenders, and other creditors in making decisions about a business. (b) The objective identifies the specific users to ensure that a range of possible points of view are included in fulfilling the needs of users but cannot be all things to all users.
3.
(a) Stewardship refers to the responsibility of management to acquire and use company resources in the best way possible. (b) The objective of financial reporting is to provide users with useful financial information. Users look for information in the financial statements about a company’s ability to earn a profit and generate future cash flows. Using the financial statements helps users assess stewardship.
4.
Under IFRS the elements of assets, liabilities, equity, revenue, and expenses are included, as they are in ASPE. Under revenues, IFRS includes gains and under expenses, IFRS includes losses. Under ASPE, gains and losses are defined in separate categories from revenues and expenses, but have similar basic definitions to those under IFRS.
5.
The two fundamental qualitative characteristics of financial information are: relevance and faithful representation. Accounting information has relevance if it makes a difference in a decision. Relevant information has predictive value or confirmatory value. Faithful representation shows the economic reality of events rather than just their legal form. Faithful representation is achieved if the information is complete, neutral, and free from material error. Complete information includes all information necessary to show the economic reality of the transaction.
Solutions Manual .
11-4
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Questions (Continued) 5. (Continued) Accounting information is neutral if it is free from bias intended to attain a predetermined result or encourage a particular behaviour. Accounting estimates must also be based on the best available information and be reasonably accurate to be considered free from material error. 6.
(a) The concept of materiality means that an item may be so small that failure to follow generally accepted accounting principles will not influence the decision of a reasonably careful investor or creditor. For example, the expensing of a $20 calculator would not technically be in accordance with GAAP since the calculator will probably have a useful life beyond one year. However, the cost is so insignificant that it will have no impact on users’ decisions and therefore, this GAAP deviation is not considered to be material. In addition, the cost constraint supports the expensing of the calculator. Materiality is also the criterion used in deciding whether or not an element deserves to be disclosed separately within the body of the financial statements or in the notes to the financial statements. (b) In order to be relevant to a financial statement user, a transaction or amount must make a difference to the user when making a decision. If an omission or misstatement does not influence a user, it is said to be immaterial or not material. Materiality is not only a matter of size, but also has to do with the nature of the omission or misstatement (for instance, illegal acts or contingent liabilities).
7.
The four enhancing qualitative characteristics of financial information are: comparability, verifiability, timeliness and understandability. Accounting information about a company is most useful when it can be compared with accounting information about other companies. Comparability results when different companies use the same accounting principles. Comparability is also easier when accounting policies are used consistently by a business from one accounting period to the next. Information is verifiable if two knowledgeable and independent people would agree that it faithfully represents the economic reality. The usefulness of accounting information is enhanced when it is provided on a timely basis, when it is still highly useful for decision-making. Information in financial statements must be capable of being understood by users. Understandability is enhanced by classified, clear, and concise presentation. It is assumed that the average user has a reasonable understanding of accounting concepts and procedures, and general business and economic conditions.
Solutions Manual .
11-5
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Questions (Continued) 8.
Although the transactions amount might be considered immaterial to the rest of the financial statements of a business, it does not mean that the transaction should be omitted. In order for financial statements to be relevant the financial information presented should be complete. The concept of materiality means that an item may be so small that failure to follow GAAP will not influence the decision of a reasonably careful investor or creditor. When dealing with the omission of a transaction, the framework discusses the decision to omit the transaction’s detail in the disclosure of separate elements in the body of the financial statement or in their notes.
9.
The qualitative characteristics differences of IFRS and ASPE can be highlighted in the following table: IFRS ASPE Qualitative Characteristics: Qualitative Characteristics: Fundamental Relevance Faithful representation Enhancing Comparability Verifiability Timeliness Understandability
Understandability Relevance Reliability Comparability
In ASPE, the reliability characteristic is similar in many ways to faithful representation in IFRS. ASPE includes conservatism as a component of reliability. Conservatism is similar to the prudence concept for IFRS. 10. The qualitative characteristic of relevance should be applied first because it will identify the specific information that would affect the decisions of investors and creditors and that should be included in the financial report. Once relevance is applied, faithful representation should be applied to ensure that the economic information faithfully represents the economic events being described. Taken together, relevance and faithful representation make financial reporting information decision useful. Then the enhancing qualitative characteristics—comparability, verifiability, timeliness, and understandability—are applied. They add to the decision usefulness of financial reporting information that is relevant and representationally faithful. They must be applied after the first two characteristics because they cannot, either individually or together, make information useful if it is irrelevant or not faithfully represented.
Solutions Manual .
11-6
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Questions (Continued) 11. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.” For some elements of the financial statements, reporting balances at their fair values is judged by management to be the more appropriate choice as doing so better reflects their intentions and plans for the future. Fair values are thought to be more relevant in some financial reporting situations and will provide users with more relevant information to assess the impact of changes in value on the company’s liquidity and solvency. 12. The conceptual framework specifically addresses revenue recognition because of its importance in the measurement of the performance of any enterprise. There are a variety of methods that can be used to recognize revenue and judgement needs to be applied in the selection of a method that is most appropriate for the circumstances and transactions of the business. The activities that generate revenue have become more complex and innovative over the years, making the point where revenues meet the guidelines for recognition much harder to determine. The complex transactions include “swap” transactions, “bill and hold” sales arrangements, risk-sharing agreements, complex rights of return, price-protection guarantees, and post-sale maintenance contracts to name a few. From the perspective of a financial statement user, the revenue being recognized should be the best fit for the situation and must provide a relevant measure of financial performance. 13. The revenue recognition steps used in the contract-based approach include: a) Identify the contract with a customer b) Identify the performance obligations in the contract c) Determine the transaction price (overall contract price) d) Allocate the transaction price to the performance obligations in the contract e) Recognize revenue when the performance obligations are complete.
Solutions Manual .
11-7
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Questions (Continued) 14. The revenue recognition criteria state that revenue is recognized when there is an increase in an asset or a decrease in a liability due to profitgenerating activities. Under the earnings approach the following criteria must be met for revenue to be recognized: a) Performance is complete and the seller has transferred to the buyer the significant risks and rewards of ownership; b) The seller does not have control over the goods or continuing managerial involvement; c) The amount of revenue can be reliably measured; d) It is probable there will be an increase in economic resources (that is, cash will be collected); and e) Costs relating to the sale of the goods can be reliably measured. 15. Under the contract-based approach, the revenue from the sale should be recognized when the performance obligation has been satisfied. Since the sale is for a single product, with no apparent return privileges or collection risk, the performance obligation will be satisfied when the customer, Beowulf Industries takes possession of the furniture on June 10, 2017. 16. Under the earnings approach of revenue recognition, the $10,000 cash received on March 24, 2017 should be recorded as unearned revenue since no landscaping services have yet been performed. The unearned revenue should appear as a current liability on Greenthumb’s balance sheet at April 30, 2017. The revenue from providing landscaping services should be allocated to the month in which the services are performed. In this case, the amount of $10,000 will be allocated to the five-month period from May through September 2017 at the rate of $2,000 per month. 17. Under the contract-based approach to recognize revenue, the indications that control of the services has transferred to the customer over a period of time are: a) Customer receives and consumes the benefits provided by the business at the same time b) Business creates or enhances an asset that the customer controls c) Business is not creating or enhancing an asset that it could have an alternative use for d) Business has a right to payment for performance completed to date.
Solutions Manual .
11-8
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Questions (Continued) 18. (a) Under the contract-based approach to revenue recognition, returns which can be measured reasonably will be treated as a separate performance obligation under the contract. Once that performance obligation has been completed at the end of 30 days that portion of revenue can be recognized. (b) If the potential returns cannot be estimated, the gross profit on the sale will be deferred and the sale recognized when all performance obligations have been completed. 19. I disagree. The payments for assets consumed in the same month as the month of payment and recorded as expenses do not violate the concept of a financial statement element. Those payments that benefit the organization for the current and future periods such as the annual insurance premium and the cost of the industrial oven should be broken down into the portion of the payment that is an expense for the month and the asset portion which will bring benefit to the business in future accounting periods. 20. Xiaoping has presented financial statements that are not useful because they include several business entities, some involved in the sale of goods and some involved in providing services. By violating the reporting entity principle, the information has become much less relevant in assessing the performance of each of the three businesses or her personal wealth. Comparisons of performance cannot be made with other businesses in the same industry, nor can trends be established and assessed by taking information from financial statements covering several fiscal years for each business. 21. Cost constraints are typically involved in the level of precision or detail of the financial information being provided. The value obtained for the level of precision on estimates for example or the finer detail of tracking all types of expenses might, due to materiality, exceed any benefit obtained from the additional effort that would be required. The concept of completeness is often tied to the disclosure principle. Completeness relates to the cost constraint in that disclosure may be limited due to the costs involved in getting the information ready for disclosure.
Solutions Manual .
11-9
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Questions (Continued) 22. (a)
It is assumed under the going concern assumption that the business will continue in its operations for the foreseeable future; that is, long enough to carry out its existing objectives and commitments.
(b)
As a consequence of the going concern assumption, the classification of assets and liabilities between current and non-current becomes relevant in the eyes of the financial statement user who may be assessing the business’ liquidity. The user may also be looking for some predictive value in the financial information that will determine expected future cash flows needed for replacing long-lived assets for example. In addition, the use of the historical cost basis of reporting some long-lived assets is justified by the expectation that the business will not need to liquidate these assets in the near future and management’s estimates and expectations for the use of the assets for the long-term can be achieved.
23. The cost constraint is a pervasive constraint that ensures the value of the information provided is greater than the cost of providing it. Cost constraints are typically involved in the level of precision, detail of the financial information being provided, or the details involved in the disclosure process. 24. The periodicity concept ties in with the timeliness concept which in turn enhances the main qualitative characteristic of relevance. The periodicity concept (also sometimes referred to as the time period concept) guides businesses in dividing up their economic activities into distinct time periods. The accrual basis of accounting is also closely tied to the periodicity concept. Together these concepts provide timely information to financial statement users who can make comparisons, and assess trends quickly in order to react appropriately to the financial information.
Solutions Manual .
11-10
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 (a) (b) (c) (d) (e) (f)
F T F T T T
BRIEF EXERCISE 11-2 (a) (b) (c) (d) (e) (f)
4. 2. 1. 5. 3. 1.
Revenues Liabilities Assets Expenses Equity Assets
BRIEF EXERCISE 11-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)
4 6 3 5 7 10 1 9 8 2 11
Solutions Manual .
11-11
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 11-4 Revenue of $250,000; the value of the work completed in March. Salaries expense of $75,000.
BRIEF EXERCISE 11-5 Using the contract–based approach, the company should recognize sales in the amount of 98% of the invoice amount of $450,000 or $441,000 in the month of September and the $9,000 should be recorded to Unearned Revenue.
BRIEF EXERCISE 11-6 The critical event in the sales transaction is the legal possession of the merchandise, which occurs based on the shipping terms. In this case since the shipping terms are FOB shipping point, the sale occurs on November 29, 2017. Accounts Receivable ............................ Sales ............................................... Cost of Goods Sold ............................... Merchandise Inventory ..................
350,000 350,000 200,000 200,000
The amount of gross profit recognized in November is $150,000 ($350,000 - $200,000)
Solutions Manual .
11-12
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 11-7 Although the customer, Ragnar Company has taken possession of the goods, Willow Appliance Company has not fulfilled all of the revenue recognition criteria. Willow is not able to reasonably estimate the probability of collection. Consequently, under the earnings approach, the gross profit on the sale is deferred until the collection is received. Accounts Receivable ............................ Deferred Gross Profit..................... Merchandise Inventory ..................
25,000 6,000 19,000
BRIEF EXERCISE 11-8 Step Description 1 Is there a contract? 2
What is the performance obligation(s)?
3
What is the transaction price?
4
Is there a need to allocate the transaction price?
5
Has the performance obligation(s) been satisfied?
Solutions Manual .
Criteria to be met and discussion Yes, a contract was signed April 3, 2017. There are two performance obligations: 1) the delivery of the microprocessors to Thompson Industries and 2) the obligation to accept returns. The transaction price is $35,000 (5,000 x $7) less the estimated refund liability of 5% ($1,750) for a net amount of $33,250. Sales will be in the amount of $33,250 and the refund liability will be $1,750 for expected returns. Yes, on June 3, 2017 Flin Flon will recognize sales of $33,250 when it delivers the goods to Thompson who takes control (possession and legal title has transferred) of the goods.
11-13
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 11-9 Operating expenses from adjusted trial balance Add: Loss on damaged inventory Accrual of sales commissions expense Total operating expenses
$55,000 4,000 2,500 $61,500
BRIEF EXERCISE 11-10 1.
The measurement criterion for historical cost has been violated. The accountant should not have recorded the increase in the value from the original cost to the fair value as this is not allowed under ASPE.
2. There is a violation of revenue recognition criteria. Since the musical production for which the ticket sales were made has not yet taken place by the end of January, none of the revenue had been earned. Instead, Unearned Revenue should have been credited in the entry made by the accountant.
BRIEF EXERCISE 11-11 (a) (b) (c) (d) (e) (f) (g)
3. 5. 1. 1. 4. 6. 2.
Full disclosure Expense recognition Revenue recognition Revenue recognition Historical cost Realizable value Matching
BRIEF EXERCISE 11-12 (a) (b) (c)
Yes Yes No
Solutions Manual .
11-14
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 11-13 (a) (b) (c)
Yes Yes Yes
BRIEF EXERCISE 11-14 (a) (b) (c) (d) (e)
1. 2. 3. 4. 6.
Going concern assumption Reporting entity concept Full disclosure Monetary unit Periodicity
Solutions Manual .
11-15
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 11-1 1. Asset 2. No element exists as the benefit to the business is not measurable and is not the result of an exchange. 3. Liability 4. No element exists as the benefit to the business is not measurable and is not the result of an exchange. 5. Liability EXERCISE 11-2 (a) (b) (c) (d) (e) (f) (g) (h)
3 4 6 6 2 7 1 5
EXERCISE 11-3 1. 2. 3. 4.
Feedback value Free from material error Complete Predictive value
Solutions Manual .
11-16
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 11-4 Step Question 1. What kind of contract does Leo Legal Services have with the customer? 2. What is Leo’s performance obligation? 3. 4.
5.
What is the transaction price? Should the transaction price be allocated? If so, how? When should Leo recognize revenue from this contract?
Answer One month of legal services by Leo Legal Services to J & J Home Inspections The performance obligation for Leo is to provide one month of legal services. The transaction price is $5,000. Since there is only one performance obligation, there is no allocation needed. The performance obligation will be satisfied by the end of the month at which time the revenue will have been earned from the contract.
EXERCISE 11-5 1. 2. 3. 4. 5. 6. 7. 8.
Contract-based approach Earnings approach Contract-based approach Contract-based approach Contract-based approach Earnings approach Earnings approach Contract-based approach
Solutions Manual .
11-17
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 11-6 1.
This is a violation of the cost measurement concept, because the inventory was recorded at its estimated fair value and not its cost. The correct journal entry is: Merchandise inventory.......................... Cash ................................................
42,000 42,000
2.
This is a violation of the reporting entity concept. The treatment of the transaction treats Evan Ellis and Ellis Company as one entity when they are two separate entities. No journal entry should have been made since Evan Ellis should have used personal assets to purchase the computer. If cash assets of the company were used, the debit entry could be to Accounts Receivable—E. Ellis, or to E. Ellis, Drawings and the credit entry to Cash.
3.
There is no violation of generally accepted accounting principles. The merchandise inventory is properly reported at the lower of cost and net realizable value.
4.
This is a question of matching, materiality, and cost constraint. In theory, the coffee machine should be depreciated to match the expense with revenue, since the coffee machine has an estimated useful life of 5 years. However, because the cost of the coffee machine is not material, the cost of accounting for it as a long-lived asset will exceed any benefits from doing so. Office Expense ....................................... Cash ...............................................
5.
50 50
This is a violation of the revenue recognition criteria. The revenue should be recognized when the service is provided in April. When the cash is received, it should be credited to an unearned revenue account until the revenue is earned. Cash ....................................................... Unearned Revenue........................
Solutions Manual .
11-18
650 650 Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 11-7 March sales = 350 × $760 = $266,000 for services performed from May-September (5 months) June sales = 300 × $800 = 240,000 for services performed from June-September (4 months) July sales = 100 × $800 = 80,000 for services performed from July-September (3 months) Total sales $586,000 No revenue would be recorded in March or April because no services were provided. Assuming the same amount of work is provided to the customers each month from May to September, revenue would be recognized as follows: March April $266,000 $240,000 $ 80,000 Total
May $53,200
June $53,200 60,000
July August Sept. $53,200 $53,200 $53,200 60,000 60,000 60,000 26,667 26,667 26,666 $53,200 $113,200 $139,867 $139,867 $139,866
EXERCISE 11-8 1.
Byer’s Innovations Co. should record rent expense in 2017 in the amount of $6,000 for the months of November and December at the rate of $3,000 per month.
2.
The full amount of $35,000 for research must be expensed immediately as there is no assurance of any future benefit to be derived from the research activity.
3.
An estimate can be made of the amount of monthly power and water expenses that should be accrued for the month of December 2017 in the amount of $5,000 ($55,000 ÷ 11). Consequently the cost of power and water for the fiscal year will be in the amount of $60,000 ($55,000 + $5,000).
4.
No depreciation expense should be recognized in the 2017 fiscal year as the packaging equipment was not yet available for use.
Solutions Manual .
11-19
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 11-9 (a) It is advisable for Susan to prepare monthly financial statements, particularly because the business is new. It is not unusual for new business owners to experience difficulty when starting a new business, for example in areas such as product pricing and expense management. Monthly financial statements will provide Susan the necessary frequent feedback she needs concerning the results of operations. Timely information will allow Susan to react quickly and make any necessary business decisions to ensure her business’ success. (b) Since Susan’s business is quite small it is not cost effective for her to adopt IFRS. Only very large operations can justify the time, effort, and cost of implementing IFRS. Consequently, Susan should follow ASPE.
Solutions Manual .
11-20
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 11-10 (a) Financial statements help the bank assess the financial position, profitability, and liquidity of their customers. With accurate and complete financial information, the bank can determine the impact the expansion plans might have on Marc’s profitability and ability to repay any current and additional loans obtained. Financial statements will allow the bank to conduct some analysis and make comparisons of Marc’s business with other similar retail operations. (b) The bank manager wants reliable, comparable, and relevant information to determine the amount of risk the bank is taking if it is to extend a loan to Marc for his inventory expansion. GAAP requires qualitative characteristics to be embedded in accounting information. (c) Unless there is contractual relationship between the two companies, such as a guarantee for an existing loan, the two companies do not have a business relationship. The two companies should not be combined for purposes of preparing financial statements. Doing so would violate the reporting entity concept of GAAP. (d) Although the rented store space is shared space with another business, there is likely other property, plant, and equipment owned by the business that is necessary to operate the store. These assets would be depreciated and would be reported on the balance sheet at their carrying amount (i.e., cost less accumulated depreciation). As for the inventory, the measurement of this current asset should be at the lower of cost and net realizable value.
Solutions Manual .
11-21
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 11-11 (a) (b) (c) (d) (e) (f)
2. 5. 3. 1. 6. 4.
Reporting entity concept Cost constraint Completeness Going concern assumption Materiality Cost constraint
EXERCISE 11-12 1. 2. 3. 4. 5. 6. 7. 8. 9.
Revenue recognition criteria Completeness Expense recognition criteria Going concern assumption; Completeness No violation (lower of cost and net realizable value) Timeliness characteristic Historical cost Reporting entity concept Cost constraint
Solutions Manual .
11-22
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 11-1A (a) The financial statements that have been provided are not useful to the bank manager as they have not been prepared in accordance with GAAP. The banker will also want to see a Statement of Owner’s Equity and a Statement of Cash Flows. Along with properly prepared financial statements, the bank manager will also want to see the notes to the financial statements which will assist him in gathering the necessary information, required under the disclosure principle, needed to interpret the elements reported on the financial statements. (b) The reporting of assets, liabilities, revenue, and expenses is not appropriate as several GAAP have been violated in their preparation. Assets are misstated because: 1. Cash should be reported at $5,000 and the remaining amount should be reported as a long-term investment of $495,000 (or a short-term investment if the intention is to resell the shares in the near future). 2. A vehicle should be reported as property, plant, and equipment, on the balance sheet and should have depreciation expense recorded in the period. It should not have been expensed completely on the statement of income. 3. The different categories of property, plant, and equipment should be disclosed, as well as the accounting policy used for depreciation. 4. The property, plant, and equipment is misstated as the estimate of the useful life far exceeds the number of years used in the calculation of the depreciation expense.
Solutions Manual .
11-23
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-1A (Continued) (b) (Continued) 5. Depreciation expense in the amount of $75,000 has been listed as an asset on the balance sheet instead of as an expense on the income statement. 6. Inventory includes cost of goods sold which should be reported on the income statement as an expense 7. Inventory has been reported at an amount that has not been adjusted to its net realizable value and is therefore overstated. Liabilities are misstated because: 1. The liabilities on the balance sheet should be classified between current and non-current liabilities. 2. The bank loan reported on the balance sheet should be relabelled as a mortgage payable and the current and non-current portions should be split on the balance sheet. 3. The security for the mortgage payable, along with its rate of interest and terms of repayment need to be disclosed in the notes to the financial statements. 4. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. Revenues are misstated because: 1. Some of the revenues from a separate entity and business, Sumsong Appliance Store, have been incorrectly included in the sales reported on the income statement. 2. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. 3. The amount of $18,000 reported as sales for orders to be filled is not a transaction and should not be included in revenue or elsewhere on the financial statements.
Solutions Manual .
11-24
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-1A (Continued) (b) (Continued) 4. There are likely performance obligations outstanding relating to the return policy. Expenses are misstated because: 1. The income statement is missing cost of goods sold expense which has been shown as inventory on the balance sheet. 2. G. Sumsong’s personal transactions are incorrectly included as expenses of the business. 3. G. Sumsong’s drawings should not appear on the income statement as an expense but should instead be reported in the statement of owner’s equity. 4. The vehicle expense is a capital asset and should appear on the balance sheet. Depreciation expense should be recorded on the vehicle for the current year. 5. There is no interest expense reported on the mortgage payable. 6. Depreciation expense in the amount of $75,000 has been listed as an asset on the balance sheet instead of an expense on the income statement. (c) Sumsong has not followed the guidance for relevance and faithful representation. As mentioned in the details of part (b) the violations include: 1. Reporting entity 2. Revenue recognition 3. Periodicity 4. Full disclosure 5. Measurement (lower of cost and NRV for inventory and depreciation expense omission for the vehicle) 6. Historical cost (for the omission of the vehicle that was expensed)
Solutions Manual .
11-25
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-1A (Continued) (d) As mentioned in the details of part (b) there have been revenues included in the income statement that have not been realized or not based on transactions. As well there may be performance obligations outstanding on the returns of merchandise which will reduce total sales reported. The measurement problems exist for the reporting of inventory at the lower of cost and net realizable value. A write down of the inventory by $4,000 should be recorded. There was also an issue of the measurement of depreciation expense caused by not applying the appropriate useful life of some capital assets. (e) Because transactions of another business have been included in the records of the business, the reporting entity principle has been violated. Not all financial statements have been prepared. No notes to the financial statements have been provided. These are violations of the full disclosure principle.
Taking It Further: When looking at the financial statements provided, it would be very difficult to interpret the performance and financial position of Sumsong. It would also be difficult to have confidence in Gillian’s ability to determine the success or failure of the business due to the extremely poor treatment of the financial records. Consequently, I would doubt Gillian’s abilities as an owner manager.
Solutions Manual .
11-26
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-2A (a)
Financial statements help the bank assess the financial position, profitability, and liquidity of their customers. With accurate and complete financial information, the bank can determine the impact the expansion plans might have on Kamloops’s profitability and ability to repay any current and additional loans obtained.
(b)
In order to ensure that the financial information provided by Kamloops is reliable, the bank has requested that the financial statements be reviewed by an independent accountant.
(c) Current assets Add: Cost of goods in transit (1) Less: Sale has not occurred (2) Accrued sales returns (3) Eliminate prepaid advertising (4) Revised current assets *($26,000 × 5%) Current liabilities Add: Invoice for goods in transit (1) Revised current liabilities
$120,000 15,000 (8,400) (1,300)* (3,500) $121,800
Sales Less: Accrued sales returns (3) Sale has not occurred, no transfer of ownership (2) Revised sales
560,000 (1,300) (8,400) $550,300
Total operating expenses Add: Advertising expense (4) Revised total operating expenses
$106,000 3,500 $109,500
Solutions Manual .
11-27
$ 80,000 15,000 $ 95,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-2A (Continued) (c) (Continued) 1. Goods in transit must be included in inventory and accounts payable as the terms of shipment indicate that Kamloops owned the inventory as of December 31, 2017. 2. No sale has occurred. The sales amount must be removed from the accounts receivable and sales accounts. The cost of goods sold is not affected because the amount ($4,300) was still included in merchandise inventory. 3. Sales returns for the last 15 days of the fiscal year need to be accrued as a reduction of sales and a reduction of accounts receivable. The amount accrued is 5% of $26,000 or $1,300. 4. The promotional expense recorded as a prepaid expense must be expensed as there is no measurable future benefit realized as of December 31, 2017. Taking It Further: (a)
Current ratio
(b)
Current ratio
=
$ 120,000 $ 80,000
=
1.50:1
=
$ 121,800 $ 95,000
=
1.28:1
As a result of the required adjustments, Kamloops’s current ratio is considerably worse as it has reduced by from the initial 1.5 to 1.28. Since the adjustments that were required are in the same direction (reducing profit, decreasing current assets, and increasing current liabilities), there appears to be bias in the errors made by Kamloops. On the other hand, without knowing the level of training and expertise of Alphonzo, the company’s manager, who is the preparer of the financial statements, it is inappropriate to conclude if the errors were intentional.
Solutions Manual .
11-28
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 1129A (a) Step Question 1. Is there a contract? If so, describe the contract. 2. What is Santa Holiday Farm’s performance obligation(s)? 3. What is the transaction price?
4.
Is there a need to allocate the transaction price? Has the performance obligation(s) been satisfied? If so, when?
5.
Answer Delivery of one fir tree and the removal of one fir tree. 1) Deliver one fir tree. 2) Remove one fir tree. The transaction price for both performance obligations is a combined price of $60 allocated on a basis of their pre-holiday package individual selling prices. Yes. For the fir tree $42.86 ($50 ÷ $70 x $60) and the disposal service $17.14 ($20 ÷ $70 x $60) The performance obligation to deliver fir trees has been satisfied by December 31, 2017 and the removal of the fir trees will be satisfied on January 3, 2018.
(b) Cash (200 x $60) ......................................... Sales (200 x $42.86) ............................ Unearned Revenue (200 x $17.14) ..... (upon delivery of the fir trees)
12,000
Unearned Revenue ..................................... Revenue............................................... (upon removal of fir trees)
3,428
8,572 3,428
3,428
Taking It Further: Accounting standards need to change to address the needs of the financial statement users. As new types of transactions occur, for example from technological advances, standards need to be developed and applied to these new transactions or situations to maintain representational faithfulness. Solutions Manual .
11-29
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 1130A Dec. 4
Asset (Cash and Building) Liability (Bank Loan)
Dec. 10
No elements as there has been no exchange and there is no transaction.
Dec. 15
Asset (Cash and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)
Dec. 18
No elements as there has been no exchange and there is no transaction.
Dec. 20
Asset (Accounts Receivable and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)
Dec. 24
Asset (Cash) Expenses (Salaries Expense)
Dec. 31
Liability (Accounts Payable) Expenses (Utilities Expense)
Dec. 31
Asset (Accumulated Depreciation – Equipment) Expenses (Depreciation Expense)
Taking It Further: Precisely defined elements for the financial statements enhance the representational faithfulness of what is being reported. It avoids confusion on the part of the financial statement reader, particularly when making comparisons with other businesses.
Solutions Manual .
11-30
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-5A (a) 1.
Port’s performance will be complete when the tires reach the destination of Kelsee Electrocar Company. This is the point where the risks and rewards of ownership will pass to Kelsee and when Kelsee has legal title of the goods.
2.
Port has no control over the goods or continuing involvement as there are no returns expected and the warranty on the goods is provided by the manufacturer of the tires.
3.
The transaction can be measured reliably at the selling price of the tires since no sales discount is offered for early payment.
4.
There is a risk that collection will not be achieved. Port cannot determine that it is probable that collection will be received. Consequently, the probability that there will be an increase in the economic resources to Port cannot be established.
5.
The cost of the goods sold of $6,000 is known but the bad debt expense is not known.
6.
The critical event in this case that will trigger the revenue will be the collection of the account from Kelsee.
Solutions Manual .
11-31
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-5A (Continued) (b) Sept. 18, 2017 Accounts Receivable (300 x $40) .............. Deferred Gross Profit.......................... Merchandise Inventory (300 x $20) .... Nov. 4, 2017 Cash ............................................................ Accounts Receivable ......................... Cost of Goods Sold .................................... Deferred Gross Profit ................................. Sales ....................................................
12,000 6,000 6,000 12,000 12,000 6,000 6,000 12,000
Taking It Further: Additional costs that could be incurred after the sale include the cost of sales returns and allowances, sales discounts, freight on sales returns, and bad debt expenses.
Solutions Manual .
11-32
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-6A (a) The contract is to deliver to the customer 300 accounting textbooks at a price of $110 per book, to be paid September 25, 2017. (b) Nicolet’s performance obligation is to ship 300 accounting textbooks to Hinton University. (c) The transaction price is $33,000 (300 x $110). (d) The revenue from the sale of the books should be recognized on August 25, 2017. (e) August 25, 2017 Accounts Receivable ....................................... Refund Liability ($33,000 X 10%)............ Sales ........................................................ Inventory Returns (300 X 10% x $80) .............. Cost of Goods Sold.......................................... Merchandise Inventory (300 X $80)........ Sept. 15, 2017 Refund Liability (10 x $110) ............................. Accounts Receivable (10 X $110) ............ Merchandise Inventory (10 x $ 80) .................. Inventory Returns ...................................
33,000 3,300 29,700 2,400 21,600 24,000 1,100 1,100 800 800
Sept. 25, 2017 Cash ($33,000 - $1,100) .................................... Accounts Receivable ...............................
31,900
Sept. 30, 2017 Refund Liability (20 x $ 110) ............................ Cash (20 X $110) .......................................
2,200
Solutions Manual .
11-33
31,900
2,200
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-6A (Continued) (e) (Continued) Merchandise Inventory (20 x $ 80) .................. Inventory Returns ...................................
1,600 1,600
Taking It Further: Because Nicolet would have offered Hinton a cash discount for early payment, the transaction price is subject to a variable consideration and so the amount of the accounts receivable recorded on August 25, 2017 should be reduced by the sales discount if it is probable that Hinton will take advantage of the discount offered by Nicolet.
Solutions Manual .
11-34
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-7A (a) and (b) 1.
Expense recognition criteria (matching concept). The cost of equipment should not be expensed immediately. Only costs that have no probable future benefits are recognized immediately as expenses. Therefore, the following entries are necessary: Equipment................................................... Cash .....................................................
80,000 80,000
Depreciation Expense [$80,000 × (100% 5 × 2)]........................... 32,000 Accumulated Depreciation—Equipment 32,000 2.
Expense recognition criteria (matching concept). The cost of property, plant, and equipment should be allocated over its useful life in a rational and systematic manner. Deferring depreciation is not rational and systematic. Therefore, the following entry is necessary: Depreciation Expense ................................ Accumulated Depreciation .................
3.
43,000 43,000
Measurement criteria (historical cost basis). Recording the transaction at its estimated fair value would not be proper because estimated fair value in this case does not represent an exchange price (the company has not adopted the revaluation model for accounting for its property, plant, and equipment). The purchase should be recorded at cost, not at a fair value that someone believes the equipment is worth. The correct entry is: Equipment................................................... Cash .....................................................
Solutions Manual .
11-35
36,000 36,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-7A (Continued) (a) and (b) (Continued) 4.
Going concern assumption. Liquidation value is not appropriate because it assumes that the enterprise will not continue. No entry is necessary. Only when liquidation appears imminent is the going concern assumption inapplicable. Otherwise, the cost measurement basis applies.
5.
Expense recognition criteria (matching concept). Expensing the cost of the rent immediately does not allow a proper matching of the expense with the revenue that will be earned over the next 6 months. The correct entry is: Prepaid Rent ............................................... Cash .....................................................
18,000 18,000
An adjusting entry is made at December 31 to record the proper rent expense. Rent Expense.............................................. Prepaid Rent........................................
12,000 12,000
Alternatively, the entry debiting Rent Expense can be recorded, but the adjusting entry at December 31 would then be as follows: Prepaid Rent ............................................... Rent Expense ......................................
6,000 6,000
If financial statements are prepared only once at the end of the fiscal year, it really doesn’t matter what entry is made originally (although debiting an asset account such as Prepaid Rent tends to result in better internal control), as long as the correct allocation is made at year end between the asset and the expense account.
Solutions Manual .
11-36
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-7A (Continued) (a) and (b) (Continued) 6.
Measurement criteria (historical cost basis). Appreciation in value does not justify recognizing a gain on the land, until the land is sold (since Kwick Kopy has not adopted the revaluation model for accounting for its property, plant, and equipment). Appreciation does not involve an exchange transaction. No entry is necessary.
Taking It Further: A liquidation basis may be appropriate for property, plant, and equipment if the company can no longer apply the going concern assumption. In such a case, the company’s demise would be imminent and liquidation is likely.
Solutions Manual .
11-37
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-8A (a) If a company files for bankruptcy, it may not satisfy the going concern assumption. The going concern assumption is a basic assumption underlying the preparation and presentation of financial statements. When this assumption is not satisfied, the balance sheet would not be classified, since all assets and liabilities would be current. The basis of measurement of assets would be liquidation or net realizable value, rather than their carrying amounts. (b) Companies that are under bankruptcy protection would disclose in the notes to their financial statements, their plan for restructuring their operations. Since many factors may remain outside of their control, depending on the circumstances, it is possible that some of the companies will not be able to continue and cannot be viewed as a going concern. Individual companies can be expected to survive bankruptcy protection and can continue to apply the going concern assumption, but the remarks in the notes to the financial statements will be strongly worded and send a clear message of warning to users. Usually, a company has to be virtually certain that it will not continue operations in the near future in order to not apply the going concern assumption.
Taking It Further: In disclosing that a company may not be able to continue as a going concern, a company’s management faces the dilemma of a “self-fulfilling” prophecy. If a company prepares financial statements without applying the going concern assumption, this is a clear signal to users that the company’s management does not believe the company will survive beyond the coming year. This sends a clear signal to users to think in terms of liquidation; it encourages creditors to demand repayment of outstanding debt and discourages potential investors from investing in the company.
Solutions Manual .
11-38
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-1B (a) The financial statements that have been provided are not useful to the investor as they have not been prepared in accordance with GAAP. The investor will also want to see a Statement of Owner’s Equity and a Statement of Cash Flows. Along with properly prepared financial statements, the investor will also want to see the notes to the financial statements which will assist him in gathering the necessary information, required under the disclosure principle, needed to interpret the elements reported on the financial statements. (b) The reporting of assets, liabilities, revenue, and expenses is not appropriate as several GAAP have been violated in their preparation. Assets are misstated because: 1. Accounts receivable are overstated. Accounts receivable should be reported at the gross amount of $35,000 and the remaining amount of $315,000 should be reported as a long-term investment (or a short-term investment if the intention is to resell the shares in the near future). In addition, an allowance for doubtful accounts should be set up to reduce the accounts receivable to their net realizable value. 2. A building addition should be reported as property, plant, and equipment, on the balance sheet and should have depreciation expense recorded in the period. It should not have been expensed completely on the statement of income. 3. The different categories of property, plant, and equipment should be disclosed, as well as the accounting policy used for depreciation. 4. The property, plant, and equipment is misstated as the estimate of the useful life far exceeds the number of years used in the calculation of the depreciation expense.
Solutions Manual .
11-39
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-1B (Continued) (b) (Continued) Assets are misstated because: (Continued) 5. Depreciation expense in the amount of $85,000 has been listed as an asset on the balance sheet instead of an expense on the income statement. 6. Inventory includes cost of goods sold which should be reported on the income statement as an expense. Liabilities are misstated because: 1. The liabilities on the balance sheet should be classified between current and non-current liabilities. 2. The accounts payable reported on the balance sheet should be reduced by an amount reported separately as a bank loan and the current and non-current portions should be split on the balance sheet. 3. The security for the bank loan (if any), the rate of interest, and the terms of repayment need to be disclosed in the notes to the financial statements. 4. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. Revenues are misstated because: 1. Some of the revenues from a separate entity and business, a music store, have been incorrectly included in the sales reported on the income statement. 2. Customer deposits appearing on the income statement as revenues need to be reported as unearned revenue on the balance sheet. 3. The amount of $35,000 reported as sales for orders to be filled is not a transaction and should not be included in revenue or elsewhere on the financial statements.
Solutions Manual .
11-40
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-1B (Continued) (b) (Continued) Expenses are misstated because: 1. The income statement is missing cost of goods sold expense which has been shown as inventory on the balance sheet. 2. D. Zytel’s personal transactions are incorrectly included as expenses of the business. 3. D. Zytel’s drawings should not appear on the income statement as an expense but should instead be reported in the statement of owner’s equity. 4. The building expense is a capital asset and should appear on the balance sheet. Depreciation expense should be recorded on the building addition for the current year. 5. There is no interest expense reported on the bank loan. 6. Depreciation expense in the amount of $85,000 has been listed as an asset on the balance sheet instead of an expense on the income statement. (c) Zytel has not followed the guidance for relevance and faithful representation. As mentioned in the details of part (b) the violations include: 1. Reporting entity 2. Revenue recognition 3. Periodicity 4. Full disclosure 5. Measurement (allowance for doubtful accounts for accounts receivable) and depreciation expense for the building that was expensed 6. Historical cost (for the omission of the building).
Solutions Manual .
11-41
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-1B (Continued) (d) As mentioned in the details of part (b) there have been revenues included in the income statement that have not been realized or not based on transactions. The measurement problems exist for the reporting of accounts receivable at realizable value. An allowance for doubtful accounts should be created in the amount of 5% of the accounts receivable balance and a bad debt expense reported on the income statement. There was also an issue of the measurement of depreciation expense caused by not applying the appropriate useful life of some capital assets. (e) Because transactions of another business have been included in the records of the business the reporting entity principle has been violated. Not all financial statements have been prepared. No notes to the financial statements have been provided. These are violations of the full disclosure principle.
Taking It Further: Using the revaluation model, public companies following IFRS can choose to report property, plant, and equipment at their fair value, as long as a fair value can be reliably measured. Certain industries, such as investment or real estate companies, where fair values are more relevant than cost find this a logical alternative. The revaluation model is not allowed under ASPE. From the perspective of a current or potential investor more upto-date information is available to assess the value of businesses they have or are considering investing in.
Solutions Manual .
11-42
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-2B (a)
Financial statements help me as a potential partner in the business in my assessment of the business’s financial position, profitability, and ability meet its financial obligations. With accurate and complete financial information, I can assess the impact the expansion plans will have on the financial performance of the business and determine if my investment can provide me with a return that is satisfactory based on the risks associated with making my investment.
(b) Current assets Less: Inventory already sold (3) Eliminate prepaid advertising (4) Revised current assets
$90,000 (35,000) (4,800) $50,200
Current liabilities $65,000 Add: Unearned revenue from contract (1) 22,000 Unearned warranty sales (2) 10,000 Revised current liabilities $97,000 Net sales and consulting revenue Less: Reduce for unearned warranty sales (2) Less: Unearned Revenue (1) Revised net sales and consulting revenue
$650,000 (10,000)* (22,000) $618,000
Total operating expenses Add: Advertising expense (4) Revised total operating expenses * ($500 × 20)
$106,000 4,800 $110,800
1. The service contract extends for a twelve-month period and so 11 months or $22,000 remains unearned at December 31, 2017 ($24,000 × 11 ÷ 12).
Solutions Manual .
11-43
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-2B (Continued) (b)
(Continued) 2. The cash obtained from the sale of extended warranties should not be included in revenue as no warranty services have yet been delivered to earn this revenue ($500 × 20). 3. Eugene has double counted the inventory items in accounts receivable and in inventory. The merchandise inventory was sold and so the recording of the sale and corresponding cost of goods sold is correctly recorded. The amount of the cost of the items sold must be removed from the inventory count and balance. There is no impact on cost of goods sold. 4. The promotional expense recorded as a prepaid expense must be expensed as there is no measurable future benefit realized as of December 31, 2017.
Taking It Further: My review of the required revisions to Eugene Company’s financial statements leads to the recalculation of the current ratio below: Before adjustment
Current = ratio
$ 90,000 $ 65,000
=
1.38:1
After adjustment
Current = ratio
$ 50,200 $ 97,000
=
0.52: 1
As a result of the required adjustments, Eugene’s current ratio is considerably worse as it has declined from the initial 1.38 to 0.52. Since the adjustments that were required are in the same direction (reducing profit, decreasing current assets, and increasing current liabilities), there appears to be bias in the errors made by Eugene. Whether the errors are intentional or not, I have concluded that the liquidity and profitability of Eugene Company does not warrant my investment. I would look into how Eugene has arrived at the pricing of the new extended warranty program, for any possible errors in the estimates. Solutions Manual .
11-44
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-3B (a) Step Question 1. Is there a contract? If so, describe the contract. 2. What is Brilliance’s performance obligation(s)? 3. What is the transaction price?
4.
5.
Is there a need to allocate the transaction price? Has the performance obligation(s) been satisfied? If so, when?
Answer Provide one box of lights and one hour of service to hang the lights. 1) Deliver one box of lights. 2) Provide one hour of service to hang the lights. The transaction price for both performance obligations is a combined price of $110 allocated on a basis of their pre-holiday package individual selling prices. Yes. For the lights $28.52 ($35 ÷ $135 x $110) and the one hour of service to hang the lights $81.48 ($100 ÷ $135 x $110) The performance obligation to provide one box of lights has been satisfied on November 15, 2017 and the service of hanging the lights will be satisfied on December 5, 2017.
(b) Cash (40 x $110) ......................................... 4,400 Sales (40 x $28.52) .............................. 1,141 Unearned Revenue (40 x $81.48) ....... 3,259 (upon delivery of the box of lights and the collection) Unearned Revenue ..................................... 3,259 Revenue............................................... (upon completion of the installation of lights)
Solutions Manual .
11-45
3,259
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-3B (Continued)
Taking It Further: If Brilliance adds a 30-day warranty on the lights offered in their holiday package, it will need to establish the costs that are likely to be incurred for this assurance type warranty. The warranty revenue would be recognized as a separate performance obligation under the contract. In part (b) an additional liability would be recognized for the warranty liability when the cash is collected which would be adjusted to revenue 30 days later.
Solutions Manual .
11-46
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-4B Oct. 4
Asset (Cash and Building) Liability (Bank Loan)
Oct. 10
No elements as there has been no exchange and there is no transaction for the business.
Oct. 15
Asset (Cash and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)
Oct. 18
No elements as there has been no exchange and there is no transaction.
Oct. 20
Asset (Accounts Receivable and Merchandise Inventory) Revenue (Sales) Expenses (Cost of Goods Sold)
Oct. 24
Asset (Cash) Expenses (Salaries Expense)
Oct. 31
Liability (Accounts Payable) Expenses (Telephone Expense)
Oct. 31
Asset (Accumulated Depreciation – Equipment) Expenses (Depreciation Expense)
Solutions Manual .
11-47
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-4B (Continued)
Taking It Further: When estimating returns, accountants use information of past returns’ history or research the level of returns that are expected for their particular industry. Since returns can occur in an accounting period following the accounting period in which the sale was recognized, arriving at an accurate estimate of returns will become even more important. An understatement of the liability for the return obligation will result in an overstatement of profit in the year of the sale and an understatement of profit in the year when the return occurs.
Solutions Manual .
11-48
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-5B (a) 1.
Crittenden’s performance will be complete when the phones reach the destination of Joe’s Country Corner Store. This is the point where the risks and rewards of ownership will pass to Joe’s and when Joe’s has legal title of the goods.
2.
Crittenden has no control over the goods or continuing involvement as there are no returns expected and the warranty on the goods is provided by the manufacturer of the phones.
3.
The transaction can be measured reliably at the selling price of the phones since no sales discount is offered for early payment. The potential revenue is $450 (10 x $45).
4.
There is a risk that collection will not be achieved. Crittenden cannot determine that it is probable that collection will be received. Consequently, the probability that there will be an increase in the economic resources to Crittenden cannot be established.
5.
The cost of the goods sold ($300) is known but the bad debt expense is not known.
6.
The critical event in this case that will trigger the revenue will be the collection of the account from Joe’s.
Solutions Manual .
11-49
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-5B (Continued) (b) March 15, 2017 Accounts Receivable (10 x $45) ................ Deferred Gross Profit.......................... Merchandise Inventory (10 x $30) ...... April 30, 2017 Cash ............................................................ Accounts Receivable ......................... Cost of Goods Sold .................................... Deferred Gross Profit ................................. Sales ....................................................
450 150 300 450 450 300 150 450
Taking It Further: Additional costs that could be incurred after the sale include the cost of sales returns and allowances, sales discounts, freight on sales returns, and bad debt expenses.
Solutions Manual .
11-50
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 11-6B (a) Dusky’s performance obligation is completed when the 50 bracelets are in the possession of Tara’s Boutique. (b) The transaction can be reliably measured at the contract price of $4,250 (50 x $85). (c) It is probable that there will be an increase in the economic resources to Dusky from the sale. (d) The costs associated with the sale are the cost of goods sold of $1,250 (50 x $25) less 10% for estimated returns for a net of $1,125. (e) The critical event that triggers revenue recognition is the passage of the title to Tara’s when delivery of the bracelets is made. (f) June 1, 2017 Accounts Receivable ....................................... Refund Liability ($4,250 X 10%).............. Sales ........................................................ Inventory Returns (50 X 10% x $25) ................ Cost of Goods Sold.......................................... Merchandise Inventory (50 X $25).......... June 20, 2017 Refund Liability (5 x $85) ................................. Accounts Receivable ............................... Merchandise Inventory (5 x $ 25) .................... Inventory Returns ...................................
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PROBLEM 11-6B (Continued) (f) (Continued) June 30, 2017 Cash ($4,250 - $425) ......................................... Accounts Receivable ...............................
3,825 3,825
Taking It Further: If the returns could not have been estimated, all costs relating to the sale of the goods could not be reliably measured and so not all of the revenue recognition criteria would have been met.
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PROBLEM 11-7B (a) and (b) 1.
Measurement criteria (historical cost basis). Recording the equipment at its estimated fair value would not be proper because estimated fair value in this case does not represent an exchange price (since Desktop has not adopted the revaluation model for accounting for its property, plant, and equipment). The purchase should be recorded at cost, not at a fair value that someone believes the equipment is worth. The correct entry is: Equipment................................................... Cash .....................................................
60,000 60,000
2.
Measurement criteria (historical cost basis). Appreciation in value does not justify recognizing a gain on the land, until the land is sold (since Desktop has not adopted the revaluation model for accounting for its property, plant, and equipment). Appreciation does not involve an exchange transaction. No entry is necessary.
3.
Expense recognition criteria (matching concept). The cost of property, plant, and equipment should be allocated over its useful life in a rational and systematic manner. Deferring depreciation is not rational and systematic. Therefore, the following entry is necessary: Depreciation Expense ................................ Accumulated Depreciation .................
4.
18,000 18,000
Expense recognition criteria (matching concept). The equipment should not be expensed immediately. Only costs which have no probable future benefits are recognized immediately as expenses. Therefore, the following entries are necessary:
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PROBLEM 11-7B (Continued) (a) and (b) (Continued) 4. (Continued) Equipment................................................... Cash .....................................................
54,000
9,000 Depreciation Expense ($54,000 6) .......... Accumulated Depreciation—Equipment
54,000
9,000
5.
Going concern assumption. The lower of cost and fair value is a conservative characteristic of accounting information. If a loss due to impairment is anticipated, it should be recorded immediately, rather than waiting until realized. But since the company will continue using the building in the foreseeable future, it is not intended to be sold, and the value is expected to increase in the future there does not appear to be an impairment. The adjustment should not be recorded. No entry is necessary.
6.
Expense recognition criteria (matching concept). The marketing plan will be designed and implemented in 2018. To date, no revenue has been earned from the plan and no efforts spent to develop the plan. Therefore the marketing expense should be matched to revenue and recorded in 2018. No entry necessary.
Taking It Further: The revaluation model of accounting for property, plant, and equipment is an alternative method under IFRS. Under the revaluation model, the carrying amount of the equipment can be adjusted to fair value. The revaluation model can be applied only to assets whose fair value can be reliably measured, and revaluations must be carried out often enough that the carrying amount is not materially different from the asset’s fair value at the balance sheet date. Solutions Manual .
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PROBLEM 11-8B (a)
EastJet Airlines prepared its financial statement using the cost model because it satisfied the going concern assumption for its operations.
(b)
EastJet Airlines faces challenges but it is not insolvent, so not following the going concern assumption is premature and inappropriate. The company’s financial disclosure, such as its statement of earnings and balance sheet, will reflect the difficulties that the company is facing. A company has to be virtually certain that it will not continue operations in the near future in order to stop applying the going concern assumption.
Taking It Further: The full disclosure concept requires that the company provide information that can affect the financial health of a company. This disclosure involves the data in the financial statements as well as the accompanying notes. In the notes to its financial statements, EastJet Airlines is required to disclose the significant risks that it is subject to, such as interest rate, foreign exchange, liquidity, market, and fuel price risk.
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CUMULATIVE COVERAGE—CHAPTERS 6 TO 11 (a)
Information on the two companies’ accounting principles would be found in the first or second note to the financial statements. It is in the note on significant accounting policies that you would learn what inventory cost formula the company used, what depreciation method, including rates of depreciation or useful lives, and any significant estimates made by each company.
(b)
Johan Company
Nordlund Company
Cash Accounts receivable Allowance for doubtful accounts Merchandise inventory Total current assets
$ 70,300 309,700 (13,600) 477,000 843,400
$ 48,400 312,500 (20,000) 520,200 861,100
Property, plant, and equipment Accumulated depreciation (1) Net property, plant, and equipment
255,300 (188,374) 66,926
257,300 (189,850) 67,450
Total assets
$910,326
$928,550
Current liabilities Long-term liabilities Total liabilities
$440,200 78,000 518,200
$436,500 80,000 516,500
Owner’s equity (2)
392,126
412,050
Total liabilities and owner’s equity
$910,326
$928,550
Note: Supporting calculations are shown on the next page.
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CUMULATIVE COVERAGE (Continued) (b) (Continued) Calculations (1) Accumulated depreciation—Johan:
Year 1 2 3 4 5 6
Carrying Amount $255,300 204,240 163,392 130,714 104,571 83,657
DiminishingBalance Rate (10% × 2) 20% 20% 20% 20% 20% 20%
Depreciation Expense $51,060 40,848 32,678 26,143 20,914 16,731
Accumulated Depreciation $ 51,060 91,908 124,586 150,729 171,643 188,374
(2) Owner’s equity: Johan: $454,750 + $13,100 ($477,000 – $463,900) change in inventory value – $75,724 ($188,374 – $112,650) change in accumulated depreciation = $392,126 Nordlund: $432,050 – $20,000 allowance for doubtful accounts = $412,050 (c) The quality of the financial information has improved for both companies. Better comparisons can now be made between the two businesses as there is now some consistency in the way in which the accounting policies have been applied and in the way in which the estimates have been arrived at. Users of the information will not be unduly influenced by the amounts reported that may be biased - based completely on the choices of accounting policies and the use of estimates.
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BYP11-1 FINANCIAL REPORTING AND ANALYSIS (a)
Corus reports its short-term investments in marketable securities at their fair value because this basis of measurement is required under IFRS followed by Corus and because this is a more relevant measure for these particular assets which are expected to be sold in the near future.
(b)
Advertising revenues are recognized in the period in which the advertising is aired under broadcast contracts and collection is reasonably assured. Subscriber fee revenues are recognized monthly based on estimated subscriber levels for the period-end, which are based on the preceding month’s actual subscribers as submitted by the broadcast distribution undertakings. The revenue recognition criteria state that revenue is recognized when there is an increase in an asset or a decrease in a liability due to profit-generating activities. Under the earnings approach the following criteria must be met for revenue to be recognized: a) performance is complete and the seller has performed the services; b) the amount of revenue can be reliably measured; c) it is probable there will be an increase in economic resources (that is, cash will be collected); and d) costs relating to providing the services can be reliably measured.
(c)
The disclosure provided in Note 27 on commitments, contingencies, and guarantees is required as a result of the full disclosure principle. The information provides relevant information to users of the financial statements concerning Corus’s obligations and expected cash flows in the future.
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BYP11-1 (Continued) (d)
The auditors’ report adds credibility to Corus’s financial statements for users such as creditors and shareholders. In the last paragraph of their report, the auditors expressed the opinion that “the financial statements presented fairly, in all material respects, the financial position of Corus Entertainment Inc. as at August 31, 2014 and 2013 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.”
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BYP11-2 INTERPRETING FINANCIAL STATEMENTS (a)
Besides the owners, additional users of McCain’s financial statements include creditors and government entities such as the Canada Revenue Agency.
(b)
Since the vast majority of countries throughout the globe follow IFRS, it is most cost effective for McCain to adopt and follow IFRS.
(c)
In spite of the fact that McCain Foods Limited is a private company and is therefore not required to prepare financial statements in accordance with International Financial Reporting Standards, management has chosen to do so to enhance its ability to make comparison of its performance with other multinational companies that are public companies. As well, if at any time in the future McCain chooses to go public, or sells the business to an international public company already using IFRS, this decision will not cause any difficulty or delay in implementation because of the financial reporting standards followed for historical financial information.
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BYP11-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP11-4 COMMUNICATION ACTIVITY MEMO To:
President of Junk Grrlz
From:
Accountant
Re:
Revenue Recognition
The purpose of this memorandum is to provide you with my advice as to (a) when to recognize the revenue from the sale of real animal fur costs to Cheap But Good, and (b) the way in which this inventory of fur coats should be reported in the financial statements of Junk Grrlz for the year ending September 30, 2017. (a)
In arriving at a reasonable conclusion as to when to recognize revenue on the transaction with Cheap But Good, some important factors need to be taken into account. You have provided Cheap But Good a very generous return policy and arrangement for payment. No orders have been received in the last year for real fur coats. It is unlikely that you can reasonably estimate how many of the coats will be returned by Cheap But Good. In order to be fair, you cannot predict the likely results from the transaction with Cheap But Good at this time. Consequently, you will need to postpone the revenue recognition until Cheap But Good actually sells the real fur coats and pays you for their purchase. This approach would be a similar treatment to a consignment sale.
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BYP 11-4 (Continued) (b)
Also similar to the treatment of a consignment sale will be the treatment of inventory of real fur coats on your balance sheet at September 30, 2017. The items should be reported at the lower of cost and the net realizable value of the items. Should Cheap But Good succeed in selling all of the coats, you will realize a gross profit on the sale. On the other hand, if no sales are made, the items of inventory might not have any realizable value by the end of your agreement with Cheap But Good, which is December 31, 2017. You will need to estimate the probability of these two results. If you are not optimistic of Cheap But Good’s potential for obtaining sales, you will need to write down the value of the inventory to the best estimate of what you believe you will ultimately be able to obtain for these real fur coats.
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BYP11-5 “ALL ABOUT YOU” ACTIVITY (a) The bank is in the business to make profit for its shareholders at the least amount of risk. What the banker is trying to determine is what type of risk the bank is facing if they lend you money to purchase a car. To do this, the bank needs to determine your ability to repay the loan and the interest on the loan, when the amounts are due. The cash budget will tell the bank what kind of revenues and costs you expect to have during the loan period and when the corresponding cash inflows and outflows will occur. The second report will determine the amount of resources and obligations you will have at your disposal during the loan period. (b) In order for the bank manager to have confidence in you as a client, your financial information has to be complete and accurate. The qualitative characteristics of reliability and faithful representation best describe what the expectations of the bank manager are concerning the information you provide. As well, the information has to be verifiable. (c) The cash flow budget is part of your loan application and will provide information about what future cash inflows and outflows you are expected to experience. For example, when you provide information about your salary, the banker will likely ask you for a pay stub as evidence of the salary level you have provided in the loan application. If you have other sources of income, your personal income tax return might be used to provide evidence of the cash flows from additional sources of income. The bank manager could also evaluate your projected expenses by comparison with expenses from other loan applicants. (d) If it is determined that the statements you have made in your loan application are false or misleading, the bank manager will surely deny you the loan. An example of misleading information is your claim to ownership of a home, which upon investigation, using a title search, reveals is owned jointly with someone else.
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BYP11-6 Santé Smoothie Saga (a)
1. Sasha Petrolinski is not accounting for the revenue correctly. Although it is beneficial to a business to have an order to provide goods into the future, this does not constitute the earning of revenue. 2.
Sasha Petrolinski is not accounting for the purchase of brewing supplies correctly. Since Sasha has taken possession of the goods, he must recognize the liability for the purchase of the supplies, based on the shipping terms of delivery.
3.
The bank should be informed of the standing order for 150 cases of craft beer every week. This type of order is large and is also indicative of a steady source of revenue and cash flows in the future.
4.
Without any corrections to the issues mentioned above, Blazing Skies Brew’s income statement will not be representationally faithful of the operations nor will it provide relevant information to Sasha’s bank. As well, the treatment of the purchase of the supplies has the effect of showing an improved liquidity on the balance sheet from the postponement of the recording of the liability for the purchase.
(b) Revenue will be earned when the goods will be delivered and the performance obligation under the contract has been satisfied. Correspondingly, Sasha’s customers will have an obligation to pay Sasha for the goods when they are delivered and no earlier.
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BYP11-6 (Continued) (c)
The purchase of brewing supplies should be recorded based on the delivery terms of the shipment. Once Sasha takes possession of the brewing supplies, he should record the supplies and the corresponding accounts payable.
(d) Although the contractual arrangement with Libations Bar is not a transaction that is reported on the financial statements, Sasha could inform the bank of this order by showing some additional documentation concerning this order in his application for the loan.
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CHAPTER 12 Accounting for Partnerships ASSIGNMENT CLASSIFICATION TABLE Exercises
Problems Set A
Problems Set B
1
1
1, 6
1, 6
4, 5, 6
2, 3
1, 6, 13
1, 6, 12
1, 6, 12
3. Allocate and record profit or loss to partners.
7, 8
4, 5, 6, 7, 8, 9
2, 3, 4, 5, 6, 10, 13
2, 3, 4, 5, 6, 9, 12
2, 3, 4, 5, 6, 9, 12
4. Prepare partnership financial statements.
9, 10, 11
10
3, 4, 5, 6, 13
2, 3, 4, 5, 6, 12
2, 3, 4, 5, 6, 12
5. Account for the admission of a partner.
12, 13,14
11, 12
7, 8, 9, 10, 7, 9, 12 13
7, 9, 12
6. Account for the withdrawal of a partner.
15, 16
13, 14,
10, 13
8, 9, 12
8, 9, 12
7. Account for the liquidation of a partnership.
17, 18
15, 16, 17, 18
11, 12
10, 11
10, 11
Learning Objectives
Questions
1. Describe the characteristics of the partnership form of business organization.
1, 2, 3
2. Account for the formation of a partnership.
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Difficulty Level
Time Allotted (min.)
Discuss advantages and disadvantages of partnerships and record formation of partnership and prepare balance sheet. Calculate and record division of profit. Prepare closing entries.
Moderate
20-25
Moderate
25-35
Calculate and record division of profit. Prepare statement of partners’ equity. Calculate and record division of profit. Prepare statement of partners’ equity and closing entries. Prepare financial statements and closing entries.
Moderate
25-30
Moderate
25-30
Moderate
30-40
Moderate
25-30
7A
Prepare entries allocate profit and prepare financial statements. Record admission of partner.
Moderate
20-25
8A
Record admission of partner.
Moderate
20-25
9A
Record withdrawal of partner.
Moderate
20-25
10A
Record withdrawal and admission of partner; allocate profit.
Complex
25-35
11A
Prepare and post entries for partnership liquidation.
Moderate
20-30
12A
Record liquidation of partnership.
Moderate
30-40
13A
Account for the formation of a partnership, allocation of profits, and withdrawal and admission of partners; prepare partial balance sheet. Discuss advantages and disadvantages of partnerships and record formation of partnership and prepare balance sheet. Record formation of partnership and prepare closing entries.
Complex
50-60
Moderate
20-25
Moderate
25-35
1A
2A
3A 4A
5A
6A
1B
2B
Description
3B
Calculate and record division of profit. Prepare statement of partners’ equity.
Moderate
25-35
4B
Calculate division of profit or loss. Prepare statement of partners’ equity, and closing entries.
Moderate
25-35
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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
5B
Prepare financial statements and closing entries.
Moderate
30-40
6B
Moderate
25-30
7B
Prepare entries allocate profit and prepare financial statements. Record admission of partner.
Moderate
20-25
8B
Record admission of partner.
Moderate
20-25
9B
Record withdrawal of partner.
Moderate
20-30
10B
Record withdrawal and admission of partner; allocate profit.
Moderate
25-35
11B
Prepare and post entries for partnership liquidation.
Moderate
20-30
12B
Record liquidation of partnership.
Moderate
25-35
13B
Account for the formation of a partnership, allocation of profits, and admission and withdrawal of partners; prepare partial balance sheet.
Complex
50-60
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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Objective 1. Describe the characteristics of the partnership form of business organization. 2. Account for the formation of a partnership.
Knowledge Q12-1 Q12-3 BE12-1
Comprehension Q12-2
Q12-4 Q12-5 Q12-6
Application P12-1A P12-1B
BE12-2 BE12-3 E12-2 E12-3 P12-1A P12-6A
P12-12A P12-13A P12-1B P12-6B P12-12B P12-13B P12-2A P12-3A P12-4A P12-5A P12-6A P12-9A P12-10A P12-13A P12-2B P12-3B P12-4B P12-5B P12-6B P12-9B P12-10B P12-13B P12-6A P12-12A P12-13A P12-3B P12-4B P12-5B P12-6B P12-12B P12-13B P12-9A P12-10A P12-13A P12-7B P12-8B P12-9B P12-10B P12-13B P12-10A P12-12A P12-13A P12-9B P12-10B P12-12B P12-13B
3.
Allocate and record profit or loss to partners.
Q12-7 Q12-8
BE12-4 BE12-5 BE12-6 BE12-7 BE12-8 BE12-9 E12-4 E12-5 E12-6 E12-7 E12-8
4.
Prepare partnership financial statements.
Q12-9 Q12-10 Q12-11
BE12-10 E12-7 E12-8 P12-3A P12-4A P12-5A
5.
Account for the admission of a partner.
Q12-13 Q12-14
Q12-12 BE12-11 BE12-12 E12-9 E12-10 P12-7A P12-8A
6.
Account for the withdrawal of a partner.
Q12-15 Q12-16
BE12-13 BE12-14 E12-9 E12-10 E12-11 E12-12 P12-9A
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BLOOM’S TAXONOMY TABLE (Continued) 7.
Learning Objective Account for the liquidation of a partnership.
Broadening Your Perspective
Solutions Manual .
Knowledge Q12-17
Comprehension Q12-18
BPY12-2
BYP12-1
Application BE12-15 E12-16 BE12-16 E12-17 BE12-17 P12-11A BE12-18 P12-12A E12-13 P12-13A E12-14 P12-11B E12-15 P12-12B P12-13B BYP12-3 BYP12-6 Santé Saga
12-5
Analysis
Synthesis
Evaluation
BYP12-4
BYP12-5
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Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
(a)
Association of individuals: A partnership is a voluntary association of two or more individuals that can be based on an act as simple as a handshake. It is far more common and preferable to have a legal, written agreement that outlines the rights and obligations of the partners.
(b)
Limited life: A partnership does not have unlimited life. A partnership may be ended voluntarily or involuntarily. Thus, the life of a partnership is definite. In a partnership, a change in ownership ends the existing partnership. Consequently, whenever a partner withdraws from the partnership or a new partner is admitted, the partnership faces dissolution and so it is said to have a limited life. The end of the partnership can be avoided by provisions in the partnership agreement.
(c)
Co-ownership of property: In a partnership, assets are owned jointly by the partners. In the case of a dissolution, the asset originally invested into the partnership does not get returned to the partner who invested the asset.
2.
The advantages of a partnership are: (1) combining skills and resources of two or more individuals, (2) ease of formation, (3) relatively free from governmental regulations and restrictions, and (4) ease of decision-making. Disadvantages are: (1) mutual agency, (2) limited life, and (3) unlimited liability.
3.
(a) The partnership agreement should contain basic information such as the name and location of the firm, the purpose of the business, and the date of inception. In addition, the agreement should specify the names and capital contributions of the partners, the rights and duties of the partners, the basis for sharing profit or loss, provisions for withdrawal of assets, procedures for settling disputes, procedures for withdrawal or admission of a partner, the rights and duties of a surviving partner if a partner dies, and procedures for liquidating a partnership. (b) If a partnership agreement is not written, the provisions of the Partnership Act will apply to the partnership. This could include equal sharing of profit and loss, amongst other provisions, which may not meet the requirements and needs of the partners.
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QUESTIONS (Continued) 4.
(a)
The value of the partners’ investment would equal the fair value of the contributed assets at the date of their transfer to the partnership.
(b) This is consistent with the cost principle because fair value represents the cost, or amount given up by the partnership, to acquire these assets. 5.
When a partner contributes equipment as his initial investment, any depreciation that has accumulated on the equipment and recorded in a previous business is not part of the investment transaction. Since the equipment is invested into a new business at its fair value, the investment is treated the same way as the purchase of a used asset. The equipment has not yet been used by the partnership so there is no accumulated depreciation.
6.
When the accounts receivable are transferred into the partnership, they should be recorded at their realizable value. In the case of Naheed’s accounts receivable, although they total $8,000 their realizable value is only $6,000. Consequently, the amount recorded as accounts receivable will be the full $8,000 but that amount will be reduced by an allowance for doubtful accounts of $2,000 in Naheed’s investment entry. Similarly, Franca’s accounts receivable should be recorded at $8,000 but reduced by the allowance for doubtful accounts amount of $1,000 for a net realizable value of $7,000.
7.
There is no direct relationship between a salary allowance for allocating profit among partners and partners’ cash withdrawals. While withdrawals reduce the capital balance of a partner, they are not used in profit allocation formulas, the way salary allowance can be used. A salary allowance is used when allocating profit to the partners and is intended to reward a partner for efforts put forth for the business.
8.
Salary expense and interest expense are elements of the income statement and represent reductions of profit before it is allocated to the partners. Salary allowance and interest allowance are part of the process of allocating the profit to the partners, and are not elements of the income statement. Salary allowance is a means of recognizing levels of effort put forth by the partners in earning profit. Interest allowance rewards partners for their levels of investment in the partnership, based on the capital account balances.
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QUESTIONS (Continued) 9.
The statement of partners’ equity has the same content as the statement of owner’s equity except that it contains the details of all the changes in each partner’s capital as well as the changes in total for the partnership. These changes include: investments, profits, losses, and drawings.
10. The statement of income of a partnership does not include the details of how the profit or loss is divided among the partners. Instead, the statement of partners’ equity is used to show this information. 11. The equity section of a partnership’s balance sheet does not show the total amount invested by the partners separate from the profit earned to date and retained in the business. Rather, that distinction for the current fiscal year (between investments and profit) is outlined in the statement of partners’ equity. Once added (or deducted in the case of a loss) to each partner’s capital account balance, the distinction between the sources of changes is no longer tracked in the subsequent financial statements of the partnership. Only the balances of the capital accounts of each partner carry forward to the next fiscal year. 12. When an admission of a new partner into a partnership occurs as a result of a purchase of an existing partner’s interest, the net assets and corresponding total partners’ equity of the partnership will remain unaffected. If the interest is purchased with an additional investment of assets in the partnership, net assets and corresponding total partners’ equity will increase by the amount of the investment. 13. Partnership net assets increase $25,000. R. Minoa’s capital balance will not necessarily be $25,000. No, R. Minoa does not necessarily acquire a 1/6 profit and loss ratio. Profit and loss will be divided according to what is stated in the partnership agreement. If no division is specified, profit or loss is divided evenly. 14. Existing partners may be willing to pay a bonus to a new partner because the new partner may bring in a strong potential to increase profit in the future. For example, the new partner may bring goodwill he has generated in the past from a strong relationship with clients he is bringing to the business.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 15. (a) There is no impact on the net assets or total capital on the partnership balance sheet if a withdrawing partner is paid from personal assets of remaining partners. In the equity section, the withdrawing partner’s capital account will be removed, and its balance added to one or more of the remaining partners’ capital accounts. (b)
If the withdrawing partner is paid from partnership assets, the net assets and the total capital of the partnership will decrease.
16. A bonus to the remaining partners occurs when the cash paid to the departing partner is less than the balance in their capital account. The departing partner may grant such a bonus to the remaining partners if the partners feel that the recorded assets are overvalued, if the partnership has a poor earnings record, or if the partner is anxious to leave the partnership. 17. The steps to liquidate a partnership are: (1) (2) (3) (4)
Sell noncash assets for cash and recognize any gain or loss on realization. Allocate any gain or loss on realization to the partners, based on their profit and loss ratios. Pay partnership liabilities in cash. Distribute the remaining cash to partners, based on their capital balances.
18. If the partner with the capital deficiency pays the amount owed to the partnership, the deficiency is eliminated. The remaining cash is then distributed to the partners, based on their capital balances. If the partner with the deficiency is unable to pay the amount owed, the other partners must absorb the loss. This loss is allocated to the remaining partners in the ratio of their profit allocation formula. The remaining cash is then distributed to the partners, based on their reduced capital balances.
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Chapter 12
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
8 Limited liability partnership 9 General partnership 1 Profit and loss ratio 2 Admission by investment 6 Withdrawal by payment from partners’ personal assets 4 Mutual agency 5 Salary allowance 10 Partnership dissolution 7 Capital deficiency 3 Partnership liquidation
BRIEF EXERCISE 12-2 Cash .................................................... 15,000 B. Ripley, Capital ...........................
15,000
Cash .................................................... 10,000 Equipment ............................................ 3,000 F. Nichols, Capital .........................
13,000
BRIEF EXERCISE 12-3 July 1
1
Solutions Manual .
Cash .................................................... 10,000 R. Black, Capital ............................ Accounts Receivable ........................... 2,400 Cash ...................................................... 8,000* Allowance for Doubtful Accounts B. Rivers, Capital ........................... *[$10,000 – ($2,400 – $400) = $8,000
12-10
10,000
400 10,000
Chapter 12
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-4 (a)
Proportions 2:1
Fractions 2/3 & 1/3
Percentages 66.67% & 33.33%
(b)
6:4
3/5 & 2/5
60% & 40%
(c)
3:8
3/11 & 8/11
27.27% & 72.73%
(d)
4:3:2
4/9 & 3/9 & 2/9
44.45% & 33.33% & 22.22%
(e)
1:2:1
¼&½&¼
25% & 50% & 25%
BRIEF EXERCISE 12-5 (a)
Income Summary......................................... 75,000 Rodd, Capital .......................................... Dall, Capital ............................................. (b)
Rodd, Capital ............................................... 37,500 Dall, Capital ................................................. 37,500 Income Summary....................................
37,500 37,500
75,000
BRIEF EXERCISE 12-6 (a) A. Scrimger D. Woods (b)
$84,000 × 3/8 = $31,500 $84,000 × 5/8 = $52,500
Income Summary ........................................ 84,000 A. Scrimger, Capital................................ D. Woods, Capital ...................................
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31,500 52,500
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-7 MET CO. Division of Profit M. TungJ. Moses T. Eaton Ching Total Profit ..................................... $70,000 Salary allowance J. Moses ........................... $24,000 T. Eaton ........................... $30,000 M. Tung-Ching.................. $5,000 59,000 Total ............................. 11,000 Profit remaining for allocation Fixed ratio 6,600 J. Moses ($11,000 × 60%) T. Eaton ($11,000 × 20%) . 2,200 M. Tung-Ching ($11,000 × 20%) 2,200 Total ............................. 11,000 Profit remaining for allocation 0 Profit allocated to partners .. $30,600 $32,200 $7,200 $70,000
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Chapter 12
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-8 THE MILLSTONE PARTNERSHIP Division of Profit Year Ended February 28, 2017 H. Mills Profit................................................. Salary allowance H. Mills .......................................... $45,000 S. Stone ....................................... Total ........................................ Profit (deficiency) remaining for allocation ............. Interest allowance H. Mills ($72,000 × 5%)................ 3,600 S. Stone ($47,000 × 5%) .............. Total ........................................ Profit (deficiency) remaining for allocation ............. Fixed ratio H. Mills [$(15,950) × 50%] ............... (7,975) S. Stone [$(15,950) × 50%].......... Total ........................................ Profit (deficiency) remaining for allocation ............. Profit allocated to the partners....... $40,625
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12-13
S. Stone
Total $60,000
$25,000 70,000 (10,000)
2,350 5,950 (15,950)
(7,975) (15,950)
$19,375
0 $60,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-9 (a) TOGNAZZINI COMPANY Division of Profit – Oct. 31, 2017 Tognazzini Lilia Terry Total Loss.................................................. $(15,300) Salary allowance L. Tognazzini ............................... $24,900 T. Tognazzini ............................... $15,000 Total ........................................ 39,900 Deficiency remaining for allocation (55,200) Interest allowance L. Tognazzini ............................... 5,300 T. Tognazzini ............................... 9,300 Total ........................................ 14,600 Deficiency remaining for allocation (69,800) Fixed ratio L. Tognazzini [$(69,800) × 75%] . (52,350) T. Tognazzini [$(69,800) × 25%] . (17,450) Total ........................................ (69,800) Loss remaining for allocation ........ 0 Loss allocated to the partners........ $(22,150) $6,850 $(15,300)
(b)
L. Tognazzini, Capital................................... 22,150 T. Tognazzini, Capital ............................. Income Summary....................................
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6,850 15,300
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-10 (a) DRS. JARRATT AND BRAMSTRUP Income Statement Year Ended April 30, 2017 Service revenue ................................................................ $377,000 Operating expenses .......................................................... 149,400 Profit.................................................................................. $227,600 (b) DRS. JARRATT AND BRAMSTRUP Statement of Partners’ Equity Year Ended April 30, 2017
Capital, May 1, 2016 .................... Add: Profit.................................... Less: Drawings............................ Capital, April 30, 2017 .................
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W. M. Jarratt Bramstrup Total $ 36,900 $ 50,400 $ 87,300 113,800 113,800 227,600 150,700 164,200 314,900 127,000 121,000 248,000 $ 23,700 $ 43,200 $ 66,900
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BRIEF EXERCISE 12-10 (Continued) (b) (Continued) DRS. JARRATT AND BRAMSTRUP Balance Sheet April 30, 2017 Assets Current assets Cash................................................................ Property, plant, and equipment Equipment ...................................................... $75,100 Less: Accumulated depreciation .................. 17,100 Total assets ........................................................
$36,000
58,000 $94,000
Liabilities and Partners’ Equity Current liabilities Accounts payable .......................................... Partners’ equity W. Jarratt, capital ........................................... $23,700 M. Bramstrup, capital .................................... 43,200 Total liabilities and partners’ equity .................
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12-16
$27,100
66,900 $94,000
Chapter 12
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-11 June 9 K. Carter, Capital .............................. 18,000 D. Dutton, Capital ........................ ($36,000 × ½ = $18,000)
18,000
BRIEF EXERCISE 12-12 Oct. 1 Cash .................................................... 58,000 Irey, Capital (50% × $8,600*) ................ 4,300 Pedigo, Capital (50% × $8,600*)........... 4,300 Vernon, Capital (45% × $148,000)
66,600
* [($40,000 + $50,000 + $58,000) × 45%] – $58,000 = $8,600
BRIEF EXERCISE 12-13 (a) Dec. 31
T. Morden, Capital ......................... 25,000 R. Neepawa, Capital ................ S. Altona, Capital ....................
12,500 12,500
(b) Same journal entry as part (a). Regardless of the amount paid for T. Morden’s capital, the entry to record T. Morden’s withdrawal from the partnership would remain the same.
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-14 (a) T. Morden receives $35,000 cash Dec. 31 T. Morden, Capital ......................... 25,000 R. Neepawa, Capital (62.5% × $10,000) .................... 6,250 S. Altona, Capital (37.5% × $10,000) .................... 3,750 Cash .........................................
35,000
(b) T. Morden receives $20,000 cash Dec. 31 T. Morden, Capital ......................... 25,000 R. Neepawa, Capital (62.5% × $5,000) S. Altona, Capital (37.5% × $5,000) Cash .........................................
3,125 1,875 20,000
BRIEF EXERCISE 12-15 A, Capital ...................................... B, Capital ...................................... C, Capital ...................................... Cash .........................................
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12-18
8,000 9,000 4,000 21,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-16 Cash Balances before liquidation
$ 15,000
Sale of noncash assets and allocation of gain New balances
125,000 140,000
Pay liabilities (40,000) New balances 100,000 Cash distribution to partners (100,000) balances 0
+
Noncash Assets = Liabilities +
Cisneros, Capital +
$ 90,000
$
40,000
(90,000)
20,000
-
40,000
13,125 (1) 33,125
-
(40,000) -
33,125 (33,125)
0
0
Gunselman, Capital +
Forren, Capital
$ 32,000
$13,000
8,750 (2) 40,750
13,125 26,125
40,750
26,125
(40,750) 0
(26,125) Final 0 0
(1) ($125,000 - $90,000) X 3 ÷ 8 = $13,125 (2) ($125,000 - $90,000) X 2 ÷ 8 = $8,750
_ Solutions Manual
12-19 .
Chapter 12
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-17 (a) Nov. 15 Cash .................................................... 20,000 Other Assets .................................. Gain on Realization........................
17,000 3,000
(b) Nov. 15 Gain on Realization ............................ D. Dupuis, Capital (1/3 × $3,000) ... V. Dueck, Capital (1/3 × $3,000)..... B. Veitch, Capital (1/3 × $3,000) ....
3,000 1,000 1,000 1,000
(c) Nov. 15 D. Dupuis, Capital ($12,000 + $1,000) 13,000 V. Dueck, Capital ($10,000 + $1,000) . 11,000 B. Veitch, Capital ($3,000 + $1,000) ... 4,000 Cash ($8,000 + $20,000).................
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28,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 12-18 (a) Nov. 15 Cash ................................................... 14,000 Loss on Realization............................ 3,000 Other Assets ..................................
17,000
(b) Nov. 15 D. Dupuis, Capital (1/3 × $3,000)........ V. Dueck, Capital (1/3 × $3,000) ......... B. Veitch, Capital (1/3 × $3,000) ......... Loss on Realization .......................
1,000 1,000 1,000 3,000
(c) Nov. 15 D. Dupuis, Capital ($12,000 – $1,000) 11,000 V. Dueck, Capital ($10,000 – $1,000) . 9,000 B. Veitch, Capital ($3,000 – $1,000) ... 2,000 Cash ($8,000 + $14,000).................
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22,000
Chapter 12
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 12-1 1.
Since Angelique and David are only planning on operating the business for the summer, a partnership would probably be the best form of business organization. A partnership is easy to form and relatively free from government regulation and restriction, which would make it easy to operate during their summer break.
2.
Since Joe and Cathy will need to raise funds in the next year, it would probably be advisable for them to operate their business as a corporation. While a new private corporation may have the same amount of difficulty as a partnership in raising capital, as shareholders of the corporation, Joe and Cathy will be personally liable for only the amounts they have invested in the business and the amount of loans they personally guarantee. If the business were to find itself in financial difficulty, Joe and Cathy would be held personally liable for all of the debt of the business if they were to operate it as a partnership.
3.
A partnership would work for these professors but to avoid liability resulting from the negligence of the other partners, a limited liability partnership may be the best form of organization for this business.
4.
A limited partnership may be appropriate, particularly if the venture is set up as a real estate investment trust. Myles would be a general partner, and the large amount of capital could be raised from the other investors who would be limited partners. Another option would be a corporation.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-2 Cash......................................................... 50,000 K. Decker, Capital...............................
50,000
Land ......................................................... 15,000 Building ................................................... 80,000 S. Rosen, Capital................................
95,000
Cash .......................................................... 9,000 Accounts Receivable.............................. 32,000 Equipment... ...................................... 39,000 Allowance for Doubtful Accounts ..... E. Toso, Capital ..................................
3,000 77,000
(b) Partners’ Equity K. Decker, capital ..................................................... $50,000 S. Rosen, capital....................................................... 95,000 E. Toso, capital ......................................................... 77,000 Total partners’ equity ............................................... $222,000
EXERCISE 12-3 Jan. 1
Solutions Manual .
Cash .................................................... 12,000 Accounts Receivable ......................... 14,000 Equipment .......................................... 23,500 Allowance for Doubtful Accounts S. Vopat, Capital ............................
12-23
3,000 46,500
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-4 (a)
Income Summary ........................................ 60,000 K. Ison, Capital ($60,000 × 55%) ............ I. McCoy, Capital ($60,000 × 45%)..........
33,000 27,000
(b) Division of Profit K. Ison Profit................................................. Salary allowance K. Ison ......................................... $30,000 I. McCoy....................................... Total ........................................ Profit remaining for allocation ....... Fixed ratio K. Ison ($10,000 × 55%) .............. 5,500 I. McCoy ($10,000 × 45%) ........... Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $35,500
I. McCoy
Total $60,000
$20,000 50,000 10,000
4,500
$24,500
10,000 0 $60,000
Income Summary ........................................ 60,000 K. Ison, Capital........................................ I. McCoy, Capital .....................................
35,500 24,500
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-4 (Continued) (c) Division of Profit K. Ison I. McCoy Profit................................................. Salary allowance K. Ison .......................................... $40,000 I. McCoy....................................... $30,000 Total ........................................ Profit (deficiency) remaining for allocation Interest allowance K. Ison ($50,000 × 10%) .............. 5,000 I. McCoy ($80,000 × 10%) ........... 8,000 Total ........................................ Profit (deficiency) remaining for allocation Fixed ratio K. Ison ($23,000 × 50%) ............... (11,500) I. McCoy ($23,000 × 50%) ........... (11,500) Total ........................................ Profit remaining for allocation ........ Profit allocated to the partners........ $33,500 $26,500 Income Summary ........................................ 60,000 K. Ison, Capital........................................ I. McCoy, Capital .....................................
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12-25
Total $60,000
70,000 (10,000)
13,000 (23,000)
23,000 0 $60,000
33,500 26,500
Chapter 12
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-5 (a) (1) HUMA AND HOW Division of Profit Year Ended June 30, 2017 R. Huma Profit................................................. Salary allowance R. Huma ....................................... $30,900 W. How ....................................... Total ........................................ Profit remaining for allocation ....... Interest allowance R. Huma ($62,000 × 6%).............. 3,720 W. How ($58,000 × 6%) ............... Total ........................................ Profit remaining for allocation ....... Fixed ratio R. Huma ($10,000 × 60%)............ 6,000 W. How ($10,000 × 40%) ............. Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $40,620
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W. How
Total $70,000
$21,900 52,800 17,200
3,480 7,200 10,000
4,000
$29,380
10,000 0 $70,000
Chapter 12
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-5 (Continued) (a)
(2) HUMA AND HOW Division of Profit Year Ended June 30, 2017 R. Huma
Profit................................................. Salary allowance R. Huma ....................................... $30,900 W. How ....................................... Total ........................................ Profit remaining for allocation ....... Interest allowance R. Huma ($62,000 × 6%).............. 3,720 W. How ($58,000 × 6%) ............... Total ........................................ Profit (deficiency) remaining for allocation ............ Fixed ratio R. Huma ($5,000 × 60%).............. (3,000) W. How ($5,000 × 40%) ............... Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $31,620
W. How
Total $55,000
$21,900 52,800 2,200
3,480 7,200 (5,000) (2,000)
$23,380
(5,000) 0 $55,000
(1) June 30 Income Summary........................... 70,000 R. Huma, Capital ....................... W. How, Capital .........................
40,620 29,380
(2) June 30 Income Summary........................... 55,000 R. Huma, Capital ....................... W. How, Capital .........................
31,620 23,380
(b)
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EXERCISE 12-6 (a) BRODSKY AND LEIGH Division of Loss D. Brodsky J. Leigh Total Loss.................................................. $(15,000) Salary allowance D. Brodsky ................................... $60,000 J. Leigh ....................................... $40,000 Total ........................................ 100,000 Deficiency remaining for allocation (115,000) Interest allowance D. Brodsky ($62,000 × 8%) ......... 4,960 J. Leigh ($88,000 × 8%)............... 7,040 Total ........................................ 12,000 Deficiency remaining for allocation (127,000) Fixed ratio D. Brodsky ($127,000 × 55%) ....... (69,850) J. Leigh ($127,000 × 45%)........... (57,150) Total ........................................ (127,000) Loss remaining for allocation .......... 0 Loss allocated to the partners.......... $(4,890) $(10,110) $(15,000)
(b) D. Brodsky, Capital .......................................... 4,890 J. Leigh, Capital ............................................. 10,110 Income Summary ................................
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15,000
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EXERCISE 12-7 (a) COPPERFIELD DEVELOPMENTS Statement of Partners’ Equity Year Ended December 31, 2017
A. E. Rodriguez Carrieri Total Capital, January 1........................ $67,140 $78,140 $145,280 Add: Investment .......................... 3,540 3,540 Profit............................................. 33,099 * 44,131 ** 77,230 100,239 125,811 226,050 Less: Drawings............................ 36,010 58,940 94,950 Capital, December 31 .................. $64,229 $66,871 $131,100 * $77,230 × 3/7 = $33,099 ** $77,230 × 4/7 = $44,131 (b) COPPERFIELD DEVELOPMENTS Balance Sheet (partial) December 31, 2017 Partners' equity Alvaro Rodriguez, capital ............................................... $64,229 Elisabetta Carrieri, capital ........................................... 66,871 Total partners' equity ........................................................ $131,100
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Chapter 12
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EXERCISE 12-8 (a) DRS. KOVACIK AND DONOVAN Income Statement Year Ended November 30, 2017 Fees earned ...................................................................... $425,000 Expenses Salaries expense ........................................ $ 80,100 Office expense ............................................... 83,600 Interest expense ........................................... 4,100 167,800 Profit.................................................................................. $257,200
DRS. KOVACIK AND DONOVAN Statement of Partners’ Equity Year Ended November 30, 2017
Capital, December 1, 2016 .......... Add: Profit.................................... Less: Drawings............................ Capital, November 30, 2017 ........
J. S. Kovacik Donovan Total $ 59,000 $ 33,000 $ 92,000 154,320* 102,880 257,200 213,320 135,880 349,200 142,000 94,000 236,000 $ 71,320 $ 41,880 $113,200
* $257,200 × 60% = $154,320
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EXERCISE 12-8 (Continued) (a) (Continued) DRS. KOVACIK AND DONOVAN Balance Sheet November 30, 2017 Assets Current assets Cash............................................................. $33,900 Supplies....................................................... 16,150 Total current assets ............................... 50,050 Property, plant, and equipment Equipment .................................................... $176,300 Less: Accumulated depreciation ............... 41,450 134,850 Total assets ............................................ $184,900 Liabilities and Partners’ Equity Current liabilities Accounts payable ....................................... $15,700 Long-term liabilities Notes payable, due 2021 ............................ 56,000 Total liabilities ........................................ 71,700 Partners’ equity J. Kovacik, capital .......................................... $71,320 S. Donovan, capital..................................... 41,880 113,200 Total liabilities and partners’ equity ..... $184,900
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EXERCISE 12-8 (Continued) (b) Closing entries dated November 30, 2017 Fees Earned ................................................... 425,000 Income Summary.................................... 425,000 Income Summary........................................... 167,800 Salaries Expense .................................... Office Expense........................................ Interest Expense .....................................
80,100 83,600 4,100
Income Summary........................................... 257,200 J. Kovacik, Capital .................................. 154,320 S. Donovan, Capital ................................ 102,880 J. Kovacik, Capital ......................................... 142,000 J. Kovacik, Drawings .............................. 142,000 S. Donovan, Capital ........................................ 94,000 S. Donovan, Drawings ...........................
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94,000
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EXERCISE 12-9 (a) (1) Sept. 1 A. Veveris, Capital................. 21,000 S. Weiss, Capital ............. ($42,000 × 1/2) = $21,000 (2) Sept. 1 A. Veveris, Capital ($42,000 × 25%)................. 10,500 J. Rubenis, Capital ($33,000 × 25%)................... 8,250 S. Weiss, Capital .............
(b) Alternative 1 Beginning balance S. Weiss admission Ending balance Alternative 2 Beginning balance S. Weiss admission Ending balance
Solutions Manual .
21,000
18,750
A. Veveris J. Rubenis Capital Capital $ 42,000 $ 33,000 (21,000) $ 21,000 $ 33,000
S. Weiss Capital
A. Veveris J. Rubenis Capital Capital $ 42,000 $ 33,000 (10,500) (8,250) $ 31,500 $ 24,750
S. Weiss Capital
12-33
$ 21,000 $ 21,000
$ 18,750 $ 18,750
Total Capital $ 75,000 $ 75,000 Total Capital $ 75,000 $ 75,000
Chapter 12
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-10 (a) (1) Jan. 1 Cash ........................................................ 65,000 M. Stavros, Capital (3/5 × $10,000) .......... 6,000 G. Metaxas, Capital (2/5 × $10,000) ......... 4,000 I. Xanthos, Capital............................
75,000
Total capital of existing partnership ......................... $160,000 Investment by new partner, I. Xanthos ...................... 65,000 Total capital of new partnership ................................ $225,000 I. Xanthos’ capital credit (33 1/3% × $225,000) ........... $75,000 Investment by new partner, I. Xanthos........................ $65,000 I. Xanthos’ capital credit .......................................... 75,000 Bonus to new partner ................................................... $10,000 (2) Jan. 1
Cash .................................................. 95,000 M. Stavros, Capital (3/5 × $10,000) G. Metaxas, Capital (2/5 × $10,000) I. Xanthos, Capital .......................
6,000 4,000 85,000
Total capital of existing partnership ......................... $160,000 Investment by new partner, I. Xanthos ..................... 95,000 Total capital of new partnership ................................ $255,000 I. Xanthos’ capital credit (33 1/3% × $255,000) ........... $85,000 Investment by new partner, I. Xanthos........................ $95,000 I. Xanthos’ capital credit .......................................... 85,000 Bonus to old partners .................................................. $10,000
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Chapter 12
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-10 (Continued) (b) Alternative 1 Beginning balance I. Xanthos admission Ending balance
Alternative 2 Beginning balance I. Xanthos admission Ending balance
Solutions Manual .
M. Stavros Capital $ 95,000
G. Metaxas Capital $ 65,000
I. Xanthos Capital
(6,000) $ 89,000
(4,000) $ 61,000
$75,000 $75,000
M. Stavros Capital $ 95,000
G. Metaxas Capital $ 65,000
I. Xanthos Capital
6,000 $101,000
4,000 $ 69,000
$85,000 $85,000
12-35
Total Capital $160,000 65,000 $225,000
Total Capital $160,000 95,000 $255,000
Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 12-11 (a) 1. Dec. 31 A. Noll, Capital ............................... 30,000 S. Miles, Capital......................... 2.
3.
30,000
Dec. 31 A. Noll, Capital ............................... 30,000 Cash ...........................................
30,000
Dec. 31 A. Noll, Capital ............................... 30,000 J. Lane, Capital (5/8 × $5,000)..... 3,125 S. Miles, Capital (3/8 × $5,000) . 1,875 Cash ...........................................
35,000
(b) Condition 1 Beginning balance A. Noll withdrawal Ending balance Condition 2 Beginning balance A. Noll withdrawal Ending balance
Solutions Manual .
J. Lane Capital $ 50,000 $ 50,000
S. Miles Capital $ 40,000 30,000 $ 70,000
A. Noll Capital $ 30,000 (30,000) 0
$120,000
J. Lane Capital $ 50,000
S. Miles Capital $ 40,000
$ 50,000
$ 40,000
A. Noll Capital $ 30,000 (30,000) 0
Total Capital $120,000 (30,000) $ 90,000
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Total Capital $120,000
Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 12-12 (a) 1. Sept. 30 K. White, Capital ............................ 74,000 D. Nagel, Capital .............................. 6,000 I. Mbango, Capital ............................ 3,000 Cash ........................................... Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to retiring partner .........................................
2.
83,000 $74,000 $9,000
Allocation of bonus: D. Nagel, Capital ($9,000 × 4/6) ..................... $6,000 I. Mbango, Capital ($9,000 × 2/6) ...................
$9,000
Sept. 30 K. White, Capital ............................ 74,000 D. Nagel, Capital........................ I. Mbango, Capital ..................... Cash ...........................................
10,000 5,000 59,000
Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to remaining partners...................................
$74,000 59,000 $15,000
Allocation of bonus: D. Nagel, Capital ($15,000 × 4/6) ....................$10,000 I. Mbango, Capital ($15,000 × 2/6)................ 5,000, $15,000 (b) Condition 2 Beginning balance K. White withdrawal Ending balance
Solutions Manual .
D. Nagel Capital
K. White Capital
$92,000
$74,000
$6,000
$172,000
10,000 $ 102,000
(74,000) -
5,000 $11,000
(59,000) $113,000
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I. Mbango Capital
Total Capital
Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 12-13 (a)
Balance before liquidation Final liquidation Final balances
Cash
Windl Capital
$172,700
$ 87,400
$ 34,500
$ 50,800
$ 172,700
(172,700) 0
(87,400) 0
(34,500) 0
(50,800) 0
(172,700) 0
(b)
Balance before liquidation Sale of assets share of losses Balance Final liquidation Final balances
Solutions Manual .
Partners' Capital Houghton Pahli Capital Capital
Partners' Capital Houghton Pahli Capital Capital
Total Capital
Cash
Windl Capital
$172,700
$ 87,400
$ 34,500
$ 50,800
$ 172,700
(30,000) 142,700
(10,000) 77,400
(10,000) 24,500
(10,000) 40,800
(30,000) 142,700
(142,700) -
(77,400) -
(24,500) -
(40,800) -
(142,700) -
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Total Capital
Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 12-14 THE BRAUN COMPANY Liquidation Schedule December 31 Assets = Liabilities + Partners' Capital Noncash Ho Li Total Cash Assets Capital Capital Capital
(a)
Account balances prior to liquidation Sale of noncash assets Balances Payment of liabilities Balances Distribution of cash to partners Final balances
$15,000 110,000 125,000 (60,000) 65,000 (65,000) -
$110,000 (110,000) -
-
$60,000
$40,000
$25,000
$65,000
60,000 (60,000) -
40,000
25,000
65,000
40,000
25,000
65,000
-
(40,000) (25,000) (65,000) -
_ Solutions Manual
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Chapter 12
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-14 (Continued) THE BRAUN COMPANY Liquidation Schedule December 31 = Liabilities + Partners' Capital Ho Li Total Capital Capital Capital
Assets Noncash Cash Assets
(b)
Account balances prior to liquidation Sale of noncash assets Balances Payment of liabilities Balances Distribution of cash to partners Final balances
$15,000
$110,000
60,000 (110,000) 75,000 (60,000) 15,000 (15,000) -
-
$ 60,000
60,000 (60,000) -
-
$40,000
$25,000
$65,000
(30,000) 10,000
(20,000) 5,000
(50,000) 15,000
10,000
5,000
15,000
(10,000) -
(5,000) -
(15,000) -
_ Solutions Manual
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-15 Summary (a), (b), and (c)
Cash
BAYLEE COMPANY Liquidation Schedule December 31 Assets = Liabilities + Partners' Capital Acc. Depr. H. Bayer J. Leech Total Equipment Equipment Capital Capital Capital
Account balances prior to liquidation $40,000 $ 130,000 Sale of assets and share of gain 100,000 (130,000) Balances 140,000 0 Payment of (55,000) liabilities Balances 85,000 0 Distribution of (85,000) cash to partners Final balances $ 0 $ 0
$ 55,000
$ 45,000
$30,000
$75,000
40,000 0
55,000
5,000 50,000
5,000 35,000
10,000 85,000
0
(55,000) 0
50,000
35,000
85,000
$ (40,000)
$
0
$
0
(50,000) (35,000) (85,000) $ 0 $ 0 $ 0
(a) Gain of $10,000 ($100,000 - $90,000) is (b) allocated equally between the partners $5,000 each. (c) Balance of cash paid Dec. 31: H. Bayer $50,000 and J. Leech $35,000.
_ Solutions Manual
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Chapter 12
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Accounting Principles, Seventh Canadian Edition
EXERCISE 12-16 (a) Dec. 31
Accumulated Depreciation ......... 40,000 Cash ............................................. 100,000 Equipment ............................... Gain on Realization.................
(b) Dec. 31 Gain on Realization ..................... 10,000 H. Bayer, Capital ($10,000 × 50%) ....................... J. Leech, Capital ($10,000 × 50%) ....................... (c) Dec. 31 Liabilities...................................... 55,000 Cash ......................................... (d) Dec. 31
Solutions Manual .
H. Bayer, Capital .......................... 50,000 J. Leech, Capital .......................... 35,000 Cash .........................................
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130,000 10,000
5,000 5,000
55,000
85,000
Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 12-17 (b)
LOL PARTNERSHIP Liquidation Schedule December 31 = Liabilities + Partners' Capital O. Low A. Olson S. Lokum Capital Capital Capital
Assets Noncash Cash Assets Account balances prior to liquidation Sale of assets and share of gain Balances (b) Payment of liabilities Balances (a) Payment of capital deficiency Balances Distribution of cash to partners Final balances
$22,000
$ 45,100
$ 59,900
$9,000
$114,000
(121,000) 0
22,000
(12,000) 33,100
(12,000) 47,900
(12,000) (3,000)
(36,000) 78,000
0
(22,000) 0
33,100
47,900
(3,000)
78,000
3,000 0
3,000 81,000
0
(81,000) $ 0
$15,000
$ 121,000
85,000 100,000 (22,000) 78,000 3,000 81,000 (81,000) $ 0
Total Capital
0
$
0
$
0
33,100
47,900
0
(33,100) $ 0
(47,900) $ 0
$
_ Solutions Manual
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Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 12-17 (Continued) (a) Proceeds from the sale of noncash assets Book value of noncash assets Loss on sale of noncash assets
$85,000 121,000 $36,000
Cash balance after paying the liabilities Refer to Liquidation Schedule above
$78,000
(b) Refer to Liquidation Schedule above (c) Dec. 31 Cash ............................................... S. Lokum, Capital ......................
3,000
31 O. Low, Capital............................... A. Olson, Capital ............................ Cash ...........................................
33,100 47,900
(d) Dec. 31 O. Low, Capital ($3,000 × 50%) ..... A. Olson, Capital ($3,000 × 50%)... S. Lokum, Capital ......................
1,500 1,500
3,000
81,000
3,000
31 O. Low, Capital ($33,100 – $1,500) 31,600 A. Olson, Capital ($47,900 – $1,500) 46,400 78,000 Cash ...........................................
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-1A (Continued) (b) (Continued) Jan.
(c) Jan.
1 Cash ............................................... 10,000 Accounts Receivable .................... 24,000 Merchandise Inventory.................. 13,000 Equipment ...................................... 15,000 Allowance for Doubtful Accounts Accounts Payable ................... P. Dasilva, Capital ...................
3,000 34,000 25,000
1 Cash ($39,000 – $25,000)............. 14,000 P. Dasilva, Capital ...................
14,000
Taking It Further: Advantages of forming a partnership instead of operating as two proprietorships include: i.
ii. iii. iv. v.
The skills of the two individuals forming the partnership may be complementary and so their ability to provide better services to their customers is enhanced. The partnership will provide an ability to share the tasks involved in running the business. A partnership will likely provide more security to the individual partners in case of illness or absence. The combined capital of the partners will help secure debt for operations. The partnership structure might assist one of the partners in a succession plan.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-2A (a) Dec. 31 Income Summary ............................. 90,000 Z. Gable, Capital ........................ M. Smith, Capital .......................
45,000 45,000
Profit is shared equally.
(b) Division of Profit Z. Gable M. Smith Profit................................................. Salary allowance Z. Gable ........................................ $42,000 M. Smith....................................... $30,000 Total ........................................ Profit (deficiency) remaining for allocation Fixed ratio Z. Gable ($12,000 × 50%) ............... (6,000) M. Smith ($12,000 × 50%) ........... (6,000) Total ........................................ Profit remaining for allocation ........ Profit allocated to the partners........ $36,000 $24,000 Dec. 31 Income Summary ............................. 60,000 Z. Gable, Capital ........................ M. Smith, Capital .......................
Solutions Manual .
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Total $60,000
72,000 (12,000)
12,000 0 $60,000
36,000 24,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-2A (Continued) (c) Division of Profit Z. Gable M. Smith Profit................................................. Salary allowance Z. Gable ........................................ $40,000 M. Smith....................................... $30,000 Total ........................................ Profit (deficiency) remaining for allocation Interest allowance Z. Gable ($20,000 × 6%) .............. 1,200 Profit (deficiency) remaining for allocation Fixed ratio Z. Gable ($11,200 × 70%) ............... (7,840) M. Smith ($11,200 × 30%) ........... (3,360) Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $33,360 $26,640 Dec. 31 Income Summary ............................. 60,000 Z. Gable, Capital ........................ M. Smith, Capital .......................
Total $60,000
70,000 (10,000) 1,200 (11,200)
11,200 0 $60,000
33,360 26,640
Taking It Further: Delaying arriving at an agreement on how to share income before starting the fiscal year has the advantage of adding fairness by applying hindsight to the salary allowance portion of the formula based on the amount of work performed. The disadvantage in delaying is allowing for disputes to occur after the fact, particularly if the results are not in line with expectations, or if unforeseen events cause one of the partners not being able to work as hard as was initially expected.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-3A (a) 1. Dec. 31 Income Summary ............................. 40,000 J. Chapman-Brown, Capital ...... C. Duperé, Capital ..................... H. Weir, Capital ..........................
6,666 14,667 18,667
CDW PARTNERS Division of Profit Year Ended December 31, 2017 J. Chapman -Brown C. Duperé H. Weir Profit............................... Salary allowance C. Duperé................... $8,000 H. Weir ....................... $12,000 Total ...................... Profit remaining for allocation ............. Fixed ratio (remainder shared equally) J. Chapman-Brown ($20,000 × 1/3) ........... $6,666 C. Duperé 6,667 ($20,000 × 1/3) ........... H. Weir ($20,000 × 1/3) ........... 6,667 Total ...................... Profit remaining _ _ _ for allocation ............. Profit allocated to the partners ............... $6,666 $14,667 $18,667
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Total $40,000
20,000 20,000
20,000 0 $40,000
Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 12-3A (Continued) (a) (Continued) 2. Dec. 31 Income Summary ........................... 40,000 J. Chapman-Brown, Capital ...... C. Duperé, Capital ..................... H. Weir, Capital ..........................
7,000 16,300 16,700
CDW PARTNERS Division of Profit Year Ended December 31, 2017 J. Chapman -Brown C. Duperé H. Weir Total Profit............................... $40,000 Interest allowance J. Chapman-Brown ($30,000 × 5%) ........... $1,500 C. Duperé ($40,000 × 5%) $2,000 H. Weir ($50,000 × 5%) $2,500 Total ...................... 6,000 Profit remaining for allocation ............. 34,000 Salary allowance J. Chapman-Brown ... 15,000 C. Duperé .................. 20,000 H. Weir ....................... 18,000 Total ...................... 53,000 Profit (deficiency) remaining for allocation (19,000) Fixed ratio (remainder shared equally) Chapman-Brown [$(19,000) × 5/10] ....... (9,500) Duperé [$(19,000) × 3/10] (5,700) H. Weir [$(19,000) × 2/10] (3,800) Total ...................... (19,000) Profit remaining for allocation ............. __________________________ 0 Profit allocated to the partners........... $7,000 $16,300 $16,700 $40,000 Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-3A (Continued) (b) CDW PARTNERS Statement of Partners’ Equity Year Ended December 31, 2017 J. ChapmanBrown C. Duperé Capital, January 1 $30,000 $40,000 Add: Profit 7,000 16,300 37,000 56,300 Less: Drawings 10,100 7,000 Capital, December 31 $26,900 $49,300
H. Weir Total $50,000 $120,000 16,700 40,000 66,700 160,000 5,000 22,100 $61,700 $137,900
Taking It Further: The partnership would include an interest allowance in its profit- and loss-sharing arrangements to reward those partners that assist in the financing of the business by leaving their capital in the business. Were it not for this willingness, the partnership would have to incur additional interest costs in order borrow cash to finance operations.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-4A (a) STOREY ROGERS PARTNERSHIP Income Statement Year Ended December 31, 2017 Sales................................................................................. Cost of goods sold .......................................................... Gross profit...................................................................... Operating expenses ........................................................ Loss..................................................................................
$340,000 250,000 90,000 130,000 $(40,000)
(b) STOREY ROGERS PARTNERSHIP Division of Loss Year Ended December 31, 2017 V. Storey G. Rogers
Total $(40,000)
Loss................................................ Salary allowance ........................... V. Storey .................................... $30,900 G. Rogers .................................. $39,700 Total ...................................... 70,600 Deficiency remaining for allocation (110,600) Interest allowance V. Storey ($82,000 × 5%)........... 4,100 G. Rogers ($101,000 × 5%) ....... 5,050 Total ...................................... 9,150 Deficiency remaining for allocation (119,750) Fixed ratio V. Storey [$(119,750) × 2/5]....... (47,900) G. Rogers [$(119,750) × 3/5] ..... (71,850) Total ...................................... (119,750) Loss remaining for allocation ...... 0 Loss allocated to the partners...... $(12,900) $(27,100) $(40,000)
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-4A (Continued) (c) STOREY ROGERS PARTNERSHIP Statement of Partners’ Equity Year Ended December 31, 2017 V. Storey G. Rogers $ 82,000 $101,000 24,000 28,800 12,900 27,100 36,900 55,900 $ 45,100 $ 45,100
Total $183,000 52,800 40,000 92,800 $ 90,200
(d) Dec. 31 Sales ............................................... 340,000 Income Summary ......................
340,000
31 Income Summary ........................... 380,000 Cost of Goods Sold .................. Operating Expenses..................
250,000 130,000
31 V. Storey, Capital .......................... 12,900 G. Rogers, Capital.......................... 27,100 Income Summary ......................
40,000
31 V. Storey, Capital ........................... 24,000 G. Rogers, Capital.......................... 28,800 V. Storey, Drawings................... G. Rogers, Drawings .................
24,000 28,800
Capital, January 1................... Less: Drawings...................... Loss ............................. Capital, December 31 .............
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-4A (Continued)
Taking It Further: While it might be reasonable to revisit the agreement for sharing profit or loss in light of this information, Veda Storey cannot force a change in the agreement on her partner. Veda should appeal to fairness with her partner and either amend the agreement prior to the current year allocation of the loss, or devise another method, such as change the profit allocation formula for the next year.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-5A (a) KANT-ADDER PARTNERSHIP Income Statement Year Ended March 31, 2017 Fees earned ....................................................................... $255,000 Expenses Salaries expense......................................... $80,000 Rent expense .............................................. 36,000 Interest expense ......................................... 5,000 Depreciation expense................................. 8,000 Supplies expense ....................................... 5,000 Total expenses ............................................................... 134,000 Profit................................................................................... $121,000 KANT-ADDER PARTNERSHIP Statement of Partners’ Equity Year Ended March 31, 2017
Capital, April 1 ........................... Add: Investment ........................ Profit* ................................ Less: Drawings.......................... Capital, March 31....................... * I. Kant: U. Adder:
Solutions Manual .
I. Kant $25,000 5,000 80,667 110,667 90,000 $ 20,667
U. Adder $ 30,000 0 40,333 70,333 60,000 $ 10,333
Total $ 55,000 5,000 121,000 181,000 150,000 $ 31,000
$121,000 × 2/3 = $80,667 $121,000 × 1/3 = $40,333
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PROBLEM 12-5A (Continued) (a) (Continued) KANT-ADDER PARTNERSHIP Balance Sheet March 31, 2017
Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies....................................................................... Total current assets ...............................................
$ 14,000 61,000 1,500 76,500
Property, plant, and equipment Equipment ...................................................... $42,000 Less: Accumulated depreciation .................. 12,000 30,000 Total assets .............................................................. $106,500 Liabilities and Partners' Equity Current liabilities Accounts payable ....................................................... $ 12,500 Salaries payable.......................................................... 8,000 Unearned revenue ...................................................... 5,000 Current portion of notes payable .............................. 1,500 Total current liabilities ........................................... 27,000 Long-term liabilities Notes payable, net of current portion ....................... 48,500 Total liabilities ........................................................... 75,500 Partners' equity I. Kant, capital ............................................................. 20,667 U. Adder, capital ......................................................... 10,333 Total partners' equity ............................................. 31,000 Total liabilities and partners' equity............................... $106,500
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-5A (Continued) (b) Mar. 31 Fees Earned ................................... 255,000 Income Summary ......................
255,000
31 Income Summary ........................... 134,000 Salaries Expense....................... Rent Expense ............................ Interest Expense ....................... Depreciation Expense ............... Supplies Expense......................
80,000 36,000 5,000 8,000 5,000
31 Income Summary ........................... 121,000 I. Kant, Capital ........................... U. Adder, Capital .......................
80,667 40,333
31 U. Adder, Capital .............................. 60,000 I. Kant, Capital .................................. 90,000 U. Adder, Drawings ................... I. Kant, Drawings .......................
60,000 90,000
Taking It Further: In this case, once the profit is added to the capital accounts, drawings were less than the capital balances. The amount of the drawings taken by individual partners can be any amount that the partners agree to. However, problems may arise in the future if insufficient capital is left in the business to fund operations.
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PROBLEM 12-6A (a) Dec. 31 T. Gilligan, Drawings .............................. 20,000 M. Melnyk, Drawings .............................. 10,000 Salaries Expense................................ (b)
Profit as reported:................................... Add back salaries expense .................... Revised Profit .........................................
30,000 $11,600 30,000 $41,600
The profit allocation is $20,800 ($41,600 ÷ 2) to each partner since no agreement as to the allocation of profit was arrived at. (c) TY & MATT SNOW REMOVAL SERVICES Statement of Partners’ Equity Year Ended December 31, 2017 T. Gilligan Capital, Jan. 1 ............................ 0 Add: Investment ............................ $ 4,000 Profit ..................................... 20,800 24,800 Less: Drawings.............................. 20,000 Capital, December 31 .................... $ 4,800
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M. Melnyk 0 $11,000 20,800 31,800 10,000 $21,800
Total 0 $15,000 41,600 56,600 30,000 $26,600
Chapter 12
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-6A (Continued) (d) TY & MATT SNOW REMOVAL SERVICES Balance Sheet December 31, 2017 Assets Current assets Cash................................................................................ $ 17,000 Property, plant, and equipment Equipment ......................................... $ 2,000 Less: Accumulated depreciation ... 400 $1,600 Vehicles .............................................. 10,000 Less: Accumulated depreciation ... 2,000 8,000 Total property, plant, and equipment........................ 9,600 Total assets ......................................................................... $26,600 Partners' Equity Partners' equity T. Gilligan, capital ....................................................... $ 4,800 M. Melnyk, capital ...................................................... 21,800 Total partners' equity .......................................................... $26,600 Taking It Further: Due to inexperience, Tyler and Matt failed to come to an agreement on their allocation of profit before they began their business together. This failure caused the profit to be shared equally at the end of the first year of operations. While Tyler is correct that an equal allocation might not be fair if he worked twice as hard as Matt, Matt also has a good point in arguing that he should be rewarded for his larger investment into the business on January 1, 2017. Tyler and Matt should come to some agreement to a fair allocation of profit for the coming year and document the details in writing.
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PROBLEM 12-7A (a)
May 1 Cash .................................................. 23,500 Watson, Capital .........................
23,500
Total capital of existing partnership .............. $94,000 Investment by Watson ................................... 23,500 Total capital of new partnership .................. $117,500 Watson's capital credit ($117,500 × 20%) ..
$23,500
Investment by Watson .................................... $23,500 Watson’s capital credit ............................... 23,500 Bonus .......................................................... $0 (b)
May 1 Cash .................................................. 35,000 Dexter, Capital ($9,200 × 5/10) .. Emley, Capital ($9,200 × 3/10)... Sigle, Capital ($9,200 × 2/10)..... Watson, Capital .........................
4,600 2,760 1,840 25,800
Total capital of existing partnership .............. $94,000 Investment by Watson ................................... 35,000 Total capital of new partnership .................. $129,000 Watson's capital credit ($129,000 × 20%) ..
$25,800
Investment by Watson .................................... $35,000 Watson’s capital credit ............................... 25,800 Bonus to old partners................................. $ 9,200
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-7A (Continued) (c)
May 1 Cash .................................................. 10,000 Dexter, Capital ($10,800 × 5/10)......... 5,400 Emley, Capital ($10,800 × 3/10) ......... 3,240 Sigle, Capital ($10,800 × 2/10) ........... 2,160 Watson, Capital .........................
20,800
Total capital of existing partnership.......... $94,000 Investment by Watson ................................ 10,000 Total capital of new partnership ................ $104,000 Watson's capital credit ($104,000 × 20%) ..
$20,800
Investment by Watson ................................ Watson’s capital credit ............................... Bonus to new partner .................................
$10,000 20,800 $ 10,800
Taking It Further: Limited Liability Partnerships (LLP) are designed to protect innocent partners from negligent actions of other partners. Partners remain fully liable for their own negligence as well as those they supervise and control, but have limited liability for negligence of the other partners. Since all partners will be active in the DESW Partnership, this type of partnership might be the way to address Watson’s concerns.
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PROBLEM 12-8A (a)
(b)
May 1 W. Sanga, Capital ($59,000 × 50%) 29,500 N. Osvald, Capital......................
29,500
May 1 Cash................................................ 68,000 R. Short, Capital ($5,600 × 3/9) .................................. 1,867 K. Osborne, Capital ($5,600 × 2/9) .................................. 1,244 W. Sanga, Capital ($5,600 × 4/9) .................................. 2,489 N. Osvald, Capital......................
73,600
Total capital of existing partnership.......... $116,000 Investment by N. Osvald ............................ 68,000 Total capital of new partnership ................ $184,000
Solutions Manual .
N. Osvald's capital credit ($184,000 × 40%)
$73,600
Investment by N. Osvald ............................ N. Osvald's capital credit ........................... Bonus to new partner .................................
$68,000 73,600 $ 5,600
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PROBLEM 12-8A (Continued) (c)
May 1 Cash.................................................. 41,000 R. Short, Capital ($9,600 × 3/9).............................. K. Osborne, Capital ($9,600 × 2/9).............................. W. Sanga, Capital ($9,600 × 4/9).............................. N. Osvald, Capital......................
3,200 2,133 4,267 31,400
Total capital of existing partnership.......... $116,000 Investment by N. Osvald ............................ 41,000 Total capital of new partnership ................ $157,000
(d)
N. Osvald's capital credit ($157,000 × 20%)
$31,400
Investment by N. Osvald ............................ N. Osvald's capital credit ........................... Bonus to old partners.................................
$41,000 31,400 $ 9,600
May 1 Cash.................................................. 29,000 N. Osvald, Capital......................
29,000
Total capital of existing partnership.......... $116,000 Investment by N. Osvald ............................ 29,000 Total capital of new partnership ................ $145,000 N. Osvald's capital credit ($145,000 × 20%)
$29,000
No bonus to new or existing partners. Taking It Further: A new partner would be willing to give a bonus to existing partners because he does not have any experience in the business and would like to be in a position to take over parts of the business from any retiring partners in the future. The admission of the new partner fits within the succession plan of the existing partners. This is often true in a dental practice. Solutions Manual .
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PROBLEM 12-9A (a) Dec. 31 R. Antoni, Capital ........................... 48,000 P. Jiang, Capital ........................
48,000
(b) Dec. 31 R. Antoni, Capital ........................... 48,000 H. Fercho, Capital ($10,000 × 6/9) ................................ 6,667 P. Jiang, Capital ($10,000 × 3/9) ................................ 3,333 Cash ...........................................
58,000
R. Antoni’s capital balance ............. $48,000 Payment to R. Antoni ..................... 58,000 Bonus to R. Antoni ........................ $10,000 (c) Dec. 31 R. Antoni, Capital ........................... 48,000 H. Fercho, Capital ($9,800 × 6/9).............................. P. Jiang, Capital ($9,800 × 3/9).............................. Cash ...........................................
6,533 3,267 38,200
R. Antoni's capital balance............ $48,000 Payment to R. Antoni ..................... 38,200 Bonus to remaining partners ......... $ 9,800
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-9A (Continued)
Taking It Further: The partnership agreement should contain a clause covering the options for payment to a withdrawing partner. Assuming the partnership agreement provides for some flexibility or choice, the next factor would be to determine if the necessary cash is currently available from the partnership assets. On the other hand, if the remaining partners have sufficient personal cash, they might be willing to pay the withdrawing partner from personal cash. This would ensure that sufficient cash remains in the business and the business does not have to take on additional debt to pay off the withdrawing partner.
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PROBLEM 12-10A (a) March 1 H. Deol, Capital .............................. 72,000 M. Kumar, Capital ($18,000 × 4/5)................... 14,400 A. Kassam, Capital ($18,000 × 1/5)................... 3,600 Cash .........................................
90,000
(b) M. Kumar, Capital $85,000 – $14,400 = $70,600 A. Kassam, Capital $43,000 – $3,600 = $39,400 (c) Feb. 28
Income Summary........................... 24,000 M. Kumar, Capital ($24,000 × 4/6) A. Kassam, Capital ($24,000 × 2/6)...................
(d) M. Kumar, Capital ($70,600 + $16,000) ....... A. Kassam, Capital ($39,400 + $8,000) ....... Total partnership capital ............................. (e) March 1 Cash ............................................... 75,000 M. Kumar, Capital ($19,050 × 4/6)................... 12,700 A. Kassam, Capital ($19,050 × 2/6)................... 6,350 C. Mawani, Capital ............
16,000 8,000 $86,600 47,400 $134,000
94,050
Total capital of existing partnership.......... $134,000 Investment by C. Mawani ........................... 75,000 Total capital of new partnership ................ $209,000 C. Mawani’s capital credit ($209,000 × 45%) $94,050 Investment by C. Mawani ........................... C. Mawani’s capital credit .......................... Bonus to new partner .................................
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$75,000 94,050 $ 19,050
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-10A (Continued) (f) M. Kumar, Capital ($86,600 – $12,700) ....... A. Kassam, Capital ($47,400 – $6,350) ....... C. Mawani, Capital ...................................... Total partnership capital .............................
$73,900 41,050 94,050 $209,000
Taking It Further: The remaining partners would be willing to pay a bonus to a withdrawing partner if, for example, the withdrawing partner leaves their clients with the continuing partners. Or, there might have been conflict between the withdrawing partner and the remaining partners that lead to the remaining partners asking the withdrawing partner to withdraw. In that situation, the remaining partners may pay a bonus to the withdrawing partner to ensure the person leaves. A bonus to a withdrawing partner may also be paid when the book value of the partnership’s assets is less than their fair value.
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PROBLEM 12-11A (a) Item Balances before liquidation Sale of noncash assets
Payment of liabilities
Allocation of Cash based on capital balances
Accounts Receivable
$32,600
D. Portman Capital
Equipment
Accum. Depreciation
Accounts Payable
A Hunt Capital
$28,000
$48,600
$(16,800)
$30,200
$42,100
$18,800
$1,300
59,800
(28,000)
(48,600)
16,800
92,400
-
-
-
(62,200)
(42,100)
(18,800)
(1,300)
-
-
-
-
Cash
(30,200)
(30,200)
62,200
-
K. Lally Capital
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PROBLEM 12-11A (Continued) (a) (Continued) June
June
June
30 Cash .................................................. 59,800 Accumulated Depreciation – Equipment .............................. 16,800 Accounts Receivable ................ Equipment..................................
28,000 48,600
30 Accounts Payable .......................... 30,200 Cash ...........................................
30,200
30 A. Hunt Capital ............................... 42,100 K. Lally, Capital .............................. 18,800 D. Portman, Capital......................... 1,300 Cash ............................................
62,200
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PROBLEM 12-11A (Continued)
(b)
Item Balances before liquidation Sales of Noncash assets and loss on sale of assets
Payment of liabilities Payment of deficiency Allocation of Cash
Accounts Receivable
Equipment
Accum. depreciation
Accounts Payable
A Hunt Capital
K. Lally Capital
D. Portman Capital
$32,600
$28,000
$48,600
$(16,800)
$30,200
$42,100
$18,800
$1,300
45,000
(28,000)
(48,600)
16,800
(7,400)
(4,440)
(2,960)
77,600
-
-
-
34,700
14,360
(1,660)
Cash
(30,200) 47,400
-30,200 -
1,660 49,060
1,660 0
(49,060)
(34,700)
(14,360)
0
0
0
0
0
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Chapter 12
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-11A (Continued) (b) (Continued) June
30 Cash................................................ 45,000 Accumulated Depreciation – Equipment .............................. 16,800 Loss on Realization ....................... 14,800 Accounts Receivable ................ Equipment..................................
28,000 48,600
30 A. Hunt, Capital ($14,800 × 50%) ...................... K. Lally, Capital ($14,800 × 30%) ...................... D. Portman, Capital ($14,800 × 20%) ..................... Loss on Realization...................
14,800
7,400 4,440 2,960
30 Accounts Payable .......................... 30,200 Cash ...........................................
30,200
30 Cash ($1,300 – $2,960) ................... D. Portman, Capital ...................
1,660
1,660
30 A. Hunt, Capital ($42,100 – $7,400) .................. 34,700 K. Lally, Capital ($18,800 – $4,440) .................. 14,360 Cash ($32,600 + $45,000 – $30,200 + $1,660) ....................
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-11A (Continued) (c)
Item Balances before liquidation Sales of noncash assets and loss on sale of assets
Cash
Accounts Accounts Accum. Receivable Equipment Depreciation Payable
K. Lally Capital
D. Portman Capital
$42,100
$18,800
$1,300
$32,600
$28,000
$48,600
$(16,800)
30,000
(28,000)
(48,600)
16,800
(14,900)
(8,940)
(5,960)
62,600
-
-
-
27,200
9,860
(4,660)
Transfer of deficiency
(2,913)
(1,747)
4,660
8,113 (8,113) -
-
Allocation of Cash
24,287 (24,287) -
Payment of liabilities
$30,200
A Hunt Capital
(30,200)
(30,200)
32,400
-
(32,400) -
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Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 12-11A (Continued) (c) (Continued) June
30 Cash................................................ 30,000 Accumulated Depreciation – Equipment .............................. 16,800 Loss on Realization ....................... 29,800 Accounts Receivable ................ Equipment..................................
28,000 48,600
30 A. Hunt, Capital ($29,800 × 50%) ...................... 14,900 K. Lally, Capital ($29,800 × 30%) ...................... 8,940 D. Portman, Capital ($29,800 × 20%) ..................... 5,960 Loss on Realization...................
29,800
30 Accounts Payable .......................... 30,200 Cash ...........................................
30,200
30 A. Hunt, Capital ($4,660 × 5 ÷ 8) ....................... 2,913 K. Lally, Capital ($4,660 × 3 ÷ 8) ....................... 1,747 D. Portman, Capital ($1,300 – $5,960)
4,660
30 A. Hunt, Capital ($42,100 – $14,900 – $2,913).. 24,287 K. Lally, Capital ($18,800 – $8,940 – $1,747).... 8,113 Cash ($32,600 + $30,000 – $30,200)
32,400
Taking It Further: The profit and loss ratio should not be used when distributing cash to partners in a liquidation. The relevant balance that must be used is the balance in each partner’s capital account, which will likely not bear any relationship to the profit and loss ratio
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PROBLEM 12-12A (a) (1)
Cash
Inventory
Bank Loan Payable
H. Brumby Capital
R. Criolio Capital
$113,000
$227,900
$179,900
$24,700
10,367
10,367
10,366
238,267
190,267
35,066
(238,267)
(190,267)
(35,066)
-
-
-
Item Balances before liquidation
$142,600
$402,900
Sale of Inventory
434,000
(434,000)
576,600 Payment of liabilities
Payment of Cash
(113,000)
(113,000)
463,600
-
(463,600)
A. Paso Capital
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PROBLEM 12-12A (Continued) (a) (1) (Continued)
Aug.
8
8
8
8
Solutions Manual .
Cash ................................................ 434,000 Gain on Realization................. Inventory..................................
31,100 402,900
Gain on Realization .......................... 31,100 H. Brumby, Capital ($31,100 × ⅓) R. Criolio, Capital ($31,100 × ⅓) A. Paso, Capital ($31,100 × ⅓)
10,367 10,367 10,366
Bank Loan Payable ......................... 113,000 Cash .........................................
113,000
H. Brumby, Capital ($227,900 + $10,367) .............. 238,267 R. Criolio, Capital ($179,900 + $10,367) .............. 190,267 A. Paso, Capital ($24,700 + $10,366) ................ 35,066 Cash ($142,600 + $434,000 – $113,000).........................
463,600
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PROBLEM 12-12A (Continued) (a) (2)
Item Balances before liquidation Sale of Inventory
Payment of liabilities
Payment of Deficiency Allocation of Cash
Inventory
Bank Loan Payable
$142,600
$402,900
$113,000
318,000
(402,900)
(28,300)
(28,300)
(28,300)
460,600
-
199,600
151,600
(3,600)
Cash
(113,000)
(113,000)
347,600
-
H. Brumby Capital
R. Criolio Capital
A. Paso Capital
$227,900
$179,900
$24,700
3,600 351,200
3,600 -
(351,200) -
(199,600) -
(151,600) -
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PROBLEM 12-12A (Continued) (a) (2) (Continued) Aug.
8
8
8
8
Cash ................................................ 318,000 Loss on Realization ........................ 84,900 Inventory..................................
402,900
H. Brumby, Capital ($84,900 × ⅓) .. 28,300 R. Criolio, Capital ($84,900 × ⅓)..... 28,300 A. Paso, Capital ($84,900 × ⅓) ....... 28,300 Loss on Realization ................
84,900
Bank Loan Payable......................... 113,000 Cash .........................................
113,000
Cash ................................................ A. Paso, Capital ($24,700 – $28,300)...............
3,600
8 H. Brumby, Capital ($227,900 – $28,300)................ 199,600 R. Criolio, Capital ($179,900 – $28,300)................ 151,600 Cash ($142,600 + $318,000 – $113,000 + 3,600) ..........
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3,600
351,200
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-12A (Continued) (b)
Inventory
H. Brumby Capital
R. Criolio Capital
A. Paso Capital
$113,000
$227,900
$179,900
$24,700
Item Balances before liquidation
$142,600
$402,900
Sale of Supplies
318,000
(402,900)
(28,300)
(28,300)
(28,300)
460,600
-
199,600
151,600
(3,600)
(1,800)
(1,800)
3,600 -
(197,800) -
(149,800) -
Payment of liabilities
Cash
Bank Loan Payable
(113,000)
(113,000)
347,600
-
Allocation of Deficiency Allocation of Cash
(347,600) -
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PROBLEM 12-12A (Continued) (b) (Continued) Aug.
8
8
H. Brumby, Capital ($3,600 × 50%) R. Criolio, Capital ($3,600 × 50%) .. A. Paso, Capital ($24,700 – $28,300) ...........
1,800 1,800
H. Brumby, Capital ($227,900 – $28,300– $1,800) .............. 197,800 R. Criolio, Capital ($179,900 – $28,300 – $1,800) ............. 149,800 Cash ($142,600 + $318,000 – $113,000) .......................
3,600
347,600
Taking It Further: In order to ensure that no partners have a deficit (debit balances) when the partnership is liquidated, the partnership agreement should provide for a minimum capital balance which should be sufficient to address any losses experienced on liquidation.
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PROBLEM 12-13A (a) 2016 Mar. 2
Cash ....................................................... Equipment.............................................. Z. Moreau, Capital ............................
15,000 18,000
Cash ....................................................... Furniture ................................................ Notes Payable .................................. K. Krneta, Capital .............................
10,000 17,000
Cash ....................................................... Equipment.............................................. V. Visentin, Capital...........................
20,000 13,000
Dec. 20 Z. Moreau, Drawings ............................. K. Krneta, Drawings .............................. V. Visentin, Drawings ............................ Cash..................................................
30,000 30,000 30,000
2
2
33,000
5,000 22,000
33,000
90,000
31 Income Summary................................... 110,000 Z. Moreau, Capital ($110,000 × 3/8). 41,250 K. Krneta, Capital ($110,000 × 2/8).. 27,500 V. Visentin, Capital ($110,000 × 3/8) 41,250 MKV PERSONAL COACHING Capital Balances December 31, 2016
Investments Drawings Profit Ending Balance
Solutions Manual .
Z. Moreau K. Krneta V. Visentin Total $33,000 $22,000 $33,000 $88,000 (30,000) (30,000) (30,000) (90,000) 41,250 27,500 41,250 110,000 $44,250 $19,500 $44,250 $108,000
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PROBLEM 12-13A (Continued) (a) (Continued) 2017 Jan. 5
K. Krneta, Capital................................... Z. Moreau, Capital ............................ V. Visentin, Capital........................... Cash..................................................
19,500 2,250 2,250 15,000
Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to remaining partners................................... Allocation of bonus: Z. Moreau, Capital ($4,500 × 3/6) .................. $2,250 V. Visentin, Capital ($4,500 × 3/6) ............. 2,250 Dec. 20 Z. Moreau, Drawings ............................. V. Visentin, Drawings ............................ Cash..................................................
$19,500 15,000 $ 4,500 $4,500
42,750 45,000 87,750
31 Income Summary................................... 123,750 Z. Moreau, Capital ($123,750 × 4/9) . 55,000 V. Visentin, Capital ($123,750 × 5/9) 68,750 2018 Jan. 4
Cash ....................................................... Z. Moreau, Capital (4/9 × $9,000) .......... V. Visentin, Capital (5/9 × $9,000) ......... D. Hirjikaka, Capital .........................
31,000 4,000 5,000 40,000
Total capital of existing partnership [see (b)]......... $129,000 Investment by new partner, D. Hirjikaka ................. 31,000 Total capital of new partnership .............................. $160,000 D. Hirjikaka capital credit (25% × $160,000)............
$40,000
Investment by new partner, D. Hirjikaka ................. D. Hirjikaka capital credit ......................................... Bonus to new partner...............................................
$31,000 40,000 $ 9,000
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PROBLEM 12-13A (Continued) (b) MKV PERSONAL COACHING Balance of Partners’ Capital Accounts January 4, 2018
Balance Dec. 31, 2016 Withdrawal of partner Drawings 2017 Profit 2017 Balance Dec. 31, 2017 Admission new partner Balance Jan. 4, 2018
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D. Hirjikaka
Z. Moreau
$40,000 $40,000
$44,250 2,250 (42,750) 55,000 58,750 (4,000) $54,750
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K. Krneta V. Visentin $19,500 (19,500)
$0
$44,250 2,250 (45,000) 68,750 70,250 (5,000) $65,250
Total $108,000 (15,000) (87,750) 123,750 129,000 31,000 $160,000
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PROBLEM 12-13A (Continued) (b) (Continued) MKV PERSONAL COACHING Balance Sheet (partial) January 4, 2018 Partners’ equity D. Hirjikaka, Capital Z. Moreau, Capital V. Visentin, Capital Total partners' equity
$40,000 54,750 65,250 $160,000
Taking It Further: Most partnerships agree to continue the partnership year while allowing partners to withdraw or be admitted to the partnership. This is particularly the case in large partnerships where these events often occur. The process to be followed should be spelled out in the partnership agreement. Formulas on how to calculate and allocate the profit for a partial year are necessary so that a partner can be admitted or withdrawn without the books being closed. In the case of MKV Personal Coaching, the business carried on in spite of the withdrawal by Karen Krneta and the admission of Dela Hirjikaka. None of the temporary accounts of the partnership were closed, nor were new accounting records created.
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PROBLEM 12-1B (Continued) (b) (Continued) Jan. 1 Cash .................................................... 5,000 Accounts Receivable ....................... 20,000 Merchandise Inventory .................... 15,000 Equipment ........................................ 14,000 Allowance for Doubtful Accounts Accounts Payable ....................... P. Vanbakel, Capital ....................
4,500 20,000 29,500
(c) Jan. 1 Cash ($34,000 – $29,500) ................... 4,500 P. Vanbakel, Capital ....................
4,500
Taking It Further: Advantages of forming a partnership instead of operating as two proprietorships include: i.
ii. iii. iv. v.
The skills of the two individuals forming the partnership may be complementary and so their ability to provide better services to their customers is automatically enhanced. The partnership will provide an ability to share the tasks involved in running the business. A partnership will likely provide more security to the individual partners in case of illness or absence. The combined capital of the partners will help secure debt for operations. The partnership structure might assist one of the partners in a succession plan.
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PROBLEM 12-2B (a) Dec. 31 Income Summary ........................... 170,500 K. Ali, Capital ............................. P. Ramsey, Capital ....................
85,250 85,250
Profit is shared equally. (b) Division of Profit K. Ali P. Ramsey Total Profit.............................................. $170,500 Salary allowance K. Ali ......................................... $82,000 P. Ramsey ................................ $33,000 Total ..................................... 115,000 Profit remaining for allocation .... 55,500 Fixed ratio K. Ali ($55,500 × 50%) .............. 27,750 P. Ramsey ($55,500 × 50%) ..... 27,750 Total ..................................... 55,500 Profit remaining for allocation .... 0 Profit allocated to the partners.... $109,750 $60,750 $170,500 Dec. 31 Income Summary ........................... 170,500 K. Ali, Capital ............................. P. Ramsey, Capital ....................
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PROBLEM 12-2B (Continued) (c) Division of Profit K. Ali P. Ramsey Profit.............................................. Salary allowance K. Ali ......................................... $60,000 $55,000 P. Ramsey ................................ Total ..................................... Profit (deficiency) remaining for allocation Interest allowance K. Ali ($53,500 × 5%) ................ 2,675 Profit (deficiency) remaining for allocation Fixed ratio K. Ali ($27,675 × 65%) ................. (17,989) (9,686) P. Ramsey ($27,675 × 35%) ..... Total ..................................... Profit remaining for allocation .... Profit allocated to the partners..... $44,686 $45,314 Dec. 31 Income Summary ............................. 90,000 K. Ali, Capital ............................. P. Ramsey, Capital ....................
Total $90,000
115,000 (25,000) (2,675) (27,675)
27,675 0 $90,000
44,686 45,314
Taking It Further: Each partner is jointly and severally liable for all partnership liabilities. Ali should be concerned with the possibility that the business does not succeed and there are insufficient assets to pay all debt outstanding. If this happens, the creditors could then make claims against the personal assets of the partners. In this case, Ali has more assets to lose than his partner Ramsey, who is less cautious about handling expenses.
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PROBLEM 12-3B (a) 1.
Dec. 31 Income Summary.............................. 55,000 S. Little, Capital ......................... L. Brown, Capital....................... P. Gerhardt, Capital...................
10,000 30,000 15,000
LBG COMPANY Division of Profit Year Ended December 31, 2017 S. L. P. Total Little Brown Gerhardt Profit............................... $55,000 Salary allowance S. Little .......................... $5,000 L. Brown .................... P. Gerhardt ................ Total ...................... Profit remaining for allocation ............. Fixed ratio (remainder shared equally) S. Little ($15,000 × 1/3) ........... $5,000 L. Brown ($15,000 × 1/3) ........... P. Gerhardt ($15,000 × 1/3) ........... Total ...................... Profit remaining for allocation ............. _ Profit allocated to the partners ............... $10,000
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$25,000 $10,000 40,000 15,000
5,000 5,000 15,000 _ $30,000
_
0
$15,000 $55,000
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 12-3B (Continued) (a) (Continued) 2.
Dec. 31 Income Summary.............................. 25,000 S. Little, Capital.............................. 4,825 L. Brown, Capital....................... P. Gerhardt, Capital...................
11,550 18,275
LBG COMPANY Division of Profit Year Ended December 31, 2017 S. L. P. Total Little Brown Gerhardt Profit............................... $25,000 Interest allowance S. Little ($65,000 × 7%) $4,550 L. Brown ($40,000 × 7%) $2,800 P. Gerhardt ($20,000 × 7%) $1,400 Total ...................... 8,750 16,250 Profit remaining for allocation Salary allowance 15,000 L. Brown .................... P. Gerhardt ................ 20,000 Total ...................... 35,000 Profit (deficiency) remaining for allocation (18,750) Fixed ratio (remainder shared equally) S. Little [$(18,750) × 3/6] ......... (9,375) L. Brown (6,250) [$(18,750) × 2/6] ......... P. Gerhardt (3,125) [$(18,750) × 1/6] ......... Total ...................... (18,750) Profit remaining _ _ _ 0 for allocation ............. Profit allocated to $(4,825) $11,550 $18,275 $25,000 the partners........... Solutions Manual .
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PROBLEM 12-3B (Continued) (b) LBG COMPANY Statement of Partners’ Equity Year Ended December 31, 2017
Capital, January 1 Add: Profit Less: Drawings Capital, December 31
S. Little $65,000 (4,825) 60,175 21,000 $39,175
L. Brown $40,000 11,550 51,550 14,000 $37,550
P. Gerhardt Total $20,000 $125,000 18,275 25,000 38,275 150,000 9,000 44,000 $29,275 $106,000
Taking It Further: The partnership would include a salary allowance in its profitand loss-sharing arrangements to reward partners that contribute more time and effort in generating revenues for the business or bring specialized talents. This element of the allocation of profit provides fairness in rewarding effort.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-4B (a) LAM TAN PARTNERSHIP Division of Loss Year Ended January 31, 2017 T. Lam
C. Tan
Total $(30,000)
Loss................................................ Salary allowance T. Lam ........................................ $20,000 C. Tan ........................................ $30,000 Total ...................................... 50,000 Deficiency remaining for allocation (80,000) Interest allowance T. Lam ($100,000 × 5%)............. 5,000 C. Tan ($120,000 × 5%) ............. 6,000 Total ...................................... 11,000 Deficiency remaining for allocation (91,000) T. Lam [($91,000 × 3/7)] ............ (39,000) C. Tan [($91,000 × 4/7)] ............. (52,000) Total ...................................... 91,000 Loss remaining for allocation ...... _ _ 0 Loss allocated to the partners $(14,000) $(16,000) $(30,000)
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PROBLEM 12-4B (Continued) (b) LAM TAN PARTNERSHIP Statement of Partners’ Equity Year Ended January 31, 2017 T. Lam C. Tan Total Capital, February 1, 2016 ............ $100,000 $120,000 $220,000 Less: Drawings........................... 12,000 14,400 26,400 Loss .................................. 14,000 16,000 30,000 26,000 30,400 56,400 Capital, January 31, 2017............ $ 74,000 $ 89,600 $163,600
(c) Jan. 31 T. Lam, Capital ............................... 14,000 C. Tan, Capital................................ 16,000 Income Summary ....................
30,000
31 T. Lam, Capital ............................... 12,000 C. Tan, Capital................................ 14,400 T. Lam, Drawings .................... C. Tan, Drawings .....................
12,000 14,400
Taking It Further: There is no relationship between the salary allowance specified in the profit and loss ratio and a partner’s drawings.
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PROBLEM 12-5B (a) CLAY AND OGLETREE, LLP Income Statement Year Ended September 30, 2017 Fees earned ..................................................... $515,000 Expenses Salaries expense......................................... $225,000 Depreciation expense................................. 12,000 Insurance expense ..................................... 18,500 Interest expense ......................................... 5,000 Property tax expense ................................. 15,000 Total expenses............................................ 275,500 Profit................................................................. $239,500
CLAY AND OGLETREE, LLP Statement of Partners’ Equity Year Ended September 30, 2017 G. Clay M. Ogletree Total Capital, October 1, 2016............ $ 65,000 $ 37,500 $102,500 Add: Investment ........................ 10,000 0 10,000 Profit* ................................ 143,700 95,800 239,500 218,700 133,300 352,000 Less: Drawings.......................... 150,000 100,000 250,000 Capital, September 30, 2017 ..... $68,700 $ 33,300 $102,000 *G. Clay $239,500 × 3/5 = $143,700 M. Ogletree $239,500 × 2/5 = $95,800
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PROBLEM 12-5B (Continued) (a) (Continued) CLAY AND OGLETREE, LLP Balance Sheet September 30, 2017 Assets Current assets Cash............................................................................. $ 13,500 Accounts receivable ................................................... 105,000 Prepaid insurance....................................................... 3,500 Total current assets ............................................... 122,000 Property, plant, and equipment Equipment ...................................................... $60,000 Accumulated depreciation ........................... 12,000 Total property, plant, and equipment ................... 48,000 Total assets ..................................................................... $170,000 Liabilities and Partners' Equity Current liabilities Accounts payable ....................................................... $ 21,500 Unearned revenue ...................................................... 24,000 Current portion of notes payable ................................. 5,000 Total current liabilities ........................................... 50,500 Long-term liabilities Notes payable, net of current portion........................... 17,500 Total liabilities ........................................................... 68,000 Partners' equity G. Clay, Capital ........................................................... 68,700 M. Ogletree, Capital .................................................... 33,300 Total partners' equity ............................................. 102,000 Total liabilities and partners' equity............................... $170,000
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PROBLEM 12-5B (Continued) (b) Sept. 30 Fees Earned .............................. Income Summary .................
515,000
30 Income Summary...................... Salaries Expense ................. Depreciation Expense.......... Insurance Expense .............. Interest Expense .................. Property Tax Expense .........
275,500
30 Income Summary...................... G. Clay, Capital..................... M. Ogletree, Capital..............
239,500
30 G. Clay, Capital ......................... M. Ogletree, Capital .................. G. Clay, Drawings ................ M. Ogletree, Drawings .........
150,000 100,000
515,000 225,000 12,000 18,500 5,000 15,000 143,700 95,800
150,000 100,000
Taking It Further: The amount of the drawings taken by individual partners can be of any amount that the partners agree to, although a deficit position in any capital account should be avoided. Since the amount of the capital balances at September 30, 2017 are disproportionate, the partners may want to provide for an interest allowance in their formula to arrive at the allocation of any profit in the future. M. Ogletree should not be allowed to draw as high an amount in the future because he will risk having a deficit position in his capital account.
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PROBLEM 12-6B (a) Dec. 31 C. Maguire, Drawings ............................. 12,000 F. Whelan, Drawings ................................. 8,000 Salaries Expense................................ (b)
Profit as reported:................................... Add back salaries expense .................... Revised Profit .........................................
20,000 $10,100 20,000 $30,100
The profit allocation is $15,050 ($30,100 ÷ 2) to each partner since no agreement as to the allocation of profit was arrived at. (c) MAGUIRE & WHELAN CLEANING SERVICES Statement of Partners’ Equity Year Ended December 31, 2017 C. Maguire Capital, Jan. 1 ............................ $ 0 Add: Investment ........................ 2,500 Profit ..................................... 15,050 17,550 Less: Drawings.............................. 12,000 Capital, December 31 .................... $ 5,550
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F. Whelan $ 0 8,750 15,050 23,800 8,000 $15,800
Total $ 0 11,250 30,100 41,350 20,000 $21,350
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Accounting Principles, Seventh Canadian Edition
PROBLEM 12-6B (Continued) (d) MAGUIRE & WHELAN CLEANING SERVICES Balance Sheet December 31, 2017 Assets Current assets Cash................................................................................ $ 13,750 Property, plant, and equipment Equipment ......................................... $ 1,500 Less: Accumulated depreciation ... 300 $1,200 Vehicles ........................................... 8,000 Less: Accumulated depreciation ... 1,600 6,400 Total property, plant, and equipment........................ 7,600 Total assets ......................................................................... $21,350 Partners' Equity Partners' equity C. Maguire, capital ...................................................... $ 5,550 F. Whelan, capital ...................................................... 15,800 Total partners' equity .......................................................... $21,350 Taking It Further: Due to inexperience, Caitlin and Fiona failed to come to an agreement on the allocation of profit before they began their business together. This failure caused the profit to be split evenly at the end of the first year of operations. While Caitlin is correct that an equal allocation might not be fair if she worked twice as hard as Fiona, Fiona also has a good point in arguing that she should be rewarded for her larger investment into the business on January 1, 2017. Caitlin and Fiona should come to some agreement to a fair allocation of profit for the coming year and document the details in writing.
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PROBLEM 12-7B (a)
May 1 Cash ................................................ 100,000 Kai, Capital.................................
100,000
Total capital of existing partnership ............ $400,000 Investment by Kai .......................................... 100,000 Total capital of new partnership .................. $500,000 Kai 's capital credit ($500,000 × 20%) .......... $100,000 Investment by Kai ......................................... $100,000 Kai’s capital credit ................................................100,000 Bonus .......................................................... $0 (b)
May 1 Cash ................................................ 145,000 Ho, Capital ($36,000 × 4/7) ........ Ishikawa, Capital ($36,000 × 2/7) Jay, Capital ($36,000 × 1/7) ....... Kai, Capital.................................
20,571 10,286 5,143 109,000
Total capital of existing partnership ............ $400,000 Investment by Kai .......................................... 145,000 Total capital of new partnership .................. $545,000 Kai's capital credit ($545,000 × 20%) ........... $109,000 Investment by Kai ......................................... $145,000 Kai’s capital credit ................................................109,000 Bonus to old partners .................................... $ 36,000
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PROBLEM 12-7B (Continued) (c)
May 1 Cash .................................................. 65,000 Ho, Capital ($28,000 × 4/7) ............... 16,000 Ishikawa, Capital ($28,000 × 2/7) ....... 8,000 Jay, Capital ($28,000 × 1/7) ................ 4,000 Kai, Capital.................................
93,000
Total capital of existing partnership.......... $400,000 Investment by Kai ....................................... 65,000 Total capital of new partnership ................ $465,000 Kai's capital credit ($465,000 × 20%) .........
$93,000
Investment by Kai ....................................... Kai’s capital credit ...................................... Bonus to new partner .................................
$65,000 93,000 $28,000
Taking It Further: A new partner may purchase a partnership interest with a gain or loss. A gain to the new partner may be experienced if the new partner’s capital received when joining the partnership is greater than the amount paid by the new partner to be admitted to the partnership. A loss to the new partner may be experienced if the new partner’s capital received when joining the partnership is less than the amount paid by the new partner to be admitted to the partnership. The two main factors that determine the outcome (gain or loss) are: 1) the percentage of the total partnership capital to be given to the new partner and 2) the amount of the total capital of the original partners prior to the admission of the new partner.
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PROBLEM 12-8B (a) Oct. 1
A. Nolan, Capital ($60,000 × 25%) ...... 15,000 15,000 C. Santos, Capital .........................
(b) Oct. 1
Cash .................................................... 80,000 A. Nolan, Capital (50% × $18,500) 9,250 D. Elder, Capital (40% × $18,500) . 7,400 T. Wuhan, Capital (10% × $18,500) 1,850 C. Santos, Capital ......................... 61,500
Total capital of existing partnership ................ Investment by C. Santos ................................... Total capital of new partnership .......................
$125,000 80,000 $205,000
C. Santos' capital credit ($205,000 × 30%) .......
$61,500
Investment by new partner, C. Santos ............. C. Santos’ capital credit .................................... Bonus to old partners .......................................
$80,000 61,500 $18,500
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PROBLEM 12-8B (Continued) (c) Oct. 1
Cash .................................................... 36,000 A. Nolan, Capital ($12,300 × 50%)... 6,150 D. Elder, Capital ($12,300 × 40%).... 4,920 T. Wuhan, Capital ($12,300 × 10%) . 1,230 C. Santos, Capital ....................... 48,300
Total capital of existing partnership .............. Investment by C. Santos ................................. Total capital of new partnership .....................
$125,000 36,000 $161,000
C. Santos’ capital credit ($161,000 × 30%).....
$48,300
Investment by new partner ............................. C. Santos’ capital credit .................................. Bonus to new partner......................................
$36,000 48,300 $12,300
(d) Solve for x 30% × ($125,000 + x) = x $37,500 + .3x = x $37,500 = .7x x = $53,571 Proof: ($125,000 + $53,571) × 30% = $53,571
Taking It Further: Existing partners would be willing to give a bonus to a new partner because he is bringing badly needed expertise and an excellent reputation to the partnership. These qualities will yield greater revenues and consequently profits for all partners. The skills of the new partner are very complementary to the existing partners, making it easier to obtain and retain clients. This is often true in law firms offering a variety of specialties to clients.
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PROBLEM 12-9B (a) Dec. 31 R. Dixon, Capital .......................... 35,000 G. Khan, Capital ......................
35,000
(b) Dec. 31 R. Dixon, Capital .......................... 35,000 B. Vuong, Capital ($12,500 × 5/8) 7,813 G. Khan, Capital ($12,500 × 3/8).. 4,687 Cash .........................................
47,500
Dixon's capital balance ............... Payment to Dixon ........................ Bonus to Dixon ............................
$35,000 47,500 $12,500
(c) Dec. 31 R. Dixon, Capital .......................... 35,000 B. Vuong, Capital ($5,500 × 5/8) G. Khan, Capital ($5,500 × 3/8) Cash ......................................... Dixon's capital balance ............... Payment to Dixon ........................ Bonus to old partners .................
3,437 2,063 29,500
$35,000 29,500 $ 5,500
Taking It Further: In order for a new partner to be admitted, the remaining partners must approve Dixon’s sale of her interest to S. Meyers. The remaining partners cannot be forced to accept a change in partners dictated by the withdrawing partner.
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PROBLEM 12-10B (a) Feb.
1 T. Radzik, Capital ........................... 98,000 Cash ......................................... S. Kopel, Capital ($8,000 × ¾) E. Falkenberg, Capital ($8,000 × ¼).......................
90,000 6,000 2,000
(b) S. Kopel, Capital $79,000 + $6,000 = $85,000 E. Falkenberg, Capital $47,000 + $2,000 = $49,000 (c) Dec. 31 Income Summary........................... 45,000 S. Kopel, Capital ($45,000 × 2/3) E. Falkenberg, Capital ($45,000 × 1/3)................... (d) S. Kopel, Capital ($85,000 + $30,000) ......... E. Falkenberg, Capital ($49,000 + $15,000) Total partnership capital ............................. (e) Mar. 1
Cash ............................................. 110,000 S. Kopel, Capital ($20,050 × 2/3) . 13,367 E. Falkenberg, Capital ($20,050 × 1/3)................... 6,683 D. Malkin, Capital..............
30,000 15,000 $115,000 64,000 $179,000
130,050
Total capital of existing partnership.......... $179,000 Investment by D. Malkin ............................. 110,000 Total capital of new partnership ................ $289,000 D. Malkin’s capital credit ($289,000 × 45%) $130,050 Investment by D. Malkin ............................. $110,000 D. Malkin’s capital credit ............................ 130,050 Bonus to new partner ................................. $ 20,050
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PROBLEM 12-10B (Continued) (f) S. Kopel, Capital ($115,000 – $13,367) ....... E. Falkenberg, Capital ($64,000 – $6,683) .. D. Malkin, Capital ........................................ Total partnership capital .............................
$101,633 57,317 130,050 $289,000
Taking It Further: There might be several reasons why a withdrawing partner would be motivated to agree to a cash payment that results in a bonus to the remaining partners. A penalty might have been applied because of some circumstances that were adverse to the partnership caused by the withdrawing partner. The partnership agreement might contain a clause that provides for the discounting of the withdrawing partners’ capital upon his departure under certain circumstances. Or, the withdrawing partner may have personal reasons for needing cash immediately, and is willing to accept a lesser amount as a result.
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PROBLEM 12-11B (a) Item Balances before liquidation Sale of noncash assets
Payment of liabilities
Allocation of Cash based on capital balances
Cash
Accounts Receivable
Accum. Equipment Depreciation
33,000
20,000
75,200
(6,400)
88,800
(20,000)
(75,200)
6,400
121,800
-
-
-
Accounts Payable
B. Hally Capital
H. Lockyear Capital
A. Vu Capital
53,160
39,600
25,200
3,840
(39,600)
(25,200)
(3,840)
(53,160)
(53,160)
68,640
-
(68,640)
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PROBLEM 12-11B (Continued (a) (Continued) May
31 Cash................................................ 88,800 Accumulated Depreciation – 6,400 Equipment.............................. Accounts Receivable ................ Equipment .................................
20,000 75,200
31 Accounts Payable.......................... 53,160 Cash ...........................................
53,160
31 B. Hally, Capital ............................ 39,600 H. Lockyear, Capital ..................... 25,200 A. Vu, Capital ................................. 3,840 Cash ...........................................
68,640
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PROBLEM 12-10B (Continued) (b) Item Balances before liquidation Sale of noncash assets
Accounts Receivable
Equipment
$33,000
$20,000
$75,200
$(6,400)
60,000
(20,000)
(75,200)
93,000
-
-
Cash
Accum. Depreciation
Accounts B. Hally Payable Capital
H. Lockyear Capital
A. Vu Capital
$39,600
$25,200
$3,840
6,400
(14,400)
(8,640)
(5,760)
-
25,200
16,560
(1,920)
$53,160
Payment of liabilities
(53,160)
(53,160)
39,840 1,920
-
Payment of Deficit Allocation of Cash based on capital balances
(41,760)
(25,200)
(16,560)
-
-
-
-
-
1,920
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PROBLEM 12-11B (Continued) (b) (Continued) May
31 Cash................................................ 60,000 Accumulated Depreciation – Equipment.............................. 6,400 Loss on Realization ....................... 28,800 Accounts Receivable ................ Equipment .................................
20,000 75,200
31 B. Hally, Capital ($28,800 × 50%)...................... 14,400 H. Lockyear, Capital ($28,800 × 30%)...................... 8,640 A. Vu, Capital ($28,800 × 20%)..................... 5,760 Loss on Realization ..................
28,800
31 Accounts Payable.......................... 53,160 Cash ...........................................
53,160
31 Cash ($3,840 – $5,760)................... A. Vu, Capital .............................
1,920
1,920
31 B. Hally, Capital ($39,600 – $14,400) ................ 25,200 H. Lockyear, Capital ($25,200 – $8,640) .................. 16,560 Cash ($33,000 + $60,000 – $53,160 + $1,920) ....................
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PROBLEM 12-11B (Continued) (c) Item Balances before liquidation Sale of noncash assets Payment of liabilities
Accounts Receivable
Accounts Payable
B. Hally Capital
H. Lockyear Capital
A. Vu Capital
$53,160
$39,600
$25,200
$3,840
(24,400) 15,200
(14,640) 10,560
(9,760) (5,920)
(3,700)
(2,220)
5,920
(19,840)
(11,500)
(8,340)
-
-
-
-
-
Cash
Accum. Depreciation
Equipment
$33,000
$20,000
$75,200
$(6,400)
40,000 73,000
(20,000) -
(75,200) -
6,400 -
(53,160)
(53,160)
19,840
-
Allocation of Loss Allocation of Cash based on capital balances
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PROBLEM 12-11B (Continued) (c) (Continued) May
31 Cash................................................ 40,000 Accumulated Depreciation – Equipment .............................. 6,400 Loss on Realization ....................... 48,800 Accounts Receivable ................ Equipment..................................
20,000 75,200
31 B. Hally, Capital ($48,800 × 50%) ...................... 24,400 H. Lockyear, Capital ($48,800 × 30%) ...................... 14,640 A. Vu, Capital ($48,800 × 20%) ..................... 9,760 Loss on Realization...................
48,800
31 Accounts Payable .......................... 53,160 Cash ...........................................
53,160
31 B. Hally, Capital ($5,920 x 5 ÷ 8) ....................... 3,700 H. Lockyear, Capital ($5,920 x 3 ÷ 8) ........................... 2,220 A. Vu, Capital ($3,840 – $9,760)
5,920
31 B. Hally, Capital ($39,600 – $24,400 – $3,700).. 11,500 H. Lockyear, Capital ($25,200 – $14,640 – $2,220).. 8,340 Cash ($33,000 + $40,000 – $53,160) ...................................
19,840
Taking It Further: Creditors must be paid before the partners upon liquidation and failing to do so would be defrauding creditors of their legal claim against the business. Solutions Manual .
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PROBLEM 12-12B (a) (1)
Item Balances before liquidation
Cash
Supplies
Accounts Payable
$100,000
$110,000
$90,000
Sale of Supplies
130,000
(110,000)
230,000 Payment of liabilities
Payment of Cash
(90,000)
(90,000)
140,000
-
(140,000) -
M. Nokota Capital
S. Taishuh Capital
A. Paso Capital
$70,000
$30,000
$20,000
10,000
5,000
5,000
80,000
35,000
25,000
(80,000) -
(35,000) -
(25,000) -
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PROBLEM 12-12B (Continued) (a) (1) (Continued) Sept. 30
30
30
30
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Cash ................................................ 130,000 Gain on Realization................. Supplies ...................................
20,000 110,000
Gain on Realization .......................... 20,000 M. Nokota, Capital ($20,000 × ½) S. Taishuh, Capital ($20,000 × ¼) A. Paso, Capital ($20,000 × ¼)
10,000 5,000 5,000
Accounts Payable ............................. 90,000 Cash .........................................
90,000
M. Nokota, Capital ($70,000 + $10,000) ................ 80,000 S. Taishuh, Capital ($30,000 + $5,000) .................. 35,000 A. Paso, Capital ($20,000 + $5,000) .................. 25,000 Cash ($100,000 + $130,000 – $90,000)................................
140,000
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PROBLEM 12-12B (Continued) (b) (2)
Item Balances before liquidation Sale of Supplies Payment of liabilities
Payment of Deficit Payment of Cash
Cash
Supplies
Accounts Payable
$100,000
$110,000
$90,000
25,000 125,000
(110,000)
(90,000)
(90,000)
35,000
-
M. Nokota Capital
S. Taishuh Capital
$70,000
$30,000
$20,000
(42,500) 27,500
(21,250) 8,750
(21,250) (1,250)
1,250
A. Paso Capital
1,250
(36,250) -
(27,500) -
(8,750) -
-
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PROBLEM 12-12B (Continued) (a) (2) (Continued) Sept. 30
30
30
30
30
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Cash ................................................ 25,000 Loss on Realization ........................ 85,000 Merchandise Inventory ...........
110,000
M. Nokota, Capital ($85,000 × ½) ... 42,500 S. Taishuh, Capital ($85,000 × ¼) .. 21,250 A. Paso, Capital ($85,000 × ¼) ....... 21,250 Loss on Realization ................
85,000
Accounts Payable........................... 90,000 Cash .........................................
90,000
Cash ................................................ A. Paso, Capital ($20,000 – $21,250)..................
1,250
1,250
M. Nokota, Capital ($70,000 – $42,500).................. 27,500 S. Taishuh, Capital ($30,000 – $21,250).................. 8,750 Cash ($100,000 + $25,000 – $90,000 + $1,250) ..........
36,250
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PROBLEM 12-12B (Continued) (b) Sept.
30 M. Nokota, Capital ($1,250 × 2/3) ........................... S. Taishuh, Capital ($1,250 × 1/3) ........................... A. Paso, Capital ($20,000 – $21,250) ........... 30
833 417
M. Nokota, Capital ($70,000 – $42,500 – $833) ...... 26,667 S. Taishuh, Capital ($30,000 – $21,250 – $417) ...... 8,333 Cash ($100,000 + $25,000 – $90,000) .........................
1,250
35,000
Taking It Further: The reasons a partnership might decide to liquidate include: 1) the activity generating the revenue of the business has stopped; 2) government regulations have caused the business to be no longer viable; 3) internal discord among the partners; and 4) the business might not have intended to last very long and this is the logical end of the business model.
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PROBLEM 12-13B (a) 2016 Feb. 14 Cash ....................................................... Furniture ................................................ I. Moretti, Capital ..............................
9,000 15,000 24,000
14 Cash ....................................................... Equipment.............................................. A. Kam, Capital ................................
12,000 24,000
14 Cash ....................................................... Equipment.............................................. Accounts Payable ............................ C. Fenandoe, Capital .......................
18,000 40,000
Dec. 20 I. Moretti, Drawings ($72,000 × 2/9) ...... A. Kam, Drawings ($72,000 × 3/9) ......... C. Fenandoe, Drawings ($72,000 × 4/9) Cash..................................................
16,000 24,000 32,000
36,000
10,000 48,000
72,000
31 Income Summary................................... 81,900 I. Moretti, Capital ($81,900 × 2/9) ..... 18,200 A. Kam, Capital ($81,900 × 3/9) ....... 27,300 C. Fenandoe, Capital ($81,900 × 4/9) 36,400
MKF MARKETING Capital Balances December 31, 2016 C. FeI. Moretti A. Kam nandoe Total Investments $24,000 $36,000 $48,000 $108,000 Drawings (16,000) (24,000) (32,000) (72,000) Profit 18,200 27,300 36,400 81,900 Ending Balance $26,200 $39,300 $52,400 $117,900
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PROBLEM 12-13B (Continued) (a) (Continued) 2017 Jan. 5
C. Fenandoe, Capital (1/2 × $52,400) ........ 26,200 C. Wells, Capital .......................... 26,200
Dec. 20 I. Moretti, Drawings ($91,800 × 2/9) .......... 20,400 A. Kam, Drawings ($91,800 × 3/9) ............. 30,600 C. Fenandoe, Drawings ($91,800 × 2/9) 20,400 C. Wells, Drawings ($91,800 × 2/9) ........... 20,400 Cash.................................................. 91,800 31 Income Summary .................................... 103,050 I. Moretti, Capital ($103,050 × 2/9) ... A. Kam, Capital ($103,050 × 3/9) ..... C. Fenandoe, Capital ($103,050 × 2/9) C. Wells, Capital ($103,050 × 2/9) .... 2018 Jan. 2
22,900 34,350 22,900 22,900
C. Fenandoe, Capital ................................. 28,700 I. Moretti, Capital .............................. 900 A. Kam, Capital ................................ 1,350 C. Wells, Capital ............................... 900 Cash.................................................. 25,550
Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to remaining partners...................................
$28,700 25,550 $ 3,150
Allocation of bonus: I. Moretti, Capital ($3,150 × 2/7) .................. A. Kam, Capital ($3,150 × 3/7) ..................... C. Wells, Capital ($3,150 × 2/7) ...................
$3,150
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PROBLEM 12-13B (Continued) (b) MKFW MARKETING Statement of Partners’ Equity Year ended December 31, 2017
Capital January 1 Admission of partner Add: Profit Less: Drawings Capital, December 31
I. Moretti $26,200 22,900 49,100 20,400 $28,700
A. Kam $39,300 34,350 73,650 30,600 $43,050
C. Fenandoe $52,400 (26,200) 22,900 49,100 20,400 $28,700
C. Wells
Total $117,900
$26,200 22,900 49,100 20,400 $28,700
103,050 220,950 91,800 $129,150
(c) Balance of Partners’ Capital Accounts January 2, 2018
Balance Dec. 31, 2017 Withdrawal of partner Balance Jan. 2, 2018
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I. Moretti
A. Kam
C. Fenandoe
C. Wells
Total
$28,700 900 $29,600
$43,050 1,350 $44,400
$28,700 (28,700) $ 0
$28,700 900 $29,600
$129,150 (25,550) $103,600
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PROBLEM 12-13B (Continued)
Taking It Further: No, Moretti is not correct. Each partner’s capital account balance is their claim on the net assets of the partnership. Since cash is the only remaining asset, it must be distributed to the partners based on the capital account balances.
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BYP12-1 FINANCIAL REPORTING PROBLEM (a) The main deciding factor in choosing between the partnership and the corporate structure when the business was founded was likely the availability of cash needed to finance the business. In this case the owners likely chose the corporate structure. Limited liability may have also been a welcome feature of the corporate form of organization. In order to have its shares traded on a stock exchange Corus would have needed to adopt the corporate structure. The transfer of ownership would have been easier with the corporate structure. With the continued expansion came a greater need for financing and consequently the involvement of more and more creditors. Consequently, the owners needed the corporate structure to attract more capital and ensure limited liability to its owners.
(b) 1) Statements of Income and Comprehensive Income: There would not be any income tax on the partnership income statement. Partnership earnings are taxed in the hands of the partners. Nor would there be any earnings per share disclosure. 2) Statement of Financial Position: The equity section of this statement would be called Partnership Equity instead of Shareholders’ Equity. Each partner’s capital account balance would be listed, in place of Share Capital, Contributed Surplus, Retained Earnings, and Accumulated Other Comprehensive Income. 3) The Statements of Changes in Shareholders’ Equity would be replaced with a Statement of Partners’ Equity. 4) Statement of Cash Flows: There would be no difference.
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BYP12-2 INTERPRETING FINANCIAL STATEMENTS The advantage of operating as a limited partnership is that it allows some (limited) partners to invest in the partnership and have limited liability. This appeals to many individuals who want to invest in the business but do not want to take the risk of having unlimited liability for all the partnership liabilities. From the business’ perspective, the company would be able to attract more investors and capital if they could offer investors limited liability. The General Partner also maintains control of the dayto-day operations.
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BYP12-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP12-4 COMMUNICATION ACTIVITY To:
Drs. Chatterjie and Unger
From:
Your Accountant
Subject:
Partnership Agreement for Medical Practice
All provinces have a Partnership Act that provides the basic rules for the formation and operation of partnerships. Partnerships are easy to form and are not subject to much government regulation. There are three forms of partnership organizations that share the following characteristics: A partnership is a voluntary association of individuals. Assets of the partnership are co-owned. Profit is divided among the partners as specified in the partnership agreement. Each partner acts for the partnership when doing partnership business and the action of any partner is binding on all other partners. The life of the partnership is not unlimited. Any change in ownership dissolves the partnership. 1.
General Partnership Each partner has unlimited personal liability for all of the debts of the partnership. This is the main disadvantage of a general partnership.
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BYP12-4 (Continued) 2.
Limited Partnership (LP) One or more of the partners retain unlimited liability and are called general partners. The remaining partners have limited liability and are called limited partners. Limited partners tend to be investors who are not active in the business. Their liability is limited to their initial investment in the business.
3.
Limited Liability Partnership (LLP) Most professionals form this type of partnership, which is designed to protect innocent partners from negligent actions of other partners. Partners remain fully liable for their own negligence as well as those they supervise and control, but have limited liability for negligence of the other partners.
I look forward to a productive session with both of you.
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BYP12-5 “ALL ABOUT YOU” ACTIVITY (a)
A partnership can exist although there might not be a formal agreement in place.
(b)
The revenues that could be earned from the band include: 1. Fees for performances 2. Royalties of proceeds on sale of songs to other performers 3. Fees for endorsements of products if they obtain sponsors or on sales of merchandise 4. SOCAN royalties for airing music
(c)
Expenses to operate the band could include: 1. Studio time to record songs 2. Repair on musical instruments 3. Rent for space to work 4. Electricity and other utilities 5. Travel costs to promote their music 6. Accommodation and meals while delivering performances in other cities 7. Promotion costs 8. Professional fees from an agent 9. Depreciation expense on musical instruments.
(d)
Some of the issues relating to sharing of the revenues and the costs incurred by the band could include: 1. Some band members might own their own musical instruments and feel that they should be reimbursed for the costs of these instruments. 2. Some band member might have contributed more talent and effort in writing songs or lyrics that are used by all band members. 3. Additional personal assets, such as a car might be used to travel. 4. Money might be used to finance the band which might have been spent more by one band member than the others.
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BYP12-5 (Continued) (e)
Should one of the band members want to leave, the issues that could come up and should be dealt with in the partnership agreement on a departure include: 1. How to deal with musical instruments that were used by this band member, and determining whose property it is if a new instrument was purchased. 2. The ownership of copyrights of the lyrics. 3. Royalties yet to be earned by the use of the songs created while in the band. 4. Cash invested to finance the operations of the band. 5. The possible need to change the name of the band. 6. Allowing the member leaving the band the right to use a song and receive a portion of the royalty of a song created while with the band but very successful after the member leaves the band.
(f)
Should another band member join the band, when revenues have already been earned issues would include: 1. A requirement for the new member to purchase some of the goodwill that has already been established by the existing band. 2. The ownership of copyrights of the lyrics already in place. 3. Royalties yet to be earned by the future use of the songs created before joining the band. 4. The possible need to change the name of the band.
(g)
Issues that would need to be dealt with if a band member were to do solo performances include: 1. Determining the rights to the songs being used in a performance. 2. Use of equipment or resources that are controlled and paid for by the band. 3. Association of the performance to the band and the repercussions on reputation and future earning ability.
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BYP12-5 (Continued) (h)
Should the band decide to split up, issues will be similar to the ones dealt with when the band was formed. They would include: 1. How to deal with musical instruments that were purchased. 2. Dealing with outstanding debts or obligations of the band, including any outstanding claims from previous band members. 3. The ownership of copyrights of the lyrics. 4. Royalties yet to be earned by the use of the songs created while in the band. 5. Rights to the band name.
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BYP12-6 Santé Smoothie Saga (a) 1. A formalized partnership agreement is imperative. A formal agreement will ensure that you consider all possible situations, contingencies, and disagreements that could arise. At present, you may be in agreement with all the decisions being made. However, if a disagreement occurs later on, you will be able to turn to the partnership agreement for guidance. The partnership agreement should contain basic information such as the name and principal location of the partnership, the purpose of the business, and the date of inception. In addition, the agreement should specify the names and capital contributions of the partners, the rights and duties of the partners, the basis for sharing profit or loss, provisions for withdrawal of assets, procedures for settling disputes, procedures for the withdrawal or admission of a partner, the rights and duties of a surviving partner if a partner dies, and procedures for liquidating a partnership.
2. Jade Wingert would need to borrow $6,900. Total fair value of Santé Smoothie’s net assets: ($8,050 + $800 + $1,200 + $450 + $1,500) $12,000 Total fair value of J Wingert’s (Gem Frogurt) net assets: ($1,500 + $5,250 + $500 + $350 + $7,500 – $10,000) 5,100 Difference $ 6,900
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BYP12-6 (Continued) (a) (Continued) 3. Both the total amount of assets and the total amount of Jade Wingert’s debt should be considered in making this decision. Each partner is jointly and severally liable for all partnership liabilities. If you go forward with the partnership, both partners will be signing the lease agreement. This debt will be in addition to the bank loan payable, which is due in the near future. If the business does not succeed and there are insufficient assets to pay all debt outstanding, creditors could then make claims against the personal assets of the partners. Jade Wingert appears to have few personal assets. This could leave you (Natalie Koebel) responsible for repaying all liabilities of the partnership. 4. Before becoming a partner with Jade Wingert, you (Natalie Koebel) should ask to see the financial statements of Gem Frogurt to assess its profitability. You should also consider what benefits (if any) would result from combining the businesses. Lastly, it would be helpful to develop a cash flow budget to see if the new business will generate enough cash to cover the lease payment and the upcoming bank loan repayment.
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BYP 12-6 (Continued) (b) SANTÉ SMOOTHIES Balance Sheet April 1, 2018 Assets Current assets Cash............................................................................. $16,450* Accounts receivable ................................................... 6,050 Inventory ..................................................................... 1,700 Supplies....................................................................... 800 Total current assets ............................................... 25,000 Property, plant, and equipment Equipment ...................................................................... 9,000 Total assets ................................................................ $34,000 Liabilities and Partners' Equity Current liabilities Bank loan payable .......................................................... $10,000 Partners' equity J. Wingert, Capital ......................................... $12,000 N. Koebel, Capital ......................................... 12,000 24,000 Total liabilities and partners' equity.......................... $34,000 * Value of N. Koebel’s proprietorship net assets ................. $12,000 Value of Jade Wingert’s proprietorship net assets .......... 5,100 Cash Jade Wingert borrowed ....................................... 6,900 Cash from N. Koebel’s proprietorship ......................... 8,050 Cash from Jade Wingert’s proprietorship ........................... 1,500 Total cash when partnership is formed ........................... $16,450
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CHAPTER 13 Introduction to Corporations ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Questions
Problems Brief Set A Exercises Exercises
Problems Set B
1. Identify and discuss the major characteristics of the corporate form of organization.
1, 2, 3, 4
1
1, 2
1
1
2. Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.
5, 6, 7, 8, 9, 10
2, 3, 4, 5
2, 3, 4, 5, 7, 11
2, 3, 4, 7, 8, 12
2, 3, 4, 7, 8, 12
3. Prepare a corporate income statement.
11
6, 7
6, 10
5, 6, 9, 12
5, 6, 9, 10, 12
8
7, 8, 10
4, 5, 6, 7, 8, 12
4, 5, 6, 7, 8, 12
9, 10
9, 10
5, 6, 9, 10, 12
5, 6, 9, 10, 12
11, 12
11, 12
7, 8, 9, 10, 11, 12
7, 8, 9, 11, 12
4. Explain and 12, 13, 14 demonstrate the accounting for cash dividends. 5. Prepare a statement 15, 16 of retained earnings and closing entries for a corporation. 6. Prepare the 17, 18 shareholders’ equity section of the balance sheet and calculate return on equity.
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Determine form of business organization.
Simple
15-20
2A
Record and post share transactions. Determine balances and answer questions.
Moderate
25-30
3A
Allocate dividends between preferred and common shares.
Simple
15-20
4A
Allocate dividends between preferred and common shares and record conversion.
Simple
25-30
5A
Record dividends; prepare income statement and statement of retained earnings.
Simple
25-30
6A
Prepare income statement, statement of retained earnings, and closing entries.
Moderate
30-35
7A
Record and post transactions. Prepare shareholders’ equity section.
Moderate
40-50
8A
Record and post transactions. Prepare shareholders’ equity section.
Moderate
50-60
9A
Prepare financial statements.
Moderate
35-40
10A
Prepare financial statements and calculate return on equity.
Moderate
50-60
11A
Calculate return on assets and equity and comment.
Simple
20-25
12A
Record transactions and adjustments, prepare financial statements.
Moderate
35-40
1B
Identify and discuss major characteristics of a corporation.
Simple
15-20
2B
Record and post share transactions. Determine balances and answer questions.
Moderate
25-30
3B
Allocate dividends between preferred and common shares.
Simple
15-20
4B
Allocate dividends between preferred and common shares and record conversion.
Moderate
25-30
5B
Record dividends; prepare income statement and statement of retained earnings.
Simple
25-30
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Difficulty Level
Time Allotted (min.)
Prepare income statement, statement of retained earnings, and closing entries Record and post transactions. Prepare shareholders’ equity section.
Moderate
35-40
Moderate
40-50
8B
Record and post transactions. Prepare shareholders’ equity section.
Moderate
50-60
9B
Prepare financial statements.
Moderate
35-40
10B
Prepare financial statements.
Moderate
50-60
11B
Calculate return on assets and equity and comment.
Simple
20-25
12B
Record transactions and adjustments; prepare financial statements.
Moderate
35-40
6B 7B
Description
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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Knowledge Objectives 1. Identify and E13-2 discuss the major characteristics of the corporate form of organization. 2. Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.
Q13-8 E13-2
3. Prepare a corporate income statement.
4. Explain and demonstrate the accounting for cash dividends
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Q13-12 Q13-13
Comprehension
Application
Q13-1 Q13-2 Q13-3 Q13-4 BE13-1 E13-1
Q13-10
Q13-5 Q13-6
Q13-7 Q13-10 BE13-2 BE13-3 BE13-4 BE13-5 E13-3 E13-4 E13-5 E13-7 E13-11 P13-2A
P13-3A P13-4A P13-7A P13-8A P13-12A P13-2B P13-3B P13-4B P13-7B P13-8B P13-12B
Q13-11
BE13-6 BE13-7 E13-6 E13-10 P13-5A P13-6A P13-9A
P13-12A P13-5B P13-6B P13-9B P13-10B P13-12B
Q13-14
BE13-8 E13-7 E13-8 E13-10 P13-4A P13-5A P13-6A P13-7A
P13-8A P13-12A P13-4B P13-5B P13-6B P13-7B P13-8B P13-12B
13-4
Analysis
Synthesis
P13-1A P13-1B
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Evaluation
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued) Learning Objectives 5. Prepare a statement of retained earnings and closing entries for a corporation
Knowledge
6. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.
Q13-17
Broadening Your Perspective
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Comprehension
Application
Q13-15 Q13-16
BE13-9 BE13-10 E13-9 E13-10 P13-5A P13-6A P13-9A
Q13-18
BE13-11 P13-11A BE13-12 P13-12A E13-11 P13-7B E13-12 P13-8B P13-7A P13-9B P13-8A P13-11B P13-9A P13-12B P13-10A BYP13-4 BYP13-6 Santé Smoothie Saga
BYP13-1 BYP13-3
13-5
Analysis
Synthesis
BYP13-2
BYP13-5
P13-10A P13-12A P13-5B P13-6B P13-9B P13-10B P13-12B
Chapter 13
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Classified by Purpose: A business may be incorporated to make a profit, like Tim Hortons. Or, it may be incorporated as a not-for-profit, like the Canadian Cancer Society. Classified by Ownership: A corporation can be publicly held or privately held. A publicly held corporation, like Corus Entertainment Inc., may have thousands of shareholders, and its shares trade in an organized securities market. A privately held corporation, like McCain Foods Limited, usually only has a few shareholders, and its shares are not offered for sale to the general public.
2.
(a) Limited liability of shareholders. 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 shareholders is normally limited to their investment in the corporation. (b) Transferable ownership rights. Ownership of a corporation is held in capital shares. The shares are transferable units. Shareholders may dispose of part or all of their interest by simply selling their shares. The transfer of ownership to another party is usually entirely at the discretion of the shareholder. (c) Ability to acquire capital. A corporation has an easier time raising capital because of features such as limited liability and the ease of transferring shares. Also, because only small amounts of money need to be invested, many individuals can become shareholders. However, small, privately held corporations can have as much difficulty getting capital as any proprietorship or partnership.
3. (a)(1) Articles of incorporation form the company’s “constitution.” They include information such as (1) the name and purpose of the corporation, (2) the number of shares and the kinds of shares to be authorized, and (3) the location of the corporation’s head office. (2) Corporate bylaws are the internal rules and procedures for operations set by the corporation after receiving its articles of incorporation. Corporations that operate inter-provincially must also get a licence from each province they do business in. (3) Organization costs include legal and accounting fees, and registration costs incurred to incorporate. (b) Donna is incorrect. A corporation can be incorporated under the federal Canada Business Corporations Act., or it can be incorporated provincially. The location of the head office needs to be included in the articles of incorporation. A corporation may operate in several provinces and have a single head office.
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QUESTIONS (Continued) 4.
The ownership rights of shareholders are the rights to: Vote on the election of the board of directors with each shareholder normally having one vote for each common share Receive dividends on a pro-rata basis with other shareholders, and Receive assets upon liquidation on a pro-rata basis with other shareholders. Shareholders manage the corporation indirectly through the board of directors that they have elected. The board of directors can then select and hire officers of the corporation to conduct business on a day-to-day basis. The board of directors decides on the corporation’s operating policies and the officers of the corporation execute the policies.
5.
The total number of shares a company is allowed to sell is called its authorized shares—it may be an unlimited amount or a specified amount. No journal entry is recorded when the number of authorized shares is set. The number of authorized shares fixes the upper limit of how many shares can be sold by the corporation. This provides shareholders with an indication of the potential dilution of their ownership share. Issued shares are shares that have been sold. A journal entry will be prepared when shares are issued. The number of issued shares can never exceed the number of authorized shares. The number of shares issued allows users of financial statements to determine how many additional shares can be sold (up to the number authorized) and determine any future dilution of their ownership percentage. That said, under ASPE it is not necessary to show the number of shares authorized, just the number issued.
6.
When Paul purchases the original shares as part of TechTop’s initial public offering, he is purchasing from the company. The $1,200 (100 × $12) he spends to buy the shares goes directly to TechTop and increases the company’s assets and shareholders’ equity. In the subsequent purchase, Paul is buying in the secondary market from another investor. The proceeds from this sale go to the seller and not to TechTop. Therefore, there is no impact on TechTop’s financial statements as a result of the second purchase.
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QUESTIONS (Continued) 7.
The basic ownership rights of preferred shareholders are the rights to receive: dividends ahead of the common shareholder, and assets upon liquidation ahead of the common shareholder. They may also have priority for reacquisition if they are redeemable or retractable. In exchange for these preferences, preferred shareholders normally are not entitled to vote. In the absence of restrictive provisions, the basic ownership rights of common shareholders are the rights to: vote in the election of the board of directors and in corporate actions that require shareholders' approval, share in corporate profit by receiving dividends, and share in assets upon liquidation.
8.
The factors that help determine the market price of share on an organized stock exchange include: The financial performance of the company The dividend history of the company The expectation of future profits determined by trends in the industry and the position the company holds when compared to its competitors External factors such as the strength of the local currency, wars, and terrorism
9.
(a) The company is required to pay the previous two years of arrears on the cumulative preferred share dividends only, before paying current year dividends. (b) Dividends in arrears are disclosed in the notes to the financial statements; they are not recorded as liabilities.
10. When convertible preferred shares are converted into common shares, the shareholder simply exchanges preferred shares for common shares, according to a predetermined ratio. To record the conversion, the amount originally paid for the preferred shares is transferred from the preferred shares account into the common shares account. If multiple share issues have occurred at varying prices, then the average per share amount for each preferred share is used instead of the original cost. This entry has no effect on (a) total assets, (b) total liabilities, or (c) total shareholders' equity.
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Chapter 13
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 11.
The unique feature of corporation income statements is a separate section that shows income tax expense. The presentation is as follows: Profit before income tax........................................................... Income tax expense* ............................................................... Profit ........................................................................................
$500,000 150,000 $350,000
* This is usually subdivided, to show the portion which is currently due and the portion which is due in future periods. Proprietorship and partnership income statements do not show a section for income taxes since income is taxed personally in the hands of the proprietor or partner. 12.
Pro rata means proportional. If you own 5% of the shares, you are entitled to 5% of the dividends that are declared.
13.
A cash dividend becomes a liability on the declaration date. This is the date the board of directors formally declares the cash dividend and announces it to shareholders. This commits the corporation to a binding legal obligation that cannot be rescinded. On the declaration date, the company debits Cash Dividends and credits Dividends Payable. On the record date, there is no entry; the company simply determines ownership of the shares. On the payment date, the Dividends Payable is debited and Cash is credited as the dividend is paid.
14.
Undeclared dividends on cumulative preferred shares do not get accrued and reported as liabilities on the balance sheet because the company’s board of directors has not created an obligation from the declaration of the dividends. The amount of any dividend arrears is reported in the notes to the financial statements. This information is useful to shareholders because it warns the common shareholders of the amount of dividends that would first have to be declared to the cumulative preferred shareholders before any dividends could be declared to common shareholders.
15.
A statement of retained earnings shows the continuity of summary transactions that have occurred during the accounting period, reconciling the beginning balance in retained earnings to the ending balance. It contains details of increases from profits reported on the income statement (or decreases due to losses) and decreases from the declaration of dividends.
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Chapter 13
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 16. Temporary accounts such as the revenue, expenses, gains, and losses from the income statement are closed to the Income Summary account. The Income Summary account is then closed to Retained Earnings. The Cash Dividend accounts are also closed to Retained Earnings. This process is the same as for proprietorships except that proprietorships have a capital account instead of retained earnings and a withdrawal account instead of cash dividends. 17. The main components of shareholders' equity on the balance sheet are: Contributed capital, Retained earnings, and Accumulated other comprehensive income (loss) for companies that follow IFRS. Contributed capital represents the amounts contributed by the shareholders. Share capital and additional contributed surplus (e.g., from reacquisition of shares) are components of contributed capital. Retained earnings represent the cumulative profit (or loss) since incorporation that has been retained in the company and not distributed to shareholders as dividends. Accumulated other comprehensive income (loss) represents gains and losses not resulting from share transactions, that bypass profit. The most common example is unrealized gains and losses on certain types of investments. 18. Company 1 would be a better investment since it can generate the same amount of profit using a smaller investment of capital by the shareholders. This can be shown by comparing the return on shareholders’ equity for each company. Company 1: $100,000 ÷ $300,000 = 33.3% and Company 2: $100,000 ÷ $350,000 = 28.6%.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 1. 2. 3. 4. 5. 6. 7. 8.
(h) (c) (b) (d) (a) (g) (e) (f)
BRIEF EXERCISE 13-2 Aug.
5
Cash (2,000 × $12) ......................... Common Shares .......................
24,000 24,000
BRIEF EXERCISE 13-3 Sep. 10
Equipment ..................................... Common Shares .......................
9,500 9,500
The fair value of the equipment received has been used to value the transaction. Since Juke Joint Ltd. is a private company, the shares are not widely traded and the $20 per share price from March 12 is likely not a reliable indicator of the fair value on September 10.
BRIEF EXERCISE 13-4 (a) Jan. 13
Cash (3,000 × $90) ............................ 270,000 Preferred Shares......................
270,000
(b) Total dividend: $4 per share × 3,000 shares = $12,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 13-5 (a) Dividends are in arrears by $225,000 ([45,000 × $2.50] × 2) if the preferred shares are cumulative. If the shares are noncumulative, there are no dividends in arrears. (b) Dividends in arrears should be reported in the notes to the financial statements.
BRIEF EXERCISE 13-6 June 30 Income Tax Expense ...................... 33,750 Income Tax Payable ................... ($800,000 − $575,000) × 15%
33,750
BRIEF EXERCISE 13-7 VICERON INC. Income Statement Year Ended June 30, 2017 Revenues ................................................................ Operating expenses ............................................... Profit before income tax......................................... Income tax expense ............................................... Profit ........................................................................
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$800,000 575,000 225,000 33,750 $191,250
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 13-8 Oct. 14 Cash Dividends—Preferred ............... 131,250 Dividends Payable (25,000 × $5.25) Nov.
131,250
1 No journal entry.
Nov. 21 Dividends Payable .............................. 131,250 Cash................................................
131,250
BRIEF EXERCISE 13-9 GRAYFAIR INC. Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1......................................... $248,000 Add: Profit...................................................................... 175,000 423,000 Less: Cash dividends .................................................... 120,000 Retained earnings, December 31 ................................... $303,000
BRIEF EXERCISE 13-10 Dec. 31
31
31
31
Solutions Manual .
Sales ............................................. Income Summary.....................
745,000
Income Summary ......................... Cost of Goods Sold ................. Operating Expenses ................ Income Tax Expense ...............
620,000
Income Summary ......................... Retained Earnings ...................
125,000
Retained Earnings........................ Cash Dividends—Common ....
25,000
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745,000
450,000 135,000 35,000
125,000
25,000 Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 13-11 TRUE GREEN NURSERIES LTD. Balance Sheet (Partial) December 31, 2017 Shareholders' equity Share capital* $6.50 cumulative preferred shares, 1,000 shares issued Common shares, 15,000 shares issued Total share capital Retained earnings Total shareholders' equity
$100,000 150,000 250,000 285,000 $535,000
* Under ASPE, it is not necessary to show the number of shares authorized.
BRIEF EXERCISE 13-12 Return on equity $283,957 =16.87% ($1,589,840 + $1,777,502) ÷ 2
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 13-1 1. 2. 3. 4. 5. 6. 7. 8.
True. True. False. Common shareholders have the right to vote, but annual dividends are not guaranteed. False. Profit is taxed as a separate entity. False. Creditors have no legal claim on personal assets of shareholders. False. Share ownership transfers are handled by stock exchanges. True. False. Corporations are heavily regulated.
EXERCISE 13-2 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)
8. 6. 11. 5. 2. 10. 12. 1. 4. 3. 7. 9.
Solutions Manual .
Retractable preferred shares Public corporation Redeemable preferred shares Authorized shares Issued shares Initial public offering Secondary market Retained earnings Liquidation preference Legal capital Convertible Cumulative
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Accounting Principles, Seventh Canadian Edition
EXERCISE 13-3 (a) Jan. 12 Cash (50,000 × $5) ................... Common Shares .................
250,000
24 Legal Fees Expense ................ Common Shares .................
4,500
July 11 Cash (1,000 × $25) ................... Preferred Shares .................
25,000
Oct.
55,000
(b)
1 Land.......................................... Common Shares .................
250,000
4,500
25,000 55,000
The average per share amount for the common shares is $5.08 [($250,000 + $4,500 + $55,000) (50,000 + 950 + 10,000)].
EXERCISE 13-4 Mar
2 Legal Fees Expense ................ Common Shares .................
June 12
30,000 30,000
Cash ......................................... Common Shares .................
375,000
July 11 Cash (1,000 x $110) ................. Preferred Shares .................
110,000
Nov. 28 Cash (2,000 x $95) ................... Preferred Shares .................
190,000
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375,000
110,000 190,000
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 13-5 (a) The preferred shareholders will convert their shares when the fair value of the common shares is either equal to or higher than the value of the preferred shares. The fair value of the common shares must be equal to at least $110 ÷ 4 = $27.50 each. This occurs on September 19. On September 28, the fair value of the common shares is in excess of $27.50. Therefore, if the preferred shareholders had not already converted, they would also be willing to convert on that day. (b) Sept. 19 Preferred Shares ...................... 11,000,000 Common Shares ................. 11,000,000 (100,000 × $110) (c) Preferred shareholders will want to convert their preferred shares into common shares before the fair value of the common shares reaches $28.75 per share ($115 ÷ 4). At this price, the company will likely redeem the shares.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 13-6 SHRUNK INC. Income Statement Year Ended July 31, 2017 Sales................................................................................ $665,000 Cost of goods sold ......................................................... 310,000 Gross profit..................................................................... 355,000 Operating expenses: Salaries expense .......................................... 140,000 Supplies expense ........................................ 10,000 150,000 Profit from operations.................................................... 205,000 Other expenses: Interest expense ........................................................ 5,000 Profit before income tax ................................................ 200,000 Income tax expense ($200,000 × 20%) .......................... 40,000 Profit................................................................................ $160,000
July 31
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Income Tax Expense ............... 10,000 Income Tax Payable............ ($200,000 × 20%) – $30,000 = $10,000
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 13-7 (a) Preferred shares, $3.50, cumulative: Arrears: $3.50 × 20,000 shares × 2 years = Current amount: Total
$140,000 70,000 $210,000
Preferred shares, $4.50, noncumulative: Current amount: $4.50 × 10,000 shares =
$45,000
Common shares: Current amount: $0.50 × 300,000 shares = Total
$150,000 $405,000
(b) 2017 Oct. 30 Cash Dividends—Preferred* .............. 255,000 Cash Dividends—Common................ 150,000 Dividends Payable ......................... *($210,000 + $45,000)
405,000
Nov. 16 No journal entry. Dec. 1
Dividends Payable ............................. 405,000 Cash................................................
405,000
(c) Dividends to cumulative preferred shareholders would be 100% of the maximum dividend of $200,000. Non-cumulative preferred shareholders and common shareholders would not receive any dividends until the cumulative preferred shareholders have been paid in full. By the end of the year, assuming no other dividends are declared, Accentrics Limited will have dividends in arrears of $10,000 [$210,000 owing to the preferred shareholders (from (a) above) – $200,000 maximum dividend].
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Accounting Principles, Seventh Canadian Edition
EXERCISE 13-8 (a) 150,000 × $4.50 = $675,000 (b) Regular dividend Arrears from Year 1 Dividend paid Arrears
Year 1 $675,000
450,000 $225,000
Year 2 $675,000 225,000 900,000 900,000 $ 0
(c) Dividends in arrears should be disclosed in the notes to the financial statements. They are not recorded in the general ledger accounts. (d) The likely amount is $4.50 per share, for a total of $675,000.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 13-9 (a) SHRUNK INC. Statement of Retained Earnings Year Ended July 31, 2017 Retained earnings, August 1, 2016 ................................ $352,000 Add: Profit ..................................................................... 160,000 512,000 Less: Cash dividends .................................................... 60,000 Retained earnings, July 31, 2017 ................................... $452,000 (b) July 31 Sales.................................................... 665,000 Income Summary ...........................
665,000
31 Income Summary ............................... 505,000 Cost of Goods Sold ....................... Supplies Expense .......................... Salaries Expense ........................... Interest Expense ............................ Income Tax Expense .....................
310,000 10,000 140,000 5,000 40,000
31 Income Summary ............................... 160,000 Retained Earnings ......................... ($665,000 – $505,000) 31 Retained Earnings ................................ 60,000 Cash Dividends—Common ...........
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160,000
60,000
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 13-9 (Continued) Income Summary Date July 31 31 31
Ref. Closing entry Closing entry Closing entry
Debit
Credit
Balance
665,000
665,000 160,000 0
Credit
Balance
J1 160,000 J1 60,000
352,000 512,000 452,000
J1 J1 J1
505,000 160,000
Ref.
Debit
Retained Earnings Date Aug. 1 July 31 31
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Balance Closing entry Closing entry
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Accounting Principles, Seventh Canadian Edition
EXERCISE 13-10 (a) DIDSBURY DIGITAL LTD. Income Statement Year Ended September 30, 2017 Service revenue.............................................................. Operating expenses ....................................................... Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ($84,500 × 15%) ............................ Profit................................................................................
(b) Sep. 30 Income Tax Expense ............... Income Tax Payable............ ($84,500 × 15%)
$529,000 442,000 87,000 2,500 84,500 12,675 $71,825
12,675 12,675
(c) DIDSBURY DIGITAL LTD. Statement of Retained Earnings Year Ended September 30, 2017 Retained earnings, October 1, 2016 .................... Add: Profit............................................................. Less: Cash dividends declared ........................... Retained earnings, September 30, 2017 .............
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$237,500 71,825 309,325 40,000 $269,325
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 13-11 The memo would contain the following: (a)
600,000 common shares are issued.
(b) 10,000 preferred shares are authorized. (c) The most common sources of contributed surplus are: 1) the amount in excess of the actual share issue price and its par value (where par value shares are allowed, not the case here); 2) the retirement of shares for less than the average issue cost, and; 3) donations of assets to the corporation. (d) Retained earnings changes each year when the Income Summary account is closed to Retained Earnings for any profit or loss for the year. Dividends declared also cause Retained Earnings to decrease. Another possible transaction that will affect the Retained Earnings account is a transaction involving the repurchase of shares, which will be discussed in Chapter 14. (e) The preferred shares are cumulative and are in arrears for two years (2016 and 2017). Consequently, the amount of dividends that will need to be paid to preferred shareholders before any dividends can be declared to common shareholders is three times the annual dividend entitlement of preferred shareholders. There are 6,000 preferred shares issued X $2 annual dividend rate per share per year, so the amount will be: 6,000 X 3 X $2 = $36,000. This assumes the dividends were declared in 2018.
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Accounting Principles, Seventh Canadian Edition
EXERCISE 13-12 (a) RAIDERS LIMITED Balance Sheet (Partial) December 31, 2017
Shareholders' equity Share capital* $5 cumulative preferred shares, 1,000 issued 1 $ 105,000 2 Common shares, 35,000 issued 350,000 Total share capital ........................................... 455,000 3 ....................................................... Retained earnings 337,000 Total shareholders’ equity .................................................. $792,000 * Under ASPE it is not necessary to show the number of authorized shares. 1 1,000 shares × $105 = $105,000 2 35,000 shares × $10 = $350,000 3 $287,000 + $125,000 – $75,000 = $337,000 (b) Return on equity $125,000 = 16.30% ($742,000* + $792,000) ÷ 2 * Shareholders’ equity December 31, 2016 = $455,000 share capital + $287,000 beginning retained earnings = $742,000.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 13-1A 1.
A partnership would be the most likely form of business for the students to choose. It is simpler to form than a corporation and less costly.
2.
Darien would likely form a corporation because he needs to raise funds to buy equipment. It is normally easier to raise funds through a corporation. A corporation is also the only form of business that provides limited liability to its owners.
3.
Joeline will likely operate her roofing services as a proprietorship because it is the simplest and least costly to form and maintain. If she feels that she has legal exposure to lawsuits from customers, she may choose to incorporate in order to limit her liability.
4.
A proprietorship would be the most likely form of business for Frank. It is simpler to form than a corporation and less costly. A corporation is the only form of business that provides limited liability to its owners. However, it is unlikely that incorporating the business would shield Frank from personal liability in the event of an accident. In addition, a sole proprietorship means that Frank maintains control of the company. This could also be achieved in a corporation if it is closely held, although it would make attracting investors unlikely.
Taking It Further: The corporation’s by-laws would detail who can act as an agent on behalf of the corporation. The shareholders vote to approve the by-laws. These types of decisions are usually made at the annual general meeting and determine who has signing authority to make payments from the company’s bank account and who has signing authority to enter into contracts on behalf of the corporation. Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-2A GENERAL JOURNAL
(a) Date
Debit
Credit
Feb. 10 Cash (80,000 × $4) .............................. 320,000 Common Shares ............................
320,000
Mar. 1 Cash (5,000 × $115) ............................ 575,000 Preferred Shares ............................
575,000
Apr.
Account Titles
J1
1 Land .................................................... 90,000 Common Shares ............................
90,000
Jun. 20 Cash (78,000 × $4.50) ......................... 351,000 Common Shares ............................
351,000
July
7 Legal Fees Expense ........................... 45,000 Common Shares ............................
45,000
Sep. 1 Cash (10,000 × $5) .............................. 50,000 Common Shares ............................
50,000
Nov. 1 Cash (1,000 × $117) ............................ 117,000 Preferred Shares ............................
117,000
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PROBLEM 13-2A (Continued) (b) Preferred Shares Date Mar. Nov.
Ref. 1 1
Debit
J1 J1
Credit
Balance
575,000 117,000
575,000 692,000
Common Shares Date
Ref.
Feb. 10 Apr. 1 June 20 July 7 Sept. 1
J1 J1 J1 J1 J1
Debit
Credit 320,000 90,000 351,000 45,000 50,000
Balance 320,000 410,000 761,000 806,000 856,000
(c) Number of preferred shares = 5,000 + 1,000 = 6,000 shares Average per share amount for the preferred shares = $692,000 ÷ 6,000 shares = $115.33 Number of common shares = 80,000 + 22,500 + 78,000 + 10,000 + 10,000 = 200,500 shares Average per share amount for common share = $856,000 ÷ 200,500 shares = $4.27 (d) The company is authorized to issue an additional 94,000 preferred shares (100,000 shares authorized – 6,000 shares issued) and an unlimited number of common shares.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-2A (Continued)
Taking It Further: April 1 and July 7 are examples of issuing share for services or noncash assets. If Wetland was a public corporation, the transactions would still be valued at the fair value of the assets or services received. In this case, the fair value of the land received and of the service received are the only amounts the company has to value the transactions. This is typical for private companies where the shares are not widely traded and the fair value of the shares given in exchange cannot be determined. For Wetland, the journal entries would be the same.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-3A
Year Dividend Paid 1 $20,000 2 15,000 3 30,000 4 35,000
(a) (b) Noncumulative Common Cumulative Common Preferred Preferred $20,000 $ 0 $20,000 $ 0 15,000 0 15,000 0 20,000 10,000 25,000 5,000 20,000 15,000 20,000 15,000
1. Regular dividend is $4 × 5,000 = $20,000 2b. Arrears = $20,000 − $15,000 = $5,000 3b. Preferred dividend = $20,000 (regular) + $5,000 (arrears) = $25,000
Taking It Further: Common shares have voting rights which allows investors some degree of influence over the company depending on how many shares are owned. Also, if the company is successful, the common shareholders will benefit more than the preferred shares from an increase in the value of their shares.
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PROBLEM 13-4A (a) Date
GENERAL JOURNAL Account Titles
2016 Jan. 10
2017 Jan. 10
J1 Debit
Credit
Cash Dividends—Preferred ............... 12,000 Cash................................................
12,000
Cash Dividends—Preferred*.............. 68,000 Cash Dividends—Common ............... 4,000 Cash................................................
72,000
* Arrears from 2016: 2016 Dividend: (8,000 × $5) .............. $40,000 Less: Dividend paid in 2016 ............. 12,000 Current year dividend (8,000 × $5) ........... Cash Dividend to Preferred....................... Mar. 1 Preferred Shares (8,000 shares) .........528,000 Common Shares (16,000 shares).. (8,000 × $66)
$28,000 40,000 $68,000
528,000
(b) The company needs to disclose dividends in arrears of $28,000 in 2016, in the notes to the financial statements.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-4A (Continued) (c) A preferred shareholder will usually convert preferred shares to common shares to participate in the growth of the market value of the common shares. Since preferred shares usually have no voting rights and carry a fixed dividend amount, their market price tends to remain fairly stable and is not subject to significant growth. Shareholders that own preferred shares can choose to keep their shares and receive stable, predictable dividends, but they can also choose to participate in the growth potential of common shares through conversion. If, through conversion, the market value of the common shares exceeds the market value of the preferred shares given up in the conversion, this would be a strong motivator to the preferred shareholder to convert, particularly if the shareholder intends to sell his investment.
Taking It Further: The conversion option allows a preferred shareholder to convert their shares to common shares and to participate in the growth of the market value of the common shares. Since preferred shares usually have no voting rights and carry a fixed dividend amount, their market price tends to remain fairly stable and is not subject to significant growth. Shareholders that own preferred shares can choose to keep their shares and receive stable, predictable dividends, but they can also choose to participate in the growth potential of common shares through conversion. This additional choice and possibility for additional returns on their investment makes convertible preferred shares more attractive to investors.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-5A
(a) Date
GENERAL JOURNAL Debit
Credit
2017 June 30 Cash Dividends—Common ............... 25,000 Dividends Payable .........................
25,000
July
Account Titles
J1
8 Dividends Payable.............................. 25,000 Cash................................................
25,000
Dec. 31 Cash Dividends—Common ............... 25,000 Dividends Payable .........................
25,000
(b) ZURICH LIMITED Income Statement Year Ended December 31, 2017 Sales ................................................................................ $1,650,000 Cost of goods sold......................................................... 1,225,000 Gross profit .................................................................... 425,000 Operating expenses ....................................................... 210,000 Profit from operations.................................................... 215,000 Interest revenue ................................................ $12,500 Interest expense ................................................ 35,000 22,500 Profit before income tax ................................................ 192,500 Income tax expense ($192,500 × 20%) .......................... 38,500 Profit ............................................................................... $154,000
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PROBLEM 13-5A (Continued) (c) ZURICH LIMITED Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1.............................. Add: Profit ............................................................ Less: Cash dividends declared* ......................... Retained earnings, December 31 ........................
$ 550,000 154,000 704,000 50,000 $654,000
* $25,000 + $25,000
Taking It Further: A statement of retained earnings shows increases from profit and decreases from distributions to owners through dividends. It does not show investments by owners through the sale of shares or repurchases of shares. In contrast, a statement of owner’s equity shows investments by owner in addition to increases from profit and distributions to owners through withdrawals.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-6A (a) MEMPHIS LTD. Income Statement Year Ended October 31, 2017 Service revenue.............................................................. Operating expenses: Depreciation expense................................... $15,250 Insurance expense .................................... 5,100 Rent expense ............................................. 38,800 Salaries expense ......................................... 175,750 Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ....................................................... Profit ...............................................................................
$385,000
234,900 150,100 1,400 148,700 29,740 $118,960
(b) MEMPHIS LTD. Statement of Retained Earnings Year Ended October 31, 2017 Retained earnings, November 1 .......................... Add: Profit ............................................................ Less: Cash dividends – common........................ Retained earnings, October 31............................
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$ 610,000 118,960 728,960 40,000 $688,960
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-6A (Continued) GENERAL JOURNAL
(c) Date
J1
Account Titles
Debit
Credit
Oct. 31 Service Revenue................................. 385,000 Income Summary ...........................
385,000
31 Income Summary ................................266,040 Depreciation Expense ................... Income Tax Expense ..................... Insurance Expense ........................ Interest Expense ............................ Rent Expense ................................. Salaries Expense ...........................
15,250 29,740 5,100 1,400 38,800 175,750
31 Income Summary ................................118,960 Retained Earnings .........................
118,960
31 Retained Earnings .................................40,000 Cash Dividends—Common ...........
40,000
(d) Income Summary Date Oct. 31 31 31
Ref. Closing entry Closing entry Closing entry
Debit
J1 J1 J1
266,040 118,960
Ref.
Debit
Credit
Balance
385,000
385,000 118,960 0
Credit
Balance
118,960
610,000 728,960 688,960
Retained Earnings Date Oct. 31 31 31
Solutions Manual .
Balance Closing entry Closing entry
J1 J1 J1
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40,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-6A (Continued)
Taking It Further: If Memphis Ltd. had been following IFRS instead of ASPE, we would prepare a Statement of Changes in Shareholders’ Equity instead of a Statement of Retained Earnings. All other statements would remain the same.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-7A (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Credit
Jan. 2 Cash ................................................. 5,000,000 Preferred Shares ............................ 5,000,000 Apr. 1 Cash Dividends—Preferred ............... 100,000 Cash (100,000 × $4 4)..................
100,000
July 1 Cash Dividends—Preferred ............... 100,000 Cash................................................
100,000
Aug. 12 Cash (100,000 × $1.70) ....................... 170,000 Common Shares ............................
170,000
Oct.
1 Cash Dividends—Preferred ............... 100,000 Cash Dividends—Common* .............. 275,000 Cash................................................ (1,000,000 + 100,000) × $0.25 = $275,000
375,000
Dec. 31 Cash Dividends – Preferred ............... 100,000 Cash .............................................
100,000
Dec. 31 Retained Earnings .............................. 100,000 Income Summary ...........................
100,000
Dec. 31 Retained Earnings .............................. 675,000 Cash Dividends—Preferred........... Cash Dividends—Common ...........
400,000 275,000
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PROBLEM 13-7A (Continued) (b) Preferred Shares Date Jan.
Ref. 2
Debit
J1
Credit
Balance
5,000,000
5,000,000
Credit
Balance
170,000
1,500,000 1,670,000
Credit
Balance
400,000
100,000 200,000 300,000 400,000 0
Credit
Balance
275,000
275,000 0
Credit
Balance
Common Shares Date Jan. 1 Aug. 12
Ref. Balance
Debit
J1
Cash Dividends—Preferred Date
Ref.
Debit
Apr. 1 July 1 Oct. 1 Dec. 31 Dec. 31
J1 J1 J1 J1 J1
100,000 100,000 100,000 100,000
Date
Ref.
Debit
Oct. 1 Dec. 31
J1 J1
275,000
Ref.
Debit
Closing entry
Cash Dividends—Common
Closing entry
Retained Earnings Date Jan. 1 Dec. 31 31
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Balance Closing entry Closing entry
J1 100,000 J1 675,000
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1,800,000 1,700,000 1,025,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-7A (Continued) (c) SCHIPPER LTD. Balance Sheet (Partial) December 31, 2017 Shareholders' equity Share capital* $4 noncumulative preferred shares, 100,000 issued ................................................. Common shares, 1,100,000** issued .................. Total share capital................................................ Retained earnings..................................................... Total shareholders’ equity ..............................
$5,000,000 1,670,000 6,670,000 1,025,000 $7,695,000
* Under ASPE, it is not necessary to show the number of authorized shares. ** 1,000,000 + 100,000 = 1,100,000 common shares No disclosure of arrears is required since the preferred shares are noncumulative.
Taking It Further: The conditions to declare and pay dividends include (1) having sufficient cash to pay for ongoing operations and not make the company insolvent by paying a dividend; (2) maintain legal capital; and (3) a decision by the board of directors of the corporation. If all of these conditions are met, the company is allowed to declare and pay dividends even though it generated a loss in the current year.
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PROBLEM 13-8A (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Feb. 28 Cash ................................................. Preferred Shares ..........................
Credit
275,000 275,000
Apr. 12 Cash ................................................. 3,200,000 3,200,000 Common Shares .......................... May 25 Land ................................................. Common Shares ..........................
75,000
Jan. 1 Cash Dividends—Preferred ............ Cash [(10,000 + 5,000) × $2.50]....
37,500
Jan. 31 Retained Earnings ........................... Income Summary .........................
50,000
Jan. 31 Retained Earnings ........................... Cash Dividends—Preferred.........
37,500
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75,000
37,500
50,000 37,500
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-8A (Continued) (b) Preferred Shares Date Feb. 1 Feb. 28
Ref.
Debit
Credit
J1
Balance
Balance
475,000 275,000 750,000
Common Shares Date Feb. 1 Apr. 12 May 25
Ref. Balance
Debit
J1 J1
Credit
Balance
1,050,000 3,200,000 4,250,000 75,000 4,325,000
Cash Dividends—Preferred Date
Ref.
Debit
Jan. 1 Jan. 31
J1 J1
37,500
Closing entry
Credit
Balance
37,500
37,500 0
Retained Earnings Date
Ref.
Feb. 1 Balance Jan. 31 Closing Entry Jan. 31 Closing Entry
J1 J1
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Debit 50,000 37,500
Credit
Balance 700,000 650,000 612,500
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-8A (Continued) (c) CATTRALL CORPORATION Balance Sheet (Partial) January 31, 2017 Shareholders' equity Contributed capital Share capital* $5 cumulative preferred shares, 15,000** issued $ 750,000 Common shares, 275,000*** issued ......................4,325,000 Total share capital ....................................................5,075,000 Retained earnings ...................................................... 612,500 Total shareholders’ equity.................................................... $5,687,500 * Under ASPE, it is not necessary to show the number of authorized shares. ** 10,000 + 5,000 = 15,000 preferred shares *** 70,000 + 200,000 + 5,000 = 275,000 common shares Dividends of $37,500 [15,000 × ($5 – $2.50)] are in arrears at January 31, 2017. Taking It Further: Under ASPE, shares issued in exchange for noncash assets are recorded at the fair value of whatever can more reasonably be determined — the fair value of the assets or the fair value of the shares. For a company applying ASPE, the fair value of the shares given in exchange can be particularly difficult to determine if there are no recent share transactions to provide a reliable fair value of the shares. For companies applying ASPE, the fair value of the noncash asset or service received can be used to value the transaction. The challenge remains of determining how many shares to issue if a fair value per share cannot be determined. This will usually be resolved by negotiation between the company and the supplier of the noncash asset or service. Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-9A CHOKE CHERRY LTD. Income Statement Year Ended December 31, 2017 Sales ............................................................................... $515,000 Cost of goods sold ......................................................... 159,000 Gross profit..................................................................... 356,000 Operating expenses: Depreciation expense................................... $20,000 Insurance expense ........................................... 8,200 Rent expense .................................................. 32,600 Salaries expense .......................................... 185,000 Supplies expense ........................................ 12,500 258,300 Profit from operations.................................................... 97,700 Other expenses: Interest expense ........................................................ 1,800 Profit before income tax ................................................ 95,900 Income tax expense ....................................................... 14,385 Profit................................................................................ $ 81,515
CHOKE CHERRY LTD. Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1.............................. Add: Profit.............................................................
$ 73,000 81,515 154,515
Less: Preferred share dividends ....................... $4,000 Common share dividends ........................ 50,000 54,000 Retained earnings, December 31 ........................ $100,515
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PROBLEM 13-9A (Continued) CHOKE CHERRY LTD. Balance Sheet December 31, 2017 Assets Current assets Cash............................................................................. $ 28,000 Inventory ..................................................................... 26,500 Supplies ......................................................................... 5,000 Total current assets ............................................... 59,500 Property, plant, and equipment Equipment .................................................... $300,000 Accumulated depreciation .......................... (65,000) Total property, plant, and equipment...................... 235,000 Total assets .......................................................... $294,500 Liabilities and Shareholders’ Equity Current liabilities Accounts payable ....................................................... $ 34,000 Income tax payable..................................................... 8,985 Unearned revenue ...................................................... 21,000 Current portion of notes payable .............................. 12,000 Total current liabilities ........................................... 75,985 Long-term debt Notes payable, net of current portion ......................... 18,000 Total liabilities ........................................................... 93,985 Shareholders’ equity Share capital* $4 noncumulative preferred shares, 1,000 issued 40,000 Common shares, 120,000 issued .......................... 60,000 Total share capital.................................................. 100,000 Retained earnings ......................................................... 100,515 Total shareholders’ equity .............................................. 200,515 Total liabilities and shareholders’ equity ............. $294,500 * Under ASPE, it is not required to show the number authorized.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-9A (Continued)
Taking It Further: Withdrawals by partners are based on mutually agreed amounts amongst the partners and on the partnership’s and the partners’ cash needs for the year. Dividends are paid to the shareholders of the corporation on a pro-rata basis based on the number of shares within a class of shares. For preferred shares, the dividend amount is usually fixed and preferred shareholders cannot receive more than their specified dividend rate. Dividends must be approved by the corporation’s board of directors before they can be paid out. Corporations must also abide by the Corporations Act in paying out dividends to ensure the company remains solvent and to ensure there is a positive balance in retained earnings. Because withdrawals are a return to a partner or owner of his investment or of profit on which he has been taxed personally, the amount of a withdrawal has no tax consequences. On the other hand, dividends are generally taxable to those who receive them as income.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-10A (a) NORTHWOOD ARCHITECTS LTD. Statement of Retained Earnings Year Ended March 31, 2017 Retained earnings, April 1 ................................... Add: Profit.............................................................
$ 64,800 59,590 * 124,390
Less: Preferred share dividends........................ $4,500 Common share dividends ........................ 40,000 44,500 Retained earnings, March 31 ............................... $ 79,890 * Calculation of profit: Consulting revenue ........................................................... $404,500 Operating expenses: Depreciation expense .................................. $ 11,825 Insurance expense ..................................... 6,550 Rent expense .................................................. 35,800 Salaries expense........................................... 245,400 Supplies expense ........................................ 25,800 325,375 Profit from operations.................................................... 79,125 Other expenses: Interest expense ........................................................ 3,000 Profit before income tax ................................................ 76,125 Income tax expense ....................................................... 16,535 Profit................................................................................ $ 59,590
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PROBLEM 13-10A (Continued) (a) (Continued) NORTHWOOD ARCHITECTS LTD. Balance Sheet (partial) March 31, 2017 Shareholders’ equity Share capital* $3 cumulative preferred shares, 1,500 issued ... $ 56,250 Common shares, 75,000 issued ............................ 75,000 Total share capital.................................................. 131,250 Retained earnings.................................................... 79,890 Total shareholders’ equity.................................. $ 211,140 * Under ASPE, it is not required to show the number authorized. (b) Return on equity = Profit ÷ Average shareholders’ equity $59,590 ($196,050* + $211,140) ÷ 2
= 29.27%
* $196,050 = Beginning Retained Earnings + Share Capital = $64,800 + $131,250 Taking It Further: Retained earnings represents the amount of past earnings that can be distributed to owners in the form of dividends. Share capital represents legal capital that cannot be distributed to shareholders. It must remain for the protection of corporate creditors.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-11A (a) 2014 Canadian Pacific Railway Limited Return on assets 8.76% (1) Return on equity 23.23% (3)
5.51% (2) 14.35% (4)
Canadian National Railway Company Return on assets 10.22% (5) Return on equity 23.97% (7)
9.19% (6) 21.79% (8)
(1) (2) (3) (4) (5) (6) (7) (8)
2013
8.76% = $1,476 ÷ (($16,640 + $17,060) ÷ 2) 5.51% = $875 ÷ (($17,060 + $14,727) ÷ 2) 23.23% = $1,476 ÷ (($5,610 + $7,097) ÷ 2) 14.35% = $875 ÷ (($7,097 + $5,097) ÷ 2) 10.22% = $3,167 ÷ (($31,792 + $30,163) ÷ 2) 9.19% = $2,612 ÷ (($30,163 + $26,659) ÷ 2) 23.97% = $3,167 ÷ (($13,470 + $12,953) ÷ 2) 21.79% = $2,612 ÷ (($12,953 + $11,018) ÷ 2)
The return on assets and return on equity ratios of both companies have both improved substantially.
(b) Canadian Pacific`s return on assets and return on equity ratios both underperformed compared to those of Canadian National in 2014 and 2013.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-11A (Continued) (c) Both Canadian Pacific and Canadian National significantly exceeded the 5-year industry average for return on equity.
Taking It Further: Comparisons can be made using intracompany (comparing within a company with prior years), intercompany (comparing with a competing company), and industry averages. In evaluating ratios, different bases of comparison allow the user to extract additional information. Intracompany comparison allows the user to determine significant trends in financial relationships over time. Intercompany comparison allows users to evaluate a company`s competitive position. Comparison with industry averages allows users to examine the performance of a company within its industry. Using Canadian Pacific and Canadian National results, the intracompany comparison allows us to examine the change in the relationship of profit to shareholders’ equity and assets from 2013 to 2014 and determine whether improvement or deterioration is occurring. The intercompany comparison allows us to examine each company’s performance by comparison to its competitor. In this case, the comparison shows that Canadian National’s performance exceeds that of Canadian Pacific. Finally, the industry average comparison allows us to compare how each company is performing within its industry.
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PROBLEM 13-12A (a) Jan. 1 Cash ................................................. Common Shares ..........................
150,000 150,000
Jan. 2 Cash (30,000 x $40) ......................... 1,200,000 1,200,000 Preferred Shares .......................... Dec. 1 Cash Dividends—Preferred*........... Cash Dividends—Common ............ Dividends Payable ....................... *(30,000 × $4)
120,000 105,000 225,000
(b) ANNORA INC. Income Statement (partial) Year Ended December 31, 2017 Profit before income tax ($915,000 - $610,000) ............ Income tax expense (15% × $305,000) .......................... Profit................................................................................
Dec. 31 Income Tax Expense ....................... Income Tax Payable..................... ($45,750 – $40,000)
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$305,000 45,750 $259,250
5,750 5,750
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PROBLEM 13-12A (Continued) (c) ANNORA INC. Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1.............................. Add: Profit.............................................................
$ 0 259,250 259,250
Less: Preferred share dividends ................... $120,000 Common share dividends ...................... 105,000 225,000 Retained earnings, December 31 ........................ $ 34,250 ANNORA INC. Balance Sheet (partial) December 31, 2017 Shareholders’ equity Share capital* $4 cumulative preferred shares, 30,000 issued $1,200,000 Common shares, 300,000 issued .......................... 150,000 Total share capital ....................................................1,350,000 Retained earnings ........................................................ 34,250 Total shareholders’ equity ......................................... $1,384,250 * Under ASPE, it is not required to show the number of shares authorized. Taking It Further: Common shareholders are referred to as “residual owners” because once the claims of the creditors and the preferred shareholders are satisfied, the common shareholders own whatever is left.
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PROBLEM 13-1B 1.
Limited liability of shareholders. If the company was operated as a sole proprietorship or a partnership, Kevin might have to satisfy the business liabilities from his personal assets if there were not sufficient assets in the business to pay the lawsuit claim.
2.
Separate legal existence. Salik can negotiate a borrowing agreement on behalf of the corporation as an agent of the corporation. If the business was operated as a sole proprietorship or a partnership, only the business owner or partner could negotiate a borrowing agreement on behalf of the company since there is no separate legal existence.
3.
Continuous life and transferable ownership rights. The corporation can continue with Marion’s daughter as President since the business is a separate legal entity. Marion can also transfer her ownership in the corporation by selling or bequeathing her shares to her daughter. If the business operated as a sole proprietorship or partnership, the business ceases to exist when Marion dies.
4.
Ability to acquire capital. The division of ownership into shares and the possibility of selling shares to the public through a public offering allow a corporation to acquire significant amounts of capital. A partnership or sole proprietorship is not as attractive to investors and does not allow business owners to attract significant amounts of investment capital.
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PROBLEM 13-1B (Continued)
Taking It Further: Investors in the secondary market want to limit their exposure to liability risk. The characteristic of limited liability means that the most investors can lose is the amount that they have paid to purchase their shares. Their personal assets are not at risk from liabilities of the corporation. This characteristic makes investments in corporations very attractive to investors.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-2B (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Jan. 10 Cash (100,000 × $2) ........................ Common Shares ........................
200,000
Mar.
1 Cash (10,000 × $42) ........................ Preferred Shares ........................
420,000
Mar. 31 Cash (75,000 × $3) .......................... Common Shares ........................
225,000
Apr.
3 Land ................................................ Common Shares ........................
74,000
July 24 Cash ............................................... Equipment....................................... Common Shares ........................
60,000 12,000
Nov.
96,000
1 Cash (2,000 × $48) .......................... Preferred Shares ........................
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Credit
200,000
420,000
225,000
74,000
72,000 96,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 13-2B (Continued) (b) Preferred Shares Date Mar. Nov.
Ref. 1 1
Debit
J1 J1
Credit
Balance
420,000 420,000 96,000 516,000
Common Shares Date
Ref.
Jan. 10 Mar. 31 Apr. 3 July 24
J1 J1 J1 J1
Debit
Credit
Balance
200,000 225,000 74,000 72,000
200,000 425,000 499,000 571,000
(c) Number of preferred shares = 10,000 + 2,000 = 12,000 shares Average per share amount for preferred shares = $516,000 ÷ 12,000 shares = $43.00 Number of common shares = 100,000 + 75,000 + 25,000 + 20,500 = 220,500 shares Average per share amount common share = $571,000 ÷ 220,500 shares = $2.59 (d) Yes. Features can be added to preferred shares to make them more attractive to potential investors. The cumulative feature assures investors that dividends not currently declared may be paid out at some point in the future. With noncumulative preferred shares, if no dividends are declared, the dividend entitlement lapses and is lost to the investor. Since the cumulative feature makes the shares more attractive, it also results in a higher price for the shares. Solutions Manual .
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PROBLEM 13-2B (Continued)
Taking It Further: April 3 and July 24 are examples of issuing share for services or noncash assets. If Highland was a public corporation, the transactions would still be valued at the fair value of the assets or services received. In this case, the fair value of the land received and of the equipment received are the only amounts the company has to value the transactions. This is typical for private companies where the shares are not widely traded and the fair value of the shares given in exchange cannot be determined. For Highland, the journal entries would be the same.
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PROBLEM 13-3B (a)
(b)
Dividend Noncumulative Cumulative Year Paid Preferred Common Preferred Common 1 $15,000 $15,000 $ 0 $15,000 $ 0 2 12,000 12,000 0 12,000 0 3 27,000 15,000 12,000 18,000 9,000 4 35,000 15,000 20,000 15,000 20,000 1. Regular dividend is $5 × 3,000 = $15,000 2b. Arrears = $15,000 − $12,000 = $3,000 3b. Preferred dividend = $15,000 (regular) + $3,000 (arrears) = $18,000
Taking It Further: Common shares have voting rights which allow investors some degree of influence over the company depending on how many shares are owned. Also, if the company is successful, the common shareholders will benefit more than the preferred shareholders from an increase in the value of their shares.
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PROBLEM 13-4B (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Credit
2016 Jan. 10 Cash Dividends—Preferred ............... 12,000 Cash................................................
12,000
2017 Jan. 10 Cash Dividends—Preferred*.............. 28,000 Cash Dividends—Common ............... 4,000 Cash................................................
32,000
* Arrears from 2016: 2016 Dividend: (5,000 × $4) ............. $20,000 Less Dividend paid in 2016 ............. 12,000 Current year dividend (5,000 × $4) ........... Cash Dividend to Preferred.......................
$ 8,000 20,000 $28,000
Mar. 1 Preferred Shares (5,000 shares) .........400,000 Common Shares (20,000 shares).. (5,000 × $80)
400,000
(b) The company needs to disclose dividends in arrears of $8,000 in 2016, in the notes to the financial statements.
(c) Number of common shares before conversion Number of commons shares from conversion 5,000 preferred X 4 ....................................... Number of common shares issued after conversion
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10,000 20,000 30,000
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PROBLEM 13-4B (Continued)
Taking It Further: Retractable preferred shares are shares that give the shareholder the right to sell the shares to the issuer at specified future dates and prices. Convertible preferred shares are preferred shares the shareholder can convert into common shares at a specified ratio. From the perspective of the company, retractable shares represent an obligation to buy back shares whose market value is lower than the retractable price. This type of transaction causes cash and shareholders’ equity to decrease. On the other hand, at a conversion of preferred shares, there is no cash involved. Total shareholders’ equity remains the same.
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PROBLEM 13-5B (a) Date
GENERAL JOURNAL Debit
Credit
2014 June 26 Cash Dividends—Common ............... 80,000 Dividends Payable .........................
80,000
July
Account Titles
J1
9 Dividends Payable.............................. 80,000 Cash................................................
80,000
Dec. 26 Cash Dividends—Common ............... 80,000 Dividends Payable .........................
80,000
HYPERCHIP LIMITED Income Statement Year Ended December 31, 2017 Net sales .......................................................................... $1,425,000 Cost of goods sold......................................................... 950,000 Gross profit .................................................................... 475,000 Operating expenses ....................................................... 270,000 Profit from operations.................................................... 205,000 Other revenues .................................................. $45,000 Other expenses ................................................. 30,000 15,000 Profit before income tax ................................................ 220,000 Income tax expense ($220,000 × 20%) .......................... 44,000 Profit ............................................................................... $ 176,000
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PROBLEM 13-5B (Continued) (b) HYPERCHIP LIMITED Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1................................. Add: Profit ............................................................... Less: Cash dividends declared * ........................... Retained earnings, December 31 ...........................
$1,150,000 176,000 1,326,000 160,000 $1,166,000
* $80,000 + $80,000 Taking It Further: A statement of retained earnings would be replaced with a statement of changes in shareholders’ equity if Hyperchip were to follow IFRS.
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PROBLEM 13-6B (a) HAYDEN INC. Income Statement Year Ended November 30, 2017 Service revenue.............................................................. Operating expenses: Depreciation expense................................... $51,650 Insurance expense .................................... 10,350 Rent expense ............................................. 43,500 Salaries expense ......................................... 220,000 Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................
$425,000
325,500 99,500 7,500 92,000 13,800 $ 78,200
(b) HAYDEN INC. Statement of Retained Earnings Year Ended November 30, 2017 Retained earnings, December 1 .......................... Add: Profit............................................................. Less: Cash dividends .......................................... Retained earnings, November 30 ........................
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$ 339,500 78,200 417,700 120,000 $ 297,700
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PROBLEM 13-6B (Continued) (c)
GENERAL JOURNAL
Date
Account Titles
J1 Debit
Credit
Nov. 30 Service Revenue................................. 425,000 Income Summary ...........................
425,000
30 Income Summary ............................... 346,800 Depreciation Expense ................... Income Tax Expense ..................... Insurance Expense ........................ Interest Expense ............................ Rent Expense ................................. Salaries Expense ...........................
51,650 13,800 10,350 7,500 43,500 220,000
30 Income Summary ............................... 78,200 Retained Earnings .........................
78,200
30 Retained Earnings .............................. 120,000 Cash Dividends—Common ...........
120,000
(d) Income Summary Date Nov. 30 30 30
Ref. Closing entry Closing entry Closing entry
Debit
J1 J1 J1
346,800 78,200
Ref.
Debit
Credit
Balance
425,000
425,000 78,200 0
Retained Earnings Date Nov. 30 30 30
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J1 J1 J1
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Credit 78,200
120,000
Balance 339,500 417,700 297,700
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PROBLEM 13-6B (Continued)
Taking It Further: The calculation of income tax expense involves the final amounts for the remainder of the income statement, so the calculation must be prepared after all adjustments have been considered. The company also has to calculate the difference between the income tax expense and the instalments remitted earlier in the year. In addition, certain opportunities for tax planning exist and managers need to calculate the profit before income tax before finalizing the income tax expense for the year.
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PROBLEM 13-7B (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Credit
Jan. 2 Cash (100,000 × $66) ...................... 6,600,000 Preferred Shares ......................... 6,600,000 Mar. 31
Cash Dividends—Preferred ........... Cash ............................................. (100,000 × $6 4)
150,000
Cash (250,000 × $1.30) ................... Common Shares .........................
325,000
June 30 Cash Dividends—Preferred ........... Cash .............................................
150,000
Sep. 30
Cash Dividends—Preferred ........... Cash .............................................
150,000
Cash Dividends—Preferred ........... Cash .............................................
150,000
Income Summary ........................... Retained Earnings ......................
160,000
Retained Earnings .......................... Cash Dividends—Preferred........
600,000
Apr. 18
Dec. 31
Dec. 31
Dec. 31
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150,000
325,000
150,000
150,000
150,000
160,000 600,000
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PROBLEM 13-7B (Continued) (b) Preferred Shares Date Jan.
Ref. 2
Debit
J1
Credit
Balance
6,600,000 6,600,000
Common Shares Date Jan. 1 Apr. 18
Ref. Balance
Debit
J1
Credit
Balance
325,000
1,650,000 1,975,000
Credit
Balance
Cash Dividends—Preferred Date
Ref.
Mar. 31 June 30 Sep. 30 Dec. 31
J1 150,000 J1 150,000 J1 150,000 J1
Closing entry
Debit
150,000 300,000 450,000 450,000 0
Retained Earnings Date Jan. 1 Balance Dec. 31 Closing entry 31 Closing entry
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Debit
600,000
Credit
Balance 550,000 160,000 560,000 110,000
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PROBLEM 13-7B (Continued) (c) CONWAY LTD. Balance Sheet (Partial) December 31, 2017 Shareholders' equity Share capital* $6 noncumulative preferred shares, 100,000 issued ............................................. Common shares, 1,750,000** issued ............... Total share capital ....................................... Retained earnings................................................. Total shareholders' equity ........................................
$6,600,000 1,975,000 8,575,000 110,000 $8,685,000
* Under ASPE, it is not required to show number of shares authorized. ** 1,500,000 + 250,000 = 1,750,000 shares No disclosure of arrears is required since the preferred shares are noncumulative.
Taking It Further: The conditions to declare and pay dividends include (1) having sufficient cash to pay for ongoing operations and not make the company insolvent by paying a dividend; (2) maintain legal capital; and (3) a decision by the board of directors of the corporation.
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PROBLEM 13-8B (a) Date Jan.
GENERAL JOURNAL Account Titles
J1 Debit
1 Cash ................................................. Preferred Shares ..........................
600,000
Apr. 14 Cash ................................................. Common Shares ..........................
560,000
June 30 Cash Dividend—Preferred Shares . Cash .............................................. (8,000 + 10,000) × ($4.00 ÷ 2)
36,000
Credit
600,000
560,000 36,000
Aug. 22 Building .................................................150,000 Common Shares .......................... 150,000 Dec
31 Income Summary ............................ Retained Earnings........................
582,000
31 Retained Earnings ........................... Cash Dividend—Preferred Shares
36,000
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582,000 36,000
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PROBLEM 13-8B (Continued) (b) Preferred Shares Date Jan. Jan.
Ref. 1 1
Balance
Debit
J1
Credit
Balance
440,000 600,000 1,040,000
Common Shares Date Jan. 1 Apr. 14 Aug. 22
Ref. Balance
Debit
J1 J1
Credit
Balance
1,050,000 560,000 1,610,000 150,000 1,760,000
Cash Dividends—Preferred Date
Ref.
Debit
June 30 Dec. 31
J1 J1
36,000
Closing entry
Credit
Balance
36,000
36,000 0
Retained Earnings Date Jan. 1 Dec. 31 Dec. 31
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Balance Closing Entry Closing Entry
Ref.
Debit
Credit
Balance
J1 J1
800,000 582,000 1,382,000 36,000 1,346,000
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PROBLEM 13-8B (Continued) (c)
LARGENT CORPORATION Balance Sheet (Partial) December 31, 2017
Shareholders' equity Share capital* Preferred shares, $4 cumulative, 18,000** issued ............................................... $1,040,000 Common shares, 120,000*** issued .................... 1,760,000 Total share capital .................................................... 2,800,000 Retained earnings..................................................... 1,346,000 Total shareholders' equity ............................................ $4,146,000 * Under ASPE, it is not necessary to show number of authorized shares. ** 8,000 + 10,000 = 18,000 shares *** 70,000 + 40,000 + 10,000 = 120,000 shares Dividends of $36,000 [18,000 × ($4 ÷ 2)] are in arrears.
Taking It Further: Under ASPE, shares issued in exchange for noncash assets are recorded at the fair value of whatever can more reasonably be determined — the fair value of the assets or the fair value of the shares. For a company applying ASPE, the fair value of the shares given in exchange can be particularly difficult to determine if there are no recent share transactions to provide a reliable fair value of the shares. For companies applying ASPE, the fair value of the noncash asset or service received can be used to value the transaction. The remaining challenge is determining how many shares to issue if a fair value per share cannot be determined. This will usually be resolved by negotiation between the company and the supplier of the noncash asset or service.
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PROBLEM 13-9B RUPERT ENGINEERING CORP. Income Statement Year Ended March 31, 2017 Consulting revenue ........................................................ $315,500 Operating expenses: Depreciation expense.................................. $ 14,800 Rent expense .................................................. 36,000 Salaries expense .......................................... 140,300 Supplies expense ........................................ 15,900 207,000 Profit from operations.................................................... 108,500 Other expenses: Interest expense ........................................................ 2,400 Profit before income tax ................................................ 106,100 Income tax expense ....................................................... 21,200 Profit................................................................................ $ 84,900 RUPERT ENGINEERING CORP. Statement of Retained Earnings Year Ended March 31, 2017 Retained earnings, April 1 ................................... Add: Profit.............................................................
$ 65,000 84,900 149,900
Less: Preferred share dividends ......................... $ 1,875 Common share dividends .......................... 53,125 55,000 Retained earnings, March 31 .............................. $ 94,900
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PROBLEM 13-9B (Continued)
RUPERT ENGINEERING CORP. Balance Sheet March 31, 2017 Assets Current assets Cash ..................................................................... Accounts receivable............................................. Supplies ................................................................ Total current assets....................................... Property, plant, and equipment Equipment .............................................. $148,000 Less: Accumulated depreciation .......... (29,600) Total property, plant, and equipment Total assets.................................................... Liabilities and Shareholders’ Equity Current liabilities Accounts payable................................................. Income tax payable .............................................. Unearned revenue ................................................ Current portion of notes payable ........................ Total current liabilities .................................. Long-term debt Long-term notes payable ..................................... Total liabilities................................................ Shareholders’ equity Share capital* $3.75 cumulative preferred shares, 500 issued Common shares, 35,000 issued ......................... Total share capital ................................................... Retained earnings ...................................................... Total shareholders’ equity ........................................... Total liabilities and shareholders’ equity ..........
$ 65,400 31,150 7,300 103,850
118,400 $222,250
$ 14,200 1,900 2,500 10,000 28,600 30,000 58,600 18,750 50,000 68,750 94,900 163,650 $222,250
* Under ASPE, it is not required to show the number authorized. Solutions Manual .
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PROBLEM 13-9B (Continued)
Taking It Further: The owner’s capital for proprietorships and retained earnings for corporations both track the cumulative profits net of distributions to owners. However, the owner’s capital account also contains investments by owners. This information is contained in the share capital account for corporations. In addition, corporate owners can choose to receive salaries which are expenses on the income statement as well as dividends that are closed directly to retained earnings. In a sole proprietorship, payments to the owner consist only of drawings that are closed directly to the owner’s capital account. The capital account of a sole proprietor or partner is an accumulation of profit that has not been taxed, plus any investments, less any drawings. (The profit is taxed in the hands of the proprietor.) Transactions flowing through the retained earnings account such as dividends and share repurchases must abide by the Business Corporations Act, whereas there is no such legislation for transactions flowing through the owner’s capital account.
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PROBLEM 13-10B CARLOTTA’S CAKES INC. Income Statement Year Ended May 31, 2017 Sales revenue ................................................................. $504,500 Cost of goods sold ......................................................... 277,475 Gross profit..................................................................... 227,025 Operating expenses: Depreciation expense................................... $42,000 Insurance expense ........................................... 7,500 Rent expense .................................................. 24,500 Salaries expense ............................................ 67,800 Supplies expense .......................................... 5,875 147,675 Profit from operations.................................................... 79,350 Other expenses: Interest expense ........................................................ 4,500 Profit before income tax ................................................ 74,850 Income tax expense ....................................................... 11,230 Profit................................................................................ $ 63,620 CARLOTTA’S CAKES INC. Statement of Retained Earnings Year Ended May 31, 2017 Retained earnings, April 1 ................................... Add: Profit............................................................. Less: Preferred share dividends ....................... $7,500 Common share dividends ........................ 50,000 Retained earnings, May 31 ..................................
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$ 73,000 63,620 136,620 57,500 $ 79,120
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PROBLEM 13-10B (Continued) CARLOTTA’S CAKES INC. Balance Sheet May 31, 2017 Assets Current assets Cash ......................................................................... Accounts receivable ................................................ Inventory .................................................................. Total current assets ............................................ Property, plant, and equipment: Equipment ............................................. $420,000 Less: Accumulated depreciation ......... (126,000) Total property, plant, and equipment .. ............. Total assets ..............................................................
$ 20,600 15,300 70,220 106,120
294,000 $400,120
Liabilities and Shareholders’ Equity Current liabilities Accounts payable .................................................... Dividend payable ..................................................... Total current liabilities ........................................ Long-term note payable............................................... Total liabilities ..................................................... Shareholders’ equity Share capital* $3 cumulative preferred shares, 5,000 issued .. Common shares, 10,000 issued ......................... Total share capital ................................................... Retained earnings ...................................................... Total shareholders’ equity ........................................... Total liabilities and shareholders’ equity ..........
$ 38,500 7,500 46,000 75,000 121,000 150,000 50,000 200,000 79,120 279,120 $400,120
* Under ASPE, it is not required to show the number authorized.
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PROBLEM 13-10B (Continued)
Taking It Further: Management may feel pressured to report positive financial performance results even though positive financial performance may not reflect the economic reality of a company. This presents an ethical conflict for managers – they may be able to find ways to improve the reported results through the use of adjustments and manipulation but managers must also be aware of their responsibility to report financial information to reflect the economic reality of a company. Managers should also consider both internal and external stakeholders that will be affected by reported results. Managers should always put their responsibility to faithfully represent information above internal pressures.
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PROBLEM 13-11B (a) 2014
2013
Husky Energy Inc. Return on assets Return on equity
3.32% (1) 6.19% (3)
5.08% (2) 9.32% (4)
Suncor Energy Inc. Return on assets Return on equity
3.42% (5) 6.52% (7)
5.06% (6) 9.73% (8)
(1) (2) (3) (4) (5) (6) (7) (8)
3.32% = $1,258 ÷ (($38,848 + $36,904) ÷ 2) 5.08% = $1,829 ÷ (($36,904 + $35,161) ÷ 2) 6.19% = $1,258 ÷ (($20,575 + $20,078) ÷ 2) 9.32% = $1,829 ÷ (($20,078 + $19,161) ÷ 2) 3.42% = $2,699 ÷ (($79,671 + $78,315) ÷ 2) 5.06% = $3,911 ÷ (($78,315 + $76,401) ÷ 2) 6.52% = $2,699 ÷ (($41,603 + $41,180) ÷ 2) 9.73% = $3,911 ÷ (($41,180 + $39,215) ÷ 2)
The return on assets and return on equity ratios of both companies have deteriorated significantly from 2013 to 2014.
(b) Husky Energy`s return on assets and return on equity ratios both underperformed slightly compared to those of Suncor Energy in 2014. In 2013, return on assets was essentially identical while the return on equity was slightly ahead for Suncor Energy compared to Husky.
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PROBLEM 13-11B (Continued) (c) Both companies underperformed in comparison to the 5year industry average for return on equity by a significant margin.
Taking It Further: Comparisons can be made using intracompany (comparing within a company over time), intercompany (comparing with a competing company), and industry averages. In evaluating ratios, different bases of comparison allow the user to extract additional information. Intracompany comparisons allow the user to determine significant trends in financial relationships over time. Intercompany comparisons allow users to evaluate a company`s competitive position. Comparison with industry averages allows users to examine the performance of a company within its industry. Using Husky Energy and Suncor Energy results, the intracompany comparison allows us to examine the change in the relationship of profit to shareholders’ equity and assets from 2013 to 2014 and determine whether an improvement or deterioration is occurring. In this case, the performance of both companies deteriorated significantly. The intercompany comparison allows us to examine each company`s performance by comparison to its competitor. In this case, the comparison allows us to note that Husky’s deterioration is very similar to Suncor’s. Finally, the industry average comparison allows us to compare how each firm is performing within its industry and to note that both companies underperform the industry.
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PROBLEM 13-12B (a) Jan. 1 Cash ................................................. Common Shares ..........................
60,000 60,000
Jan. 2 Cash (1,000 × $62.50) ...................... Preferred Shares ..........................
62,500
Dec. 10 Cash Dividends—Preferred*........... Cash Dividends—Common ............ Dividends Payable ....................... *(1,000 × $5.00)
5,000 12,000
62,500
17,000
(b) NYGREN CORPORATION Income Statement Year Ended December 31, 2017 Consulting revenue ($268,000 + $22,000) ..................... $290,000 Operating expenses: Salaries expense ($164,000 + $4,200)........ $168,200 Rent expense .................................................. 42,000 Office expense ................................................ 12,000 Depreciation expense .................................. 13,000 235,200 Profit from operations before income tax .................... 54,800 Income tax expense (15% × $54,800) ............................ 8,220 Profit................................................................................ $ 46,580
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PROBLEM 13-12B (Continued) (b) (Continued) NYGREN CORPORATION Statement of Retained Earnings Year Ended December 31, 2017 Retained earnings, January 1.............................. Add: Profit............................................................. Less: Preferred share dividends ....................... $5,000 Common share dividends ........................ 12,000 Retained earnings, December 31 ........................
$
0 46,580 46,580
17,000 $29,580
NYGREN CORPORATION Balance Sheet (partial) December 31, 2017 Shareholders’ equity Share capital* $5 cumulative preferred shares, 1,000 issued ..... $ 62,500 Common shares, 6,000 issued .............................. 60,000 Total share capital.................................................. 122,500 Retained earnings.................................................... 29,580 Total shareholders’ equity.................................. $152,080 * Under ASPE, it is not required to show the number authorized. Taking It Further: Common shareholders are referred to as “residual owners” because once the claims of the creditors and the preferred shareholders are satisfied, the common shareholders own whatever is left.
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BYP13-1 FINANCIAL REPORTING PROBLEM (a) Per note 15 to the financial statements, Corus Entertainment Inc. has 2 classes of shares. There is an unlimited number of Class A voting shares authorized and 3,428,292 issued; and an unlimited number of Class B nonvoting shares authorized and 82,335,593 issued. (b) Both classes of shares rank equally with respect to the right to receive any remaining property in the event of a liquidation, dissolution, or wind-up. Class A voting shares are convertible at any time into an equivalent number of Class B non-voting shares. Class B non-voting shares are convertible into an equivalent number of Class A voting shares in limited circumstances. (c)
During the 2014 fiscal year, Corus issued 259,500 shares of Class B non-voting shares for $5,465,000 under a stock option plan. Corus also issued 1,024,947 Class B nonvoting shares for $24,682,000 under a dividend reinvestment plan. Finally, 2,000 Class A voting shares were converted to Class B non-voting shares at a carrying amount of $15,000.
(d) The average per share amount for the Class A voting shares is $7.74 ($26,549,000 ÷ 3,428,292). The average per share amount for the Class B non-voting shares is $11.43 ($940,781,000 ÷ 82,335,593). (e)
Corus declared $98,113,000 in dividends during fiscal 2014.
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BYP13-1 (Continued) (f)
Return on equity = Profit ÷ Average shareholders’ equity (figures in thousands) Return on equity 2013 = $165,749 ÷ ($1,220,833 + $1,136,090) 2 = 14.1% The company’s return on equity has deteriorated significantly over the past year from 14.1% in fiscal 2013 to 12.3% in fiscal 2014.
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BYP13-2 INTERPRETING FINANCIAL STATEMENTS (a) Loblaw’s profitability has declined from 2013 to 2014. Its gross profit margin has increased slightly but the ratios of return on assets and return on equity have declined dramatically indicating that profit plummeted in 2014. (b) The fair value of Loblaw’s shares depends on a number of 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 stock market. Inconsistent with the decline in profitability, the market price of the common shares has increased significantly from 2013 to 2014. This is likely due to the acquisition of Shoppers Drug Mart which occurred during the 2014 fiscal year. (c) The reason so many common shares were issued during 2014 was for the purchase of Shoppers Drug Mart. This is by no means a typical recurring event for any company. While issuing preferred shares does not dilute the voting percentages of existing common shareholders this acquisition could not have been done without doubling the shareholders’ equity through the issuance of common shares. (d) Stock option plans are used to obtain and retain key employees of the company. It is a form of compensation that costs the company less than salaries paid to employees. From the perspective of the employees and directors, who may contribute to or influence the success of the company, these individuals can benefit directly from this success by the exercise of stock options.
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BYP 13-2 (Continued) (e)
The dollar amount of dividend per preferred share is $1.49 ($225,000,000 X .0595 ÷ 9,000,000 = $1.49). Depending on the market value of the preferred shares, this rate is higher than the interest rate on savings in a bank account because the rate has to be sufficiently high to attract investors. An investment in preferred shares is considerably riskier for an investor than a savings account. The payment of the dividends is at the discretion of the board of directors, and is dependent on the financial performance of the company and the company’s ability to pay the dividends. Interest on a savings account is a liability of the bank and is paid on a regular basis.
(f)
Loblaw may choose to redeem the shares in order to stop paying dividends and reduce its cash outflows. The commitment to pay dividends continues as long as the shares are outstanding, so the company may choose to redeem the shares to conserve its cash for the future.
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BYP13-3
Accounting Principles, Seventh Canadian Edition
COLLABORATIVE LEARNING ACTIVITY
All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP13-4 COMMUNICATION ACTIVITY Memorandum To: XXX, Shareholder of Ghost River Back Country Limited From: Accountant Re: Purchase of land and building You are currently considering purchasing land and a building and trying to determine whether to pay for the purchase by using debt or shares. You have also indicated that you currently do not have excess cash in your business. A common method of paying for large purchases is to use debt. If you finance the purchase with a lender such as a bank, the seller of the property will not be involved in your business. This is an advantage as you would continue to exercise 100% control over the day-to-day operations of your business. This alternative usually requires that you provide a down payment, and this may not be possible because of your cash situation. You may also be able to finance the purchase directly with the seller. In this case, he may be willing to accept no down payment in exchange for security on the property. You would need to determine if your cash situation would allow for regular payments of interest and/or principal. Interest payments are taxdeductible and would reduce your taxable income. This transaction would increase the assets and the debt on your balance sheet. It would also increase your debt ratio. You are also considering paying for the purchase by issuing shares of your company. Issuing shares does not require any cash to complete the transaction. If you pay by issuing common shares, you will be issuing voting shares. It is unlikely that the seller will want to be a minority shareholder (own less than 50%), since he will exercise little control over the business
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BYP 13-4 (Continued) and dividend decisions. This would be very risky for the seller since you would then own the land and building, he would receive no cash, and have no control over cash payments to himself. You may be required to issue more than 50% of the voting control and would therefore lose control of your company. In addition, it would be difficult for him to sell his shares in your company because it is a private corporation. Alternatively, you may be able to structure the exchange by giving preferred shares. The shares would be subject to a fixed dividend rate. The negotiations with the seller would likely involve various features on the preferred shares to make the exchange more attractive. For example, the seller would likely require that the preferred shares be cumulative and redeemable or retractable. If the shares are redeemable, you can terminate the relationship with the seller at a predetermined point in the future. The dividend payments are not tax-deductible and are paid with after-tax funds. Accepting shares in exchange for his property is riskier for the seller since he is not receiving cash, and is dependent on the profitability of your business to receive dividends. This transaction would increase the assets and the shareholders’ equity on your balance sheet. If you use preferred shares and the features make the shares similar to debt financing, the shares would be reclassified as debt on the balance sheet. In conclusion, I recommend that you carefully consider the advantages and disadvantages outlined above. If the seller is willing to consider financing the purchase with preferred shares, this would be most advantageous to you considering your current cash situation.
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BYP13-5 “ALL ABOUT YOU” ACTIVITY (a)
The benefits of incorporating at the federal level include: 1. Heightened name protection 2. Right to carry on business anywhere in Canada 3. Recognition 4. Excellence in client service 5. Fully bilingual staff to answer your inquiries
(b)
Almost any type of business may incorporate under the Canada Business Corporations Act (CBCA). However, mortgage, banking, insurance, loan and trust companies, and other Financial Institutions, cooperative, Chambers of Commerce as well as not-for-profit corporations are incorporated under different statutes. There are no restrictions, such as minimum company size, on the businesses that may incorporate under the CBCA.
(c)
One or more individuals who are 18 years of age or older, are not of unsound mind and who are not bankrupt may form a corporation under the Canada Business Corporations Act (CBCA). Similarly, one or more companies or "bodies corporate" may incorporate a company.
(d)
Federal corporations are formed when you file articles of incorporation with Corporations Canada and a certificate of incorporation is issued. Form 1 provides in the application the main information concerning the corporation such as its name, the name of the incorporators, the classes of shares, etc. Form 2 provides all of the necessary information about the initial registered office address and the names and addresses of the members of the first board of directors.
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BYP 13-6 (Continued) (e)
Filing online offers the following distinct advantages: 1. Convenience 2. Reduced delivery costs 3. Immediate acknowledgement of filing 4. Prompt articles processing 5. Reduced filing fee
(f) 1. A corporation must prepare financial statements and provide copies of your financial statements to your shareholders at least 21 days before your corporation's annual meeting each year. 2. Generally Accepted Accounting Principles are set out in the Canadian Institute of Chartered Accountants Handbook. 3. Shareholders may decide by a unanimous resolution (voting and non-voting shares) not to appoint an auditor. 4. A corporation must keep certain corporate records at its registered office or at some other location elsewhere in Canada as set out by the directors. Upon request, a corporation's shareholders and creditors (such as suppliers) may examine the following records:
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Articles of Incorporation, by-laws and their amendments and any unanimous shareholder agreements; Minutes of meetings and resolutions of shareholders; Copies of certain forms that have been filed, A share register showing the names and addresses of all shareholders and details of shares held.
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BYP13-6 Santé Smoothie Saga (a) 2018 May 15 Cash Dividends—Common ............ Dividends Payable ....................... May 31 Dividends Payable .......................... Cash..............................................
85,000 85,000 85,000 85,000
Since only Janet and Brian own the common shares at the date the dividend is declared, they would receive the full $85,000 on a pro-rata basis. This means that Janet would receive $42,500 ($85,000 / 2) and Brian would receive $42,500 since they both own 100 common shares. (b) SANTÉ SWEETS LTD. Statement of Retained Earnings Year Ended May 31, 2018 Retained earnings, June 1, 2017 ......................... Add: Profit* ........................................................... Less: Cash dividends .......................................... Retained earnings, May 31, 2018......................... * ($255,823 × [1 – 18%])
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$116,251 209,775 326,026 85,000 $241,026
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Accounting Principles, Seventh Canadian Edition
BYP13-6 (Continued) (c) SANTÉ SWEETS LTD. Balance Sheet (Partial) May 31, 2018 Shareholders' Equity Share capital Common shares, 200 shares issued................................ $ 200 Retained earnings .............................................................. 241,026 Total shareholders' equity .................................. $241,226 Note: Under ASPE, a firm is not required to show the number of authorized shares. Also, it would not include the preferred shares on the balance sheet, as none are issued. (d) June 1 Cash ................................................. Accounts Receivable ...................... Merchandise Inventory ................... Supplies ........................................... Equipment ....................................... Common Shares ..........................
8,050 800 1,200 450 1,500 12,000
(e)
Balance before transaction Shares issued Balance after transaction
Number of shares 200 10 210
Dollar amount $200 $12,000 $12,200
Average $1.00 $1,200.00 $58.10
There is a significant change in value of the common shares because of the relatively low number of shares issued to Natalie for the large fair value of her assets.
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Accounting Principles, Seventh Canadian Edition
BYP13-6 (Continued) (f) Janet and Brian likely determined the price of $1,200 per share by dividing the shareholders’ equity amount by the number of shares issued ($241,026 ÷ 200 shares = $1,205). By using the value of $1,200 per share to value Natalie’s contribution in assets, they obtained a quantity of 10 common shares. This value is likely not fair to Natalie. The low number of shares given to Natalie means that she will receive only 4.8% (10 / 210 based on her number of shares over the total number of shares issued) of any dividends paid out. Natalie’s parents assume that Natalie will become the fulltime administrator, but she would receive a very low proportion of the profits and have no voting control over the operations of the business.
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Accounting Principles, Seventh Canadian Edition
CHAPTER 14 Corporations: Additional Topics and IFRS ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Questions
Brief Exercises
1. Explain how to account for stock dividends and stock splits, and compare their financial impact.
1, 2, 3
1, 2, 3
1, 2, 7, 8, 9
1, 2, 4, 8
1, 2, 4, 8
2. Explain how to account for the reacquisition of shares.
4, 5, 6, 7
4, 5
3, 7, 10
2, 3, 4, 6, 7, 8
2, 3, 4, 6, 7, 8
3. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.
8, 9, 10, 11
6, 7, 8
4, 5, 7, 9, 10
3, 5, 6, 8
3, 5, 6, 8
4. Explain the different types of accounting changes and account for the correction of a prior period error.
12, 13
9, 10
6, 7, 8
4, 6, 7, 12
4, 5, 6, 7, 12
5. Prepare a statement of changes in shareholders’ equity.
14,15
11, 12
8, 9, 10
7, 8, 9
7, 8, 9
6. Explain earnings and dividend performance and calculate performance ratios.
16, 17, 18
13, 14, 15
11, 12, 13
10, 11, 12
10, 11, 12
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Exercises
Problems Set A
Problems Set B
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Compare impact of cash dividend, stock dividend, and stock split.
Simple
20-25
2A
Record and post transactions; prepare shareholders’ equity section.
Moderate
25-30
3A
Determine impact of reacquired shares.
Moderate
25-30
4A
Record stock dividends, splits, and reacquisition of shares. Report balances in shareholders’ equity.
Moderate
30-40
5A
Prepare income statement and statement of comprehensive income.
Moderate
25-30
6A
Correct error from prior period; prepare statement of retained earnings.
Moderate
30-35
7A
Record and post transactions; prepare a statement of changes in shareholders’ equity.
Complex
30-40
8A
Prepare financial statements.
Moderate
60-70
9A
Prepare statement of changes in shareholders’ equity.
Complex
25-35
10A
Calculate earnings per share.
Moderate
30-35
11A
Calculate ratios and comment.
Moderate
25-30
12A
Calculate and evaluate ratios with discontinued operations.
Moderate
30-35
1B
Compare impact of cash dividend, stock dividend, and stock split.
Simple
20-25
2B
Record and post transactions; prepare shareholders’ equity section.
Moderate
25-30
3B
Determine impact of reacquired shares.
Moderate
25-30
4B
Record stock dividends, splits, and reacquisition of shares. Show impact of transactions on accounts.
Moderate
30-40
5B
Prepare income statement and statement of comprehensive income.
Moderate
25-30
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
6B
Correct error from prior period; prepare statement of retained earnings.
Moderate
30-35
7B
Record and post transactions; prepare a statement of changes in shareholders’ equity.
Complex
30-40
8B
Prepare financial statements.
Moderate
60-70
9B
Prepare statement of changes in shareholders’ equity.
Complex
25-35
10B
Calculate earnings per share.
Moderate
30-35
11B
Calculate ratios and comment.
Simple
25-30
12B
Calculate and evaluate ratios with discontinued operations.
Moderate
30-35
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objectives 1. Explain how to account for stock dividends and stock splits, and compare their financial impact.
Knowledge Comprehension Q14-1 Q14-2 Q14-3
2. Explain how to account for the reacquisition of shares.
Q14-4
Q14-5 Q14-6 Q14-7
Application BE14-1 P14-1A BE14-2 P14-2A BE14-3 P14-4A E14-1 P14-8A E14-2 P14-1B E14-7 P14-2B E14-8 P14-4B E14-9 P14-8B BE14-4 P14-6A BE14-5 P14-7A E14-3 P14-8A E14-7 P14-2B E14-10 P14-3B P14-2A P14-4B P14-3A P14-6B P14-4A P14-7B P14-8B BE14-6 P14-5A BE14-7 P14-6A BE14-8 P14-8A BE14-12 P14-5B E14-4 P14-6B E14-5 P14-8B E14-7 E14-9 E14-10
3. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.
Q14-8 Q14-9 Q14-10 Q14-11
4. Explain the different types of accounting changes and account for the correction of a prior period error.
Q14-12 Q14-13
BE14-9 BE14-10 E14-6 E14-7 E14-8
P14-6A P14-7A P14-12A P14-6B P14-7B P14-12B
Q14-14
BE14-11 BE14-12 E14-8 E14-9 E14-10
6. Explain earnings and dividend performance and calculate performance ratios.
Q14-16 Q14-17 Q14-18
BE14-13 BE14-14 E14-11 E14-12
P14-7A P14-8A P14-9A P14-7B P14-8B P14-9B P14-5A P14-10A P14-5B P14-10B
Broadening Your Perspective
BYP14-1
5. Prepare a statement of changes in shareholders’ equity.
Solutions Manual .
Q14-15
14-4
Analysis Synthesis Evaluation
BE14-15 E14-13 P14-11A P14-12A P14-11B P14-12B BYP 14-2 BYP14-3
BYP14-4
BYP14-5 BYP14-6
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
(a) When a stock dividend is declared, at the declaration date, the entry is Dr. Stock Dividend and Cr. Stock Dividend Distributable. (b) There is no entry on the record date and (c) at the date of distribution, the entry is Dr. Stock Dividend Distributable and Cr. Common Shares.
2.
Freddy is not better off after the stock split. A stock split signifies that additional shares are issued in a multiple, such as 2-for-1, in exchange for old shares. The effect of the stock split is to adjust the fair value of the shares. For example, in a 2-for-1 stock split, the fair value normally will decrease by half and the number of shares doubles so that the total value of the investment stays the same.
3.
(a) (b) (c) (d) (e)
Assets Liabilities Share capital Retained earnings Number of shares
Cash Dividend Decrease N/E N/E Decrease N/E
Stock Dividend N/E N/E Increase Decrease Increase
4.
A company would repurchase its shares for the following reasons: 1. To increase trading of the company’s shares in the securities market in the hope of increasing the company’s fair value. 2. To reduce the number of shares issued, which will increase earnings per share. 3. To eliminate hostile shareholders by buying them out. 4. To have additional shares available so that they can be reissued to officers and employees through stock compensation plans, or used to acquire other companies.
5.
This transaction: (a) decreases total assets, (b) has no effect on total liabilities and, (c) decreases total shareholders' equity.
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Chapter 14
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Accounting Principles, Seventh Canadian Edition
Questions (Continued) 6.
When the reacquisition price paid is less than the average per share amount of the shares being repurchased, the difference is considered a contribution to the remaining shareholders and is credited to the Contributed Surplus-Reacquisition of Common Shares. When the reacquisition price paid is more than the average per share amount of the shares being repurchased, the difference is debited to Contributed Surplus-Reacquisition of Common Shares from the same class of shares to the extent of any pre-existing balance in the account, and then debited to Retained Earnings. Consequently, the account Contributed SurplusReacquisition of Common Shares can never have a debit balance.
7.
I disagree with Camille. Regardless of the current market value of the common shares being repurchased, the account Common Shares must be reduced by the average per share amount for the shares currently issued. The average per share amount is used because it is impractical and often impossible to determine the dollar amount of each individual share that is being reacquired.
8.
Intraperiod tax allocation is the allocation of income tax within the accounting period, to items or categories that attracted the tax. For example, the tax associated with continuing operations is shown separately from the tax associated with discontinued operations. Allocating the tax to these specific items is important because it allows those items or sub-totals to show the after-tax results, which is more relevant to the financial statement user.
9.
Discontinued operations refer to the disposal or reclassification of the “held for sale” components of an entity. It is important to report discontinued operations separately because they represent atypical items. Investors trying to get a picture of the company’s future growth potential should not include discontinued operations in their analysis of future earnings potential because they will not exist in the future.
10.
Comprehensive income includes all changes to shareholders’ equity during a period except those resulting from the sale or repurchase of shares and from the payment of dividends. This includes not only the profit presented in a traditional income statement, but also other comprehensive income (OCI). OCI includes certain gains and losses that are not included in profit, such as unrealized gains and losses from some long-term strategic equity investments and foreign currency translation. OCI is reported on the comprehensive income statement in an all-inclusive format with the income statement or as a separate financial statement. OCI is closed to Accumulated Other Comprehensive Income, a permanent account that appears in the equity section of the balance sheet, immediately after Retained Earnings.
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Accounting Principles, Seventh Canadian Edition
Questions (Continued) 11.
Other comprehensive income is reported on the comprehensive income statement in an all-inclusive format with the income statement or as a separate financial statement.
12.
A company is allowed to change an accounting policy when the change is required by generally accepted accounting principles (GAAP) or when the resulting financial statements will provide more reliable and relevant information. When there is a change in accounting policy, companies are required to retroactively apply the new standards except if it is impractical to do so. This means the company must recalculate and restate all of the related accounts as if it had always followed the new policy. But, if significant estimates are required, or if the required information is not available, then it is not possible for prior financial statements to be restated for comparative purposes. Whether or not the prior periods are restated, companies must disclose the details of the change to the new policy in their notes to the financial statements.
13.
A company can make a change in accounting estimate on an as-needed basis, whenever circumstances, conditions, and events change and a better estimate is established. Changes in estimates are common and are not a result of an error. Consequently, the change in estimate is not applied retroactively but implemented prospectively, to the current and future accounting periods.
14. Contributed Capital Profit Loss Issue shares Share reacquisition
Increase Decrease
Other comprehensive gains Other comprehensive losses Dividend declaration Stock dividend Increase Correction of prior period errors Cumulative effect of a change in accounting policy
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Contributed Retained Surplus Earnings Increase Decrease Increase or Decrease
Accum. Other Comp. Income
Decrease Increase Decrease Decrease Decrease Increase or Decrease Increase or Decrease
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Questions (Continued) 15.
The two components of comprehensive income are: profit or loss and other comprehensive income.
16.
Earnings per share is calculated by dividing profit less preferred dividends by the weighted average number of common shares outstanding. The fully diluted earnings per share adjusts earnings per share for the maximum possible dilution that would occur if securities were converted into common shares.
17.
(a) When calculating earnings per share, the amount of profit available to common shareholders is not always the same as total profit because preferred shareholders rank ahead of common shareholders for dividends. Preferred shareholders’ dividend entitlement must be satisfied before dividends can be declared on common shares. The preferred share dividends declared will reduce profit available to common shareholders. Also, the annual dividend entitlement of the preferred shares will not be available to common shareholders if the shares are cumulative. (b) Weighted average number of shares is used in the earnings per share calculation and not simply the number of shares at the end of the year because the profit available for common shareholders has been generated over the period of the year. The numbers of shares issued and outstanding during the fiscal year may vary tremendously and affect the company’s ability to generate profit. Using the weighted average number of shares in the calculation provides a less biased and fairer measure of performance.
18.
(a) Unfavourable (b) Favourable (c) Either favourable or unfavourable depending on the interpretation of the investor. That is, a decrease in the PE ratio makes the shares more affordable to purchase. An increase in the PE ratio means the shares will sell at a higher price and there exists more likelihood that the price will increase even further. (d) Favourable from the perspective of a potential investor receiving the dividend.
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14-1 Mar. 1 Stock Dividends (400,000 × 5% × $5) ...100,000 Stock Dividends Distributable..........
100,000
14 Date of record – not entry required 31 Stock Dividends Distributable .............. 100,000 Common Shares................................
100,000
BRIEF EXERCISE 14-2 (a) (b) (c) (d)
Share capital Retained earnings Total shareholders’ equity Number of shares
Before $2,000,000 600,000 $2,600,000 225,000
After $2,270,000* 330,000* $2,600,000 247,500
* Number of shares issued: 225,000 × 10% = 22,500 shares Stock dividend: 22,500 shares × $12 = $270,000 Retained earnings will decrease and share capital will increase by this amount.
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 14-3 Transaction (a) Declared a cash dividend (b) Paid the cash dividend declared in part (a) (c) Declared a stock dividend (d) Distributed the stock dividend declared in part (c) (e) Split stock 2 for 1
Shareholders’ Assets Liabilities Equity
Number of Shares
NE
+
–
NE
–
–
NE
NE
NE
NE
NE
NE
NE
NE
NE
+
NE
NE
NE
+
BRIEF EXERCISE 14-4 (a) Apr 5
(b) Apr 5
Common Shares (8,000 × $6.25*) ...... 50,000 Contributed Surplus— Reacquisition of Common Shares Cash .............................................
5,000 45,000
Common Shares (8,000 × $6.25*) ...... 50,000 Retained Earnings.............................. 10,000 Cash .............................................
60,000
*Average per share amount = $250,000 ÷ 40,000 shares = $6.25
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Chapter 14
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 14-5 (a) Average per share amount: $12.60 ($315,000 ÷ 25,000) This average is applicable at both dates: Feb. 7, 2017 and Dec. 22, 2017 (b) Feb.
8
Dec. 22
Common Shares (1,000 × $12.60) ... 12,600 Contributed Surplus— Reacquisition of Common Shares Cash .............................................
2,600 10,000
Common Shares (2,000 × $12.60) ... 25,200 Contributed Surplus— Reacquisition of Common Shares .. 2,600 Retained Earnings............................ 200 Cash .............................................
28,000
BRIEF EXERCISE 14-6 (a)
Income tax expense on continuing operations = Profit before income tax × income tax rate = $320,000 × 20% = $64,000
(b)
Income tax savings on loss from operations = $(85,000) × 20% Income taxes on gain on disposal of assets = $60,000 × 20% Income tax savings on discontinued operations
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$(17,000) 12,000 $ (5,000)
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 14-7 OLIVIER CORPORATION Statement of Income Year Ended August 31, 2017
Revenues ................................................. Operating expenses ................................. Profit before income taxes ...................... Income tax expense ................................. Profit from continuing operations ....... Discontinued operations: Loss from operations of discontinued operations, net of $17,000 income tax savings Gain on disposal of assets of discontinued operations, net of $12,000 income tax expense Profit..........................................................
$500,000 180,000 320,000 64,000 256,000
$68,000
48,000
20,000 $236,000
BRIEF EXERCISE 14-8 JET SET AIRLINES Statement of Comprehensive Income Year Ended December 31, 2017 Profit ............................................................... Other comprehensive income Gain on equity investments, net of $19,8001 income tax expense ........ Comprehensive income ................................ 1 $66,000 × 30% = $19,800
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14-12
$920,000
46,200 $966,200
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 14-9 Mar 1 Income Tax Recoverable ................................ 1,000 Retained Earnings [$5,000 × (1 − 20%)] ......... 4,000 Accumulated Depreciation—Equipment
5,000
BRIEF EXERCISE 14-10 BROADFOOT BAKERIES INC. Statement of Retained Earnings Year Ended December 31, 2017 Balance, January 1, 2017 as previously reported ......... $394,000 Add: Correction for understatement of depreciation expense, net of $1,000 income tax saving ......... 4,000 Balance, January 1, 2017 as restated ............................ 390,000 Add: Profit ..................................................................... 128,000 518,000 Less: Dividends.............................................................. 44,000 Balance, December 31 .................................................... $474,000
BRIEF EXERCISE 14-11 (a) 525,000 = 500,000 beg. balance + 50,000 shares issued − 25,000 shares reacquired (b) $600,000 = balance at December 31, 2016 (c) $(28,750) = $603,750 − $600,000 − $32,500 (d) $23,000 = $15,000 + $8,000 (e) $(21,000) = $181,000 − $179,500 − $22,500 (f) $17,000 = $68,000 − $51,000 (g) $875,750 = $603,750 + $23,000 (from (d) above) + $181,000 + $68,000 (h) Profit of $19,500 = $179,500 − ($190,000 − $30,000) (i) $54,000 = $51,000 + $3,000 (j) $845,500 = $600,000 + $15,000 + $179,500 + $51,000
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 14-12 (a) PENINSULA SUPPLY CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2017
Common Shares Balance, January 1 Issued shares for cash Reacquired common shares Cash dividends Comprehensive income Balance, December 31
$600,000 32,500 (28,750)
$603,750
Contributed Surplus– Reacquisition of Common Shares
Retained Earnings
Accumulated Other Comprehensive Income
$15,000
$179,500
51,000
(21,000) 22,500 $181,000
17,000 $68,000
8,000
$23,000
Total $845,500 32,500 (20,750) (21,000) 39,500 $875,750
_ Solutions Manual
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 14-12 (Continued) (b)
PENINSULA SUPPLY CORPORATION Partial Balance Sheet December 31, 2017
Shareholders' equity Contributed capital Share capital Common shares, 525,000 shares issued Other contributed capital Contributed surplus—reacquisition of common shares......................................... Total contributed capital ....................................... Retained earnings.................................................. Accumulated other comprehensive income ....... Total shareholders' equity
$603,750 23,000 626,750 181,000 68,000 $875,750
BRIEF EXERCISE 14-13 Weighted average number of shares: Date Jan. 1 Mar. 1 June 1 Sep. 30
Solutions Manual .
Actual Number 20,000 (5,000) 6,000 10,000 31,000
Fraction of Year × 12/12 = × 10/12 = × 7/12 = × 3/12 =
14-15
Weighted Average 20,000 (4,167) 3,500 2,500 21,833
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 14-14 (a) Earnings per share = $1.81 [($454,000 – $55,000*) 220,000] * 22,000 × $2.50 = $55,000 (b) Same as in (a) above $1.81. Since the preferred shares are cumulative, their dividend needs to be paid before any of the earnings become available to the common shareholders. Therefore, cumulative preferred dividends must be deducted from profit in calculating earnings per share, whether they are declared and paid or not. (c)
Same as in (a) above $1.81
(d) Earnings per share = $2.06 ($454,000 220,000)
BRIEF EXERCISE 14-15 Price-earnings ratio = Market price per share ÷ Earnings per share = $24.00 ÷ $4.00 = 6 times Payout ratio
Solutions Manual .
= Cash dividends ÷ profit = $90,000 ÷ $450,000 = .20 or 20%
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 14-1 (1) (2) (3) After Cash After Stock After Stock Dividend Dividend Split
Before Action Total assets
$1,875,000 $1,851,000
$1,875,000 $1,875,000
Total liabilities $ 75,000 $ 75,000 Common shares 1,200,000 1,200,000 Retained earnings 600,000 576,000 Total shareholders' equity 1,800,000 1,776,000 Total liabilities and $1,875,000 $1,851,000 shareholders’ equity
$ 75,000 $ 75,000 1,242,000* 1,200,000 558,000 600,000 1,800,000 1,800,000
Number of common shares
60,000
60,000
$1,875,000 $1,875,000
63,000
120,000
* $1,200,000 + (60,000 shares × 5% × $14) = $1,242,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 14-2 1.
No this is not the correct entry. Transactions with shareholders are never recorded as an expense. The correct entry is:
Dec. 31 Cash Dividends—Preferred (20,000 × $4 ÷ 4) ..................... Dividends Payable ................. 2.
20,000
No, this is not the correct entry. Stock dividends do not give rise to a liability. The correct entry is:
Dec. 31 Stock Dividends (1,000 x $12) ... Common Stock Dividends Distributable ...... 3.
20,000
12,000 12,000
No, this is not the correct entry. Stock splits are not recorded in the accounting records, only the total number of shares outstanding is affected, and the balance in the preferred share account will remain the same as it was before the split. The only requirement is to prepare a memo entry indicating that there are now 40,000 preferred shares issued and outstanding.
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Chapter 14
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Accounting Principles, Seventh Canadian Edition
EXERCISE 14-3 (a) Jan. 6 Cash ............................................. 300,000 Common Shares ................. (200,000 shares × $1.50)
300,000
12 Cash ......................................... Common Shares ................. (50,000 shares × $1.75)
87,500
87,500
Mar. 17 Cash ............................................. 105,000 Preferred Shares ................. (1,000 shares × $105)
105,000
July 18 Cash .......................................... 2,000,000 Common Shares ................. 2,000,000 Nov. 17 Common Shares (200,000 × $1.91*) ................ Retained Earnings ................... Cash (200,000 × $1.95) ........
382,000 8,000
Dec. 30 Common Shares (150,000 × $1.91*) ................ 286,500 Contributed Surplus— Reacquisition of Common Shares Cash (150,000 × $1.80) ........
390,000
16,500 270,000
*Average per share amount for Common Shares: Number of Transaction Proceeds of Common Shares Date Issue Issued January 6 200,000 $ 300,000 January 12 50,000 87,500 July 18 1,000,000 2,000,000 Total 1,250,000 $2,387,500 $2,387,500 1,250,000 = $1.91
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Accounting Principles, Seventh Canadian Edition
EXERCISE 14-3 (Continued) (b) There are 900,000 common shares remaining, at an average per share amount of $1.91** **Average per share amount for Common Shares: Transaction Date January 6 January 12 July 18 Nov. 17 Dec. 30 Total
Number of Common Shares Issued 200,000 50,000 1,000,000 (200,000) (150,000) 900,000
Proceeds of Issue $ 300,000 87,500 2,000,000 (382,000) (286,500) $1,719,000
$1,719,000 900,000 = $1.91
EXERCISE 14-4 SHRINK LTD. Partial Statement of Comprehensive Income Year Ended December 31, 2017 Profit from continuing operations........... Discontinued operations Profit on discontinued component operations, net of $27,000* income tax expense $63,000 Loss on disposal of discontinued operations, net of $9,000** income tax savings . 21,000 Profit..........................................................
$320,000
42,000 $362,000
* $90,000 × 30% = $27,000 ** $30,000 × 30% = $9,000
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-5 TOP BRANDS LIMITED Income Statement Year Ended March 31, 2017 Revenues Fees earned........................................... Rent revenue ......................................... Operating expenses Advertising expense............................. Depreciation expense........................... Telephone expense .............................. Profit from operations.............................. Other revenues Gain on disposal of equipment............ Other expenses Interest expense ................................... Profit before income taxes ...................... Income tax expense ($74,000 × 30%) ...... Profit from continuing operations........... Discontinued operations Loss on discontinued operations, net of $5,400 in income tax savings ..... Profit..........................................................
$62,000 34,000 7,000 3,000 8,000
$96,000
18,000 78,000 1,500 5,500 74,000 22,200 51,800
12,600 $39,200
TOP BRANDS LIMITED Statement of Comprehensive Income Year Ended March 31, 2017 Profit.......................................................... Other comprehensive income (loss) Loss on equity investments, net of $900 in income tax savings ........ Comprehensive income ...........................
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$39,200
2,100 $37,100
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-6 (a) Jan. 1 Land ............................................................... 75,000 Income Tax Payable .............................. 18,750 Retained Earnings [$75,000 × (1 − 25%)] 56,250
(b) SILVER FOX ENTERPRISES INC. Statement of Retained Earnings Year Ended December 31, 2017 Balance, January 1 as previously reported ........ Add: Correction of error in recording purchase of land in 2016, net of $18,750 income tax expense ............................................................. Balance, January 1 as adjusted .......................... Add: Profit............................................................. Less: Cash dividends .......................................... Retained earnings, December 31 ........................
Solutions Manual .
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$ 573,500
56,250 629,750 193,000 822,750 216,000 $606,750
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-7 FYRE LITE CORPORATION Statement of Retained Earnings Year Ended December 31, 2017 Balance, January 1, as previously reported .................... $650,000 Add: Correction for understatement of 2016 profit due to error, net of $21,2501 income tax expense 63,750 Balance, January 1, as adjusted ........................................ 713,750 Add: Profit ...................................................................... 562,5002 1,276,250 Less: Excess cost of reacquired shares ........ $ 50,000 Cash dividends ....................................... 245,000 295,000 Balance, December 31 ...................................................... $981,250 1 2
$85,000 × 25% = $21,250 $750,000 × (1 − 25%) = $562,500
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-8
Item 1. 2. 3. 4. 5. 6. 7. 8.
Contributed Capital Share Capital Additional NE NE I NE NE NE I NE NE NE NE NE D I NE NE
Retained Earnings D NE NE D NE I NE I
Accumulated Other Comprehensive Income NE NE NE NE NE NE NE I
Total Shareholders’ Equity D I NE NE NE I D I
_ Solutions Manual
14-24 .
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-9 MARCHELLE CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2017
Stock Dividend Distributable
Common Shares Balance, January 1 Issued for cash Stock split 3 for 2 Stock dividends Comprehensive income Balance, December 31
$2,200,000 1,200,000 0
$850,000
$27,000
(495,000) 390,000 $745,000
(28,500) $ (1,500)
Total
1
$495,000 $3,400,000
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
$495,000
2
3
$3,077,000 1,200,000 0 0 361,500 $ 4,638,500
1
($80,000 × $15 = $1,200,000) (220,000 + 80,000) × (3/2-1) = 150,000 (220,000 + 80,000 + 150,000) × 5% × $22 = $495,000 3 $38,000 × (1 − 25%) = $28,500 2
_ Solutions Manual
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-10 (a) Feb. 2 Common Shares*......................................25,000 Contributed Surplus— Reacquisition of Common Shares...........19,500 Cash ............................................... *($800,000 ÷ 32,000) x 1,000 Apr. 17 Dividend Declared ....................................70,000 Cash ...............................................
44,500
70,000
Oct. 29 Cash ........................................................ 104,000 Common Shares ........................... 104,000
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-10 (Continued) (b) RUBY RED RENTAL CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2017
Common Shares Balance, January 1 Issued for cash Reacquired shares Dividends Comprehensive income Balance, December 31
1
Contributed Surplus– Reacquisition of Common Shares
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
$540,000
$1,500,000
$(25,000)
(70,000) 385,000 $1,815,000
40,000 $15,000
$800,000 104,000 (25,000)
$879,000
(19,500)
$520,500
1
Total $2,815,000 104,000 (44,500) (70,000) 425,000 $3,229,500
($800,000 ÷ 32,000) × 1,000 = $25,000 $44,500 – $25,000 = $19,500
_ Solutions Manual
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-10 (Continued) (c) Number of common shares issued Beginning balance January 1, 2017 ..... Shares repurchased Feb. 2 ................... Shares issued for cash Oct. 29............. Balance Dec. 31, 2017 ...........................
32,000 (1,000) 2,000 33,000
EXERCISE 14-11 (a)
Profit available to common shareholders = Profit − Preferred share dividends = $465,325 − $65,000 = $400,325
(b) Weighted average number of shares December 1, 2016 Feb. 28, 2017 May 31, 2017 Nov. 1, 2017
(c)
60,000 × 12/12 10,000 × 9/12 (5,000) × 6/12 15,000 × 1/12
= = = =
60,000 7,500 (2,500) 1,250 66,250
Earnings per share = Profit available to common shareholders ÷ Weighted average number of common shares = $400,325 ÷ 66,250 = $6.04
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-12 (a)
Weighted average number of shares Jan. 1, 2017 Apr. 1, 2017 Sept. 30, 2017
80,000 × 12/12 10,000 × 9/12 (5,000) × 3/12
= = =
80,000 7,500 (1,250) 86,250
(b) 1. (i) Earnings per share = $5.91 [($520,000 − $10,000*) 86,250] *5,000 × $2 = $10,000 1. (ii) Same as in [(b) 1. (i)] above: $5.91. Since the preferred shares are cumulative, their dividends need to be paid before any of the earnings become available to the common shareholders. Therefore, cumulative preferred dividends must be deducted from profit in calculating earnings per share, whether they are declared and paid or not. 2. (i) Same as in [(b) 1. (i)] above $5.91 2. (ii) Earnings per share = $6.03 ($520,000 86,250)
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-13 (a) Earnings per share Price-earnings ratio Payout ratio
2017
2016
2015
$3.79 11.3 X .660
$4.18 11.9 X .538
$5.26 10.7 X .399
Calculations: Earnings per share (in thousands) 2017: ($1,978 − $73) ÷ 502 = $3.79 2016: ($2,131 − $43) ÷ 500 = $4.18 2015: ($2,663 − $30) ÷ 501 = $5.26 Price-earnings ratio 2017: $43.00 ÷ $3.79 = 11.3 times 2016: $49.75 ÷ $4.18 = 11.9 times 2015: $56.25 ÷ $5.26 = 10.7 times Payout ratio 2017: $2.50 ÷ $3.79 = .660 2016: $2.25 ÷ $4.18 = .538 2015: $2.10 ÷ $5.26 = .399
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 14-13 (Continued) (b) Earnings per share have deteriorated substantially over the past three years, moving from $5.26 to $3.79, a 28% decrease. This indicates that the company is earning less profit per common share. This decrease occurred primarily because profit has decreased. The 2017 earnings per share is also lower because preferred share dividends have increased over the three-year period. This leaves less profit for common shareholders. The price-earnings ratio increased in 2016, and then declined in 2017. There are many factors affecting price-earnings ratios but one possible reason for the decline could be that investors are not anticipating as high a level of income in the future. The priceearnings ratio should be compared to other companies in the industry to see if a multiple of around eleven is good for this type of business. The company’s dividends have increased each year and the payout ratio has increased substantially as a percentage of earnings per share over the three-year period. The increase is due to the increase in dividends paid as well as the decrease in earnings per share.
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 14-1A (a) Cash Dividend
Stock Dividend
3-for-1 Stock Split
(1)
Assets
$12,000,000 − No effect = $600,000a = $12,000,000 $11,400,000
No effect = $12,000,000
(2)
Liabilities
No effect = $4,000,000
No effect = $4,000,000
No effect = $4,000,000
(3)
Common shares
No effect = $2,000,000
$2,000,000 + $600,000b = $2,600,000
No effect = $2,000,000
(4)
Retained earnings
$6,000,000 − $600,000 = $5,400,000
$6,000,000 − $600,000 = $ 5,400,000
No effect = $6,000,000
(5)
Total $8,000,000 − shareholders’ $600,000 = $7,400,000 equity
No effect ($8,000,000 + $600,000 − $600,000 = $8,000,000)
No effect = $8,000,000
(6)
Number of shares
20,000 increase (20,000 + 400,000 = 420,000)
800,000 increase (400,000 × 3 = 1,200,000)
No effect = 400,000
a 400,000 × $1.50 = $600,000 b 400,000 × 5% × $30 = $600,000
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-1A (Continued) (b) 1. Cash dividend Cash dividend 1,000 × $1.50 = $1,500 Fair value of shares 1,000 × $28.501 = $28,500 1
Assumed that fair value of the shares would likely drop by the amount of the cash dividend ($30 − $1.50 = $28.50)
2. Stock Dividend Stock dividend 1,000 × 5% = 50 shares Fair value of shares 1,050 × $28.57142 = $30,000 2
Assumed that fair value of the shares would drop accordingly ($30 ÷ 105% = $28.5714), the same amount as the stock dividend.
3. Stock Split Stock split 1,000 × 3 = 3,000 shares Fair value of shares = 3,000 × $103 = $30,000 3
Assumed that fair value of the shares would likely decrease by two-third because of the stock split ($30 × 1/3 = $10)
In terms of final value, the shareholder would be in the same position having received a cash dividend, a stock dividend, or a stock split. However, a stock dividend or split would allow the shareholder to control the receipt of the cash and the related tax payment. Since the shareholder can control when the shares are sold, they can control when the income tax would have to be paid on any gains. Stock dividends and stock splits also provide the shareholder with an increased number of shares on which to generate future gains and dividends. Alternatively, some shareholders may prefer to receive a cash dividend since they do not have to sell the shares to obtain the cash. As well, there are brokerage fees associated with selling shares. Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-1A (Continued)
Taking It Further Advantages: Increases marketability of a company’s shares by reducing the fair value. This makes it easier for the company to sell additional shares since the fair value per share has been decreased. Makes it easier for investors to trade their shares since the fair value per share is decreased. Frequently seen as a good sign to investors and is frequently accompanied by an increase above split value. A reverse split can increase fair value per share and allow a company to continue trading its shares on a stock exchange; this increases marketability of the shares for investors and allows a company to continue accessing the secondary market. Disadvantages: A reverse split can be seen as a negative sign to investors and can be accompanied by a further decline in fair value below the split value.
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-2A (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Jan. 15 Cash Dividends—Common ......................90,000 Dividends Payable (90,000 × $1) ......
Credit
90,000
Jan. 31 Date of record – No entry required Feb. 15 Dividends Payable ................................. 90,000 Cash ...................................................
90,000
July 1 Memo: 3-for-2 stock split increases the number of shares to 135,000 (90,000 × 3 ÷ 2) Dec. 15 Common Stock Dividends ..................... 135,000 Common Stock Dividends Distributable (135,000 × 10% × $10). 135,000 30 Date of record – No entry required 31 Income Summary ................................... 315,000 Retained Earnings ............................ 315,000 [($450,000 × (1 – 30%)] 31 Retained Earnings .................................. 225,000 Cash Dividends—Common .............. 90,000 Common Stock Dividends................ 135,000
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-2A (Continued) (b) Common Shares Date Jan.
Explanation
Ref.
Debit
Credit
1 Balance
Balance 1,100,000
Common Stock Dividends Distributable Date
Explanation
Dec. 15
Ref.
Debit
J1
Credit
Balance
135,000
135,000
Credit
Balance
90,000
90,000 0
Credit
Balance
135,000
135,000 0
Cash Dividends—Common Date
Explanation
Jan. 15 Dec. 31 Closing entry
Ref.
Debit
J1 J1
90,000
Ref.
Debit
J1 J1
135,000
Ref.
Debit
Common Stock Dividends Date
Explanation
Dec. 15 31 Closing entry Retained Earnings Date
Explanation
Jan. 1 Balance Dec. 31 Closing entry 31 Closing entry
Solutions Manual .
Credit
J1 315,000 J1 225,000
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Balance 540,000 855,000 630,000
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-2A (Continued) (c) LEBLANC CORPORATION Partial Balance Sheet December 31, 2017 Shareholders' equity Share capital Common shares, no par value, unlimited number of shares authorized, 135,000 shares issued... $1,100,000 Common stock dividend distributable ............... 135,000 Total share capital................................................ 1,235,000 Retained earnings..................................................... 630,000 Total shareholders' equity .............................. $1,865,000
Taking It Further: From the perspective of an investor, the advantage of a stock dividend or a stock split is that the shares can become more affordable to another investor who is willing to buy the shares on the stock market. The disadvantage of a stock dividend is that they are taxable when received, but no additional cash is made available to pay the applicable taxes. Some of the additional shares issued on a stock dividend may need to be sold to generate the cash needed to pay the income tax on the stock dividend. For stock splits, there are no disadvantages to the investor.
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-3A (a) Shares authorized Shares issued - refer to part (b)
1,000,000 437,000
(b) Common shares Contributed Surplus—reacquisition of Common shares Retained earnings
$1,351,330 $6,750 $719,420
Calculations:
Bal 1. 2. 3. 4. 5.
Common shares (a)
Number of shares (b)
Average per share amount (a) ÷ (b)
Cont. surplus — reacq. of common shares
$1,500,000 147,000 1,647,000 (30,800) 1,616,200 22,500 1,638,700 (55,620) 1,583,080 (231,750) $1,351,330
500,000 35,000 535,000 (10,000) 525,000 5,000 530,000 (18,000) 512,000 (75,000) 437,000
$3.00
$15,000
$720,000
3.08
15,000 (1) 800 15,800
720,000
3.08 3.09 3.09 3.09
Retained earnings
720,000
15,800 720,000 (2) (15,800) (580) 0 719,420 (3) 6,750 $ 6,750 $719,420
(1) (10,000 × $3.08) − (10,000 × $3) = $30,800 − $30,000 = $800 (2) (18,000 × $3.09) − (18,000 × $4) = $55,620 − $72,000 = $(16,380). A maximum of $15,800 is deducted from contributed surplus; the remainder, $580, is deducted from retained earnings. (3) (75,000 × $3.09) – (75,000 × $3) = $231,750 − $225,000 = $6,750
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-3A (Continued)
Taking It Further: Reporting the number of shares authorized and issued allows shareholders to determine how many additional shares can be sold and how much their share ownership can potentially be diluted. If there are a maximum number of shares authorized, this would also determine how many additional shares can be issued to raise capital. Knowing the number of shares issued allows investors to determine their percentage ownership.
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-4A Calculations needed for parts (a) and (b) Common Shares (1) (2) Date Jan. 1, Feb. 11 Subtotal Mar. 2 Subtotal June 14 Subtotal Sept. 16 Subtotal Dec. 13 Bal.
No. of Shares 150,000 50,000 200,000 (20,000) 180,000 180,000 360,000 (50,000) 310,000 15,500 325,500
Total Cost $2,400,000 1,000,000 3,400,000 (340,000) 3,060,000
Jan. 1, July 25 Bal.
Solutions Manual .
No. of Shares
17.00 17.00 17.00
3,060,000 (425,000) 2,635,000 294,500 $ 2,929,500
Preferred Shares (1) (2) Date
(3) Average per Share Amount $16.00
Total Cost
5,000 (500) 4,500
14-40
$375,000 (37,500) 337,500
8.50 8.50 9.00
(3) Average per Share Amount $75.00 75.00 75.00
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-4A (Continued) (a) Feb. 11 Cash ................................................... 1,000,000 Common Shares ......................... 1,000,000 (50,000 shares × $20) Mar. 2 Common Shares (20,000 × $17.00) .................................... 340,000 Contributed Surplus— Reacquisition of Common Shares ....... 30,000 Retained Earnings ................................. 70,000 440,000 Cash (20,000 × $22)......................... July 25 Preferred Shares (500 × $75) ................ 37,500 Contributed Surplus— Reacquisition of Preferred Shares Cash (500 × $70)..............................
2,500 35,000
Sept. 16 Common Shares (50,000 × $8.50) .......... 425,000 Retained Earnings .................................. 425,000 Cash (50,000 × $17)......................... 850,000 Oct. 27 Stock Dividends (15,500 × $19).............. 294,500 Stock Dividends Distributable ....... 294,500 Dec. 13 Stock Dividends Distributable ............... 294,500 Common Shares ............................. 294,500 (b) Share capital Preferred shares $4 cumulative, convertible, 100,000 authorized, 4,500 shares issued Common shares, unlimited number of shares authorized, 325,500 shares issued
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$ 337,500 2,929,500
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-4A (Continued) Taking It Further: The Contributed Surplus account is reported in shareholders’ equity because it represents equity contributed by shareholders who are willing to take less money than the average per share amount paid for shares being repurchased.
Solutions Manual .
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-5A (a) PORT HOPE CORPORATION Income Statement Year Ended November 30, 2017 Sales............................................................................... $9,124,000 Cost of goods sold ........................................................ 7,280,000 Gross profit.................................................................... 1,844,000 Operating expenses............................. $1,120,000 Depreciation expense .......................... 355,000 1,475,000 Profit from operations................................................... 369,000 Other revenues .............................................................. 48,000 Profit before income taxes ........................................... 417,000 Income tax expense* ..................................................... 104,250 Profit from continuing operations................................ 312,750 Discontinued operations Profit on discontinued operations of communications devices division net of $5,000** income taxes ............. $15,000 Loss on disposal of discontinued communications devices division net of $18,750*** income tax savings 56,250 41,250 Profit.......................................................... $271,500 Earnings per share Profit ....................................................................
$1.23
$271,500 – $25,000 = $1.23 200,000
* ($417,000 × 25%) = $104,250 ** ($20,000 × 25%) = $5,000 *** ($75,000 × 25%) =$18,750
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-5A (Continued) (b) PORT HOPE CORPORATION Statement of Comprehensive Income Year Ended November 30, 2017 Profit.......................................................... Other comprehensive loss Loss on equity investment, net of $20,750* in income tax savings ..................... Comprehensive income ...........................
$271,500
62,250 $209,250
*($83,000 × 25%) = $20,750
Taking It Further: It is important to report gains and losses from discontinued operations separately from continuing operations because they represent atypical items. Investors trying to get a picture of the company’s future growth potential should not include discontinued operations in their analysis of future earnings potential because they will not exist in the future. Profit from continuing operations is a better indication of ongoing performance of the business on a comparative basis.
Solutions Manual .
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-6A (a) 2017 Mar. 17 Notes Payable .................................. Income Taxes Payable ................ Retained Earnings ...................... ($57,000 × 25% = $14,250) (b) Apr. 10 Common Shares .............................. Retained Earnings ........................... Cash .............................................
57,000 14,250 42,750
75,000 22,500 97,500
(c)Pr ofit Year Ended October 31, 2017 Fees earned .....................................................................$1,476,000 Operating expenses ................................ $929,000 Depreciation expense ......................... 87,000 1,016,000 Profit from operations................................................... 460,000 Interest expense .............................................................. 54,000 Profit before income taxes ........................................... 406,000 Income tax expense* ........................................................ 101,500 Profit................................................................................... 304,500 * ($406,000 × 25%) = $101,500
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-6A (Continued) (d) ZUG LIMITED Statement of Retained Earnings Year Ended October 31, 2017 Balance, November 1, 2016 as previously reported Add: Correction of error in recording payment on notes payable in 2016, net of $18,750 income tax expense........................................ Balance, November 1 as adjusted....................... Add: Profit............................................................. Less: Reacquired common shares $ 22,500 Cash dividends ................... 120,000 Balance November 30, 2017 ................................
$ 575,000
42,750 617,750 304,500 922,250 142,500 $779,750
Taking It Further: Financial statements are generally presented on a comparative basis to help the user of the financial statements make comparisons and assess trends in performance. In order for the information to be comparable, the financial statement of the prior period must be corrected to rectify the information affected by the prior year error.
Solutions Manual .
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-7A (a), (b), and (c) Preferred Shares Date
Explanation
Ref.
Jan.
1 Balance (10,000)
Debit
Credit
Balance 1,100,000
Common Shares Date
Explanation
Ref.
Debit
Credit
J1
Jan.
1 Balance (320,000) 15 Reacquisition of shares (20,000) Oct. 1 Issue of shares (100,000)
Balance 1,280,000
80,000 J1
1,200,000 800,000 2,000,000
Contributed Surplus—Reacquisition of Common Shares Date
Explanation
Ref.
Jan.
1 Balance 15 Reacquisition of shares
Debit
Credit
J1 30,000
Balance 30,000 0
Retained Earnings Date Jan.
1 15 July 1 Dec. 31 31
Explanation
Ref.
Balance Reacquisition of shares Prior period error Income Summary Dividends
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Debit
J1 30,000 J1 J1 J1 25,000
Credit
Balance
2,443,500 2,413,500 187,500 2,601,000 570,000 3,171,000 3,146,000
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-7A (Continued) (b) GENERAL JOURNAL Date
Account Titles
J1 Debit
Credit
Jan. 15 Common Shares ($4(1) × 20,000) ........... 80,000 Contributed Surplus—Reacquisition of Common Shares................................ 30,000 Retained Earnings ................................. 30,000 Cash (20,000 × $7)............................. 140,000 (1)
$1,280,000 ÷ 320,000 = $4
Mar. 31 Cash Dividends—Preferred .................. 12,500 Cash (10,000 × $5 × ¼)......................
12,500
Jun. 30 Cash Dividends—Preferred .................. 12,500 Cash (10,000 × $5 × ¼)......................
12,500
Jul. 1 Long-Term Investment ........................... 250,000 Income Tax Payable ($250,000 × 25%) 62,500 Retained Earnings [$250,000 × (1 − 25%)] ....................... 187,500 Oct. 1 Cash (100,000 × $8) ................................ 800,000 Common Shares ............................... 800,000 (c) Dec. 31 Income Summary [$760,000 × (1 − 25%)] .......................... 570,000 Retained Earnings ......................... 570,000 31 Retained Earnings ...................................25,000 Cash Dividends—Preferred ..........
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25,000
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 14-7A (Continued) (d)
JAJOO CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017
Balance January 1, as previously reported Correction for understatement of investment, net of $62,500 income tax expense Balance January 1, as adjusted Issued for cash Reacquired shares Cash dividends—preferred Profit Balance, December 31
Preferred Shares
Common Shares
Contributed Surplus– Reacquisition of Common Shares
$1,100,000
$1,280,000
$30,000
1,100,000
$1,100,000
Retained Earnings
Total
$2,443,500
$4,853,500
187,500
187,500 5,041,000 800,000 (140,000) (25,000) 570,000 $ 6,246,000
1,280,000 800,000 (80,000)
30,000
2,631,000
(30,000)
$2,000,000
0
(30,000) (25,000) 570,000 $3,146,000
_ Solutions Manual
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-7A (Continued)
Taking It Further: Corrections of prior period errors are recorded in the retained earnings account because they relate to revenues and expenses of prior periods. These revenues and expenses have been transferred to the retained earnings account through the closing entries of prior periods. To record them in current year accounts would misstate current year results. In addition, comparative figures are restated to adjust for the error. This enhances comparability and usefulness of the information.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-8A (a) PANSY PAINTS LTD. Statement of Comprehensive Income Year Ended December 31, 2017 Sales............................................................................... Cost of goods sold ........................................................ Gross profit.................................................................... Operating expenses Depreciation expense ......................... $29,000 Office expense .................................... 11,000 Advertising expense ........................... 7,860 Profit from operations................................................... Other revenues Gain on sale of equipment .....................................
$780,000 412,000 368,000
47,860 320,140 850 320,990
Other expenses Interest expense 4,650 Profit before income taxes ........................................... 316,340 Income tax expense* ..................................................... 79,085 Profit............................................................................... 237,255 Other comprehensive income Loss on equity investment, net of $1,350 income tax savings** ............................. .... 4,050 Comprehensive income .................................................... $233,205 *$316,340 × 25% = $79,085 **[$5,400 × (1 − 25%)] = $4,050
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-8A (Continued) (b) PANSY PAINTS LTD. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017
Balance, January 1 Cash dividends Comprehensive income Balance, December 31
Common Shares
Contributed Surplus– Reacquisition of Common Shares
$255,000
$7,500
$255,000
$7,500
Retained Earnings $35,030 (15,000) 237,255 $257,285
Accumulated Other Comprehensive Income (Loss) (4,050) $(4,050)
Total $297,530 (15,000) 233,205 $ 515,735
_ Solutions Manual
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-8A (Continued) (c) PANSY PAINTS LTD. Partial Balance Sheet December 31, 2017 Shareholders' equity Contributed capital Share capital Common shares, 18,000 shares issued Other contributed capital Contributed surplus—reacquisition of common shares......................................... Total contributed capital ....................................... Retained earnings.................................................. Accumulated other comprehensive income (loss) Total shareholders' equity ....................................
$255,000 7,500 262,500 257,285 (4,050) $515,735
Taking It Further: The first of two methods of preparing the statement of comprehensive income is to combine the income statement with the comprehensive income statement on an all-inclusive basis. The second method is to prepare the statement of comprehensive income on its own, starting with profit, taken from the income statement. Neither format is better. The choice of which format to use depends on the nature and amount of information that a company needs to present on its statement for its users. For example, if a company has several material transactions to disclose in other comprehensive income, it may choose the separate statement format. A company may also choose a separate statement format if it wants to emphasize the profit amount rather than comprehensive income.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-9A TMAO INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017
Balance, January 1 Reacquired common shares Stock split 2 for 1 Cash dividends– preferred Stock dividends– common Comprehensive income Balance, December 31
Preferred Shares
Common Shares
$400,000
$800,000 (50,000)
Contributed Surplus– Reacquisition of Common Shares
Stock Dividend Distributable
1
$10,000
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
$450,000
$(50,000)
2
(12,000) 5
$400,000
$750,000
3
$180,000
$10,000
$1,600,000 (40,000) 0
0
$180,000
Total
(180,000) 227,500 $485,500
(12,000) 4
65,000 $15,000
0 292,500 $1,840,500
1
(10,000 ÷ 160,000) X $800,000 = $50,000 $50,000 - $40,000 3 150,000 × 10% × $12 = 15,000 × $12 = $180,000 4 $350,000 × (1 − 35%) = $227,500 5 4,000 × 2 from split × ($3 ÷ 2) = $12,000 2
_ Solutions Manual
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-9A (Continued)
Taking It Further: Comprehensive income is closed at the end of the year to accumulated other comprehensive income. In turn, accumulated other comprehensive income is an element of shareholders’ equity in the balance sheet. For companies following ASPE, there is no comprehensive income and consequently no accumulated other comprehensive income either.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-10A (a)
Weighted Average Number of Shares
Date Apr. 1 June 1 July 1 Sept. 30 Jan. 31 Mar. 31
Beginning balance Reacquired shares Issued 50,000 shares Reacquired shares Issued 60,000 shares Ending balance
Actual Fraction number of Year 500,000 12/12 (12,000) 10/12 50,000 9/12 (8,000) 6/12 60,000 2/12 590,000
Weighted Average 500,000 (10,000) 37,500 (4,000) 10,000 533,500
(b) Earnings per Share = Income available to common shareholders ÷ Weighted average number of common shares = [$973,600 – (20,000 × $6)] ÷ 533,500 = $1.60 Note: The current year’s annual preferred dividend must be subtracted from profit whether or not it is declared. Dividend arrears are not relevant in the calculation. (c)
The number of common shares issued at March 31, 2017 is 590,000 as calculated in part (a) above.
Taking It Further: Preferred shareholders usually have the return (or dividend rate) on their investment fixed by the terms of the share issue. They do not share in additional income. The concept of “earnings per share” for preferred shareholders; therefore, has no meaning. Common shareholders; however, do not have a dividend rate and “own” all of the company’s profit after the preferred shareholders receive their dividend.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-11A (a) ($ in millions except for market price per share) Canadian Pacific Railway Limited Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio
2013 $875 − $0 = $5.00 174.9 $160.65 = 32.13 times $5.00 $246 = .281 $875
2014 $1,476 − $0 = $8.54 172.8 $223.75 = 26.20 times $8.54 $241 = .163 $1,476
2012 $484 − $0 = $2.82 171.8 $100.90 = 35.78 times $2.82 $232 = .479 $484
Canadian National Railway Company Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio
2014 $3,167 − $0 = $3.86 819.9 $80.02 = 20.73 times $3.86 $818 = .258 $3,167
2013 $2,612 − $0 = $3.10 843.1 $60.56 = 19.54 times $3.10 $724 = .277 $2,612
2012 $2,680 − $0 = $3.08 871.1 $90.33 = 29.33 times $3.08 $652 = .243 $2,680
_ Solutions Manual
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Accounting Principles, Seventh Canadian Edition
Problem 14-11A (Continued) (a) (Continued) In order to comment on whether a particular ratio has improved or deteriorated, one must take on the role of a user of that ratio. If the user is management, in the case of CP, earnings and earnings per share improved dramatically and continuously from 2012 to 2014. On the other hand, for Canadian National, earnings per share improved slightly in 2013, in spite of a drop in earnings, and had a large improvement in 2014. From a potential investor’s point of view, a lower priceearnings ratio is an indicator of lower risk. From that perspective, Canadian Pacific’s price-earnings ratio keeps decreasing because of the large and continuous increase in earnings per share. While this may be perceived as a deteriorating ratio, one must keep in mind that the pace of the increase in the market price of the shares is being outpaced by the increase in earnings. This might not necessarily be a negative trend to a potential investor. On the other hand, Canadian National’s price-earnings ratio deteriorated in 2013 and then improved in 2014. Finally, for the dividend payout ratio, if one takes the perspective of a current shareholder who receives dividends, Canadian Pacific’s ratio is deteriorating over the years, but in absolute terms, the dividend amounts have remained the same. Canadian National’s payout ratio has remained fairly constant.
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Accounting Principles, Seventh Canadian Edition
Problem 14-11A (Continued) (b) Canadian Pacific’s earnings per share are higher than Canadian National’s earning per share in 2013 and 2014, but it is imperative to compare earnings per share while also considering the market price of each share. Therefore, it is more useful to compare the price-earnings ratios. The price-earnings ratio of Canadian National is lower than Canadian Pacific, which may indicate that the market considers Canadian Pacific to be a superior investment. The trend of Canadian Pacific’s PE ratio is not good however. If a current shareholder is interested in receiving regular dividends, Canadian National’s dividend payout ratio would be considered more favourably as it pays out a higher proportion of its profits compared to Canadian Pacific. If a shareholder has purchased the shares for capital appreciation they would most certainly prefer Canadian Pacific’s dramatic increase in market price per share.
Taking It Further: The presentation of earnings per share and fully diluted earnings per share is required. The fully diluted earnings per share shows the “worst-case” scenario if all possible convertible securities are converted into common shares. This allows users to assess the impact of management decisions on their share holding and its potential dilution.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-12A (a) Before Discontinued Operations Ratio 2017 $1,160 − $20 = 33.53% 1. Return on equity $3,400 $1,160 − $20 = $3.80 2. Earnings per share 300 $45.50 3. Price-earnings = 11.97 ratio times $3.80
2016 $810 − $20 = 32.92% $2,400 $810 − $20 = $2.72 290 $33.65 = 12.37 times $2.72
2015 $570 − $15 = 30.83% $1,800 $570 − $15 = $1.98 280 $44.80 = 22.63 times $1.98
After Discontinued Operations Ratio 2017 $710 − $20 = 20.29% 1. Return on equity $3,400 $710 − $20 2. Earnings per = $2.30 share 300 $45.50 3. Price-earnings = 19.78 ratio times $2.30
2016 $730 − $20 = 29.58% $2,400 $730 − $20 = $2.45 290 $33.65 = 13.73 times $2.45
2015 $500 − $15 = 26.94% $1,800 $500 − $15 = $1.73 280 $44.80 = 25.90 times $1.73
_ Solutions Manual
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-12A (Continued) (b) Before Discontinued Operations: Highlander’s return on equity increased slightly from 2015 to 2017 because the increase in profit from continuing operations was larger than the increase in shareholders’ equity. The earnings per share from continuing operations increased substantially due to a large increase in profit from continuing operations. The price-earnings ratio showed a substantial decrease due to the large increase in earnings per share from continuing operations. After Discontinued Operations: The return on equity shows an increase from 2015 to 2016, followed by a substantial decrease in 2017 from 2016 because the losses from discontinued operations offset all of the increase in profit from continuing operations, so profit is down while there is a substantial increase in shareholders’ equity. Earnings per share increased from 2015 to 2017 due to increased profit, but not as substantially as the earnings per share from continuing operations. The price-earnings ratio decreased due to the increase in earnings per share from continuing operations. Again, the decrease was not as substantial as the amount calculated before discontinued operations.
Taking It Further: Performing the analysis on results before discontinued operations reflects financial results as if the discontinued operations were not there. This is a better indication of ongoing performance and will lead to better comparability with years after 2017. The results before discontinued operations show substantial increases for return on equity and earnings per share caused by a substantial increase in profits from continuing operations. The losses from the discontinued operations in 2017 affected this trend for all three ratios. Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-1B (a) Cash Dividend
Stock Dividend
2-for-1 Stock Split
(1)
Assets
$9,000,000 − $750,000a = $8,250,000
No effect = $9,000,000
No effect = $9,000,000
(2)
Liabilities
No effect = $2,500,000
No effect = $2,500,000
No effect = $2,500,000
(3)
Common shares No effect = $3,000,000
$3,000,000 + $750,000b = $3,750,000
No effect = $3,000,000
(4)
Retained earnings
$3,500,000 − $750,000 = $2,750,000
$3,500,000 − $750,000 = $ 2,750,000
No effect = $3,500,000
(5)
Total shareholders’ equity
$6,500,000 − $750,000 = $5,750,000
No effect ($6,500,000 + $750,000 − $750,000 = $6,500,000)
No effect = $6,500,000
(6)
Number of shares
No effect = 500,000
25,000 increase (25,000 + 500,000 = 525,000)
500,000 increase (500,000 × 2 = 1,000,000)
a b
500,000 × $1.50 = $750,000 500,000 × 5% × $30 = 25,000 × $30 = $750,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-1B (Continued) (b) 1. Cash Dividend Cash dividend 2,000 × $1.50 = $3,000 Fair value of shares 2,000 × $28.501 = $57,000 1
Assumed that fair value of the shares would likely drop by the amount of the cash dividend ($30 − $1.50 = $28.50)
2. Stock Dividend Stock dividend 2,000 × 5% = 100 shares Fair value of shares 2,100 × $28.57142 = $60,000 2
Assumed that fair value of the shares would drop accordingly ($30 ÷ 105% = $28.5714), the same amount as the stock dividend
3. Stock Split Stock split 2,000 × 2 = 4,000 shares Fair value of shares 4,000 × $153 = $60,000 3
Assumed that fair value of the shares would likely drop by half because of the stock split ($30 × ½ = $15)
In terms of final value, the shareholder would be in the same position having received either a cash or a stock dividend. However, a stock dividend would allow the shareholder to control the receipt of the cash and the related tax payment. Since shareholders can control when the shares are sold, they can control when the income tax would have to be paid on any gains. Alternatively, some shareholders may prefer to receive a cash dividend since they do not have to sell the shares to obtain the cash. As well, there are often brokerage fees associated with selling shares.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-1B (Continued) (b) (Continued) The decision as to whether a cash or stock dividend would be more beneficial really depends on the preferences of the shareholder and their tax situation. A stock split would leave the investor in exactly the same position before and after the split. The investor would own twice as many shares, but each share should be worth about half as much. Therefore, on an overall basis, the shareholder’s financial position should not have changed.
Taking It Further The purpose of a reverse stock split is to increase market value per share and allow a company to continue trading its shares on a stock exchange; this increases marketability of the shares for investors and allows a company to continue accessing the secondary market. A public company in financial difficulty may experience a decline in the market value of the common shares to pennies per share. With a reverse stock split of 20 for 1 for example, the market value of the common shares should increase as much as 20 times that of the pre-stock split market price.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-2B (a) Date
GENERAL JOURNAL Account Titles
J1 Debit
Feb. 1 Cash Dividends—Common (75,000 × $1) ........................................... 75,000 Dividends Payable—Common .........
Credit
75,000
15 Date of record – no entry required Mar. 1 Dividends Payable—Common .............. 75,000 Cash ...................................................
75,000
April 1 No entry required—Memo only to increase the number of common shares to 150,000 (75,000 × 2) Dec. 1 Stock Dividends—Common (150,000 × 5% × $16) .............................. 120,000 Common Stock Dividends Distributable 120,000 20 Date of record – no entry required 31 Income Summary [$400,000 × (1 − 25%)] ........................... 300,000 Retained Earnings ............................ 300,000 31 Retained Earnings .................................. 195,000 Cash Dividends—Common .............. 75,000 Stock Dividends—Common ............. 120,000
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PROBLEM 14-2B (Continued) (b) Common Shares Date Jan.
Explanation 1 Balance
Ref.
Debit
Credit
Balance 1,700,000
Common Stock Dividends Distributable Date Dec.
Explanation 1
Ref.
Debit
J1
Credit
Balance
120,000
120,000
Credit
Balance
75,000
75,000 0
Credit
Balance
120,000
120,000 0
Cash Dividends—Common Date
Explanation
Feb. 1 Dec. 31 Closing entry
Ref.
Debit
J1 J1
75,000
Ref.
Debit
J1 J1
120,000
Ref.
Debit
Stock Dividends—Common Date Dec.
Explanation 1 31 Closing entry
Retained Earnings Date
Explanation
Jan. 1 Balance Dec. 31 Closing entry 31 Closing entry
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Credit
J1 300,000 J1 195,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-2B (Continued) (c) ASAAD CORPORATION Partial Balance Sheet December 31, 2017 Shareholders' equity Share capital Common shares, no par value, unlimited number of shares authorized, 157,500 shares issued ............................................. $1,700,000 Stock dividends distributable ..................... 120,000 Total share capital ..................................... 1,820,000 Retained earnings............................................. 705,000 Total shareholders' equity......................... $2,525,000
Taking It Further: The share price will usually change in inverse proportion to the split or dividend so that the total fair value of the shares in circulation remains the same. For example, with a two-for-one stock split, the fair value of an individual share will reduce by half, but there are twice as many shares after the split as before. The total fair value of all shares outstanding remains the same. This reflects the lack of change in the company’s total assets. In practice, the share price will usually rise above the split value, or the decreased value due to the stock dividend, because of investor interest.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-3B (a) Shares authorized Shares issued
150,000 15,300
(b) Common shares Contributed surplus—reacquisition of Common shares Retained earnings
$597,292 $4,560 $203,848
Calculations:
Bal 1. 2. 3. 4. 5.
Common shares (a)
Number of shares (b)
$490,000 (21,000) 469,000 169,200 638,200 64,500 702,700 (46,848) 655,852 (58,560) $597,292
14,000 (600) 13,400 3,600 17,000 1,000 18,000 (1,200) 16,800 (1,500) 15,300
Average Cont.surplus per share —reacq. of amount common (a) ÷ (b) shares $35.00 35.00
Retained earnings
$12,000 (1) (5,400) 6,600
$220,000
(2) (6,600) 0 (3) 4,560 $ 4,560
(16,152) 203,848
37.54 39.04 39.04 39.04
$203,848
(1) (600 × $35) − (600 × $44) = $21,000 − $26,400 = $5,400 (2) (1,200 × $39.04) − (1,200 × $58) = $46,848 − $69,600 = $(22,752). A maximum of $6,600 is deducted from contributed surplus; the remainder, $16,152, is deducted from retained earnings. (3) (1,500 × $39.04) – (1,500 × $36) = $58,560 − $54,000 = $4,560
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PROBLEM 14-3B (Continued)
Taking It Further: Stock compensation plans are used by companies to attract, retain, and remunerate key employees. When issuing shares to fulfill employee stock compensation plans, a company wants to prevent the additional share issue from causing a reduction of earnings per share for existing shareholders. To achieve this goal and avoid dilution, the company buys back its own shares. Part of the benefit to employees from receiving shares as remuneration or compensation comes from the future increase in the market value of the common shares obtained. Employees should; therefore, be motivated to act in the best interest of the company to ensure profits increase which will in turn lead to increases in the market value of the shares received as compensation. Cash bonuses, on the other hand, do not necessarily motivate the future behaviour of employees as they are often based on the performance in the past. Paying bonuses also has the disadvantage of draining cash out of the business. For these reasons, companies reacquire common shares for employee compensation plans.
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PROBLEM 14-4B Calculations needed for parts (a) and (b) Common Shares (1) (2) Date Jan. 1, Jan. 17 Sub. Feb. 27 Sub. Apr. 14 Sub. Aug. 16 Sub. Dec. 3 Bal.
No. of Shares 500,000 50,000 550,000 (20,000) 530,000 530,000 1,060,000 (100,000) 960,000 48,000 1,008,000
(3) Average per Total Cost Share Amount $4,000,000 $8.00 500,000 4,500,000 8.18 (163,600) 8.18 4,336,400 8.18 4,336,400 (409,000) 3,927,400 480,000 4,407,400
4.09 4.09 4.37
Preferred Shares (1) (2)
Date Jan. 1, June 25 Bal.
Solutions Manual .
(3) Average per No. of Shares Total Cost Share Amount 4,000 $600,000 $150.00 (500) (75,000) 150.00 3,500 525,000 150.00
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-4B (Continued) (a) Jan. 17 Cash ................................................. Common Shares ......................... (50,000 shares × $10)
500,000 500,000
Feb. 27 Common Shares (20,000 × $8.18) .......... 163,600 Contributed Surplus— Reacquisition of Common Shares ....... 2,000 Retained Earnings .................................... 74,400 Cash (20,000 × $12)......................... 240,000 June 25 Preferred Shares (500 × $150) ................. 75,000 Contributed Surplus— Reacquisition of Preferred Shares Cash (500 × $145)............................
2,500 72,500
Aug. 16 Common Shares (100,000 × $4.09) ........ 409,000 Retained Earnings .................................. 691,000 Cash (100,000 × $11)....................... 1,100,000 Oct. 17 Stock Dividends (48,000 × $10).............. 480,000 Stock Dividends Distributable ....... 480,000 Dec. 3
Stock Dividends Distributable ............... 480,000 Common Shares ............................. 480,000
(b) Share capital Preferred shares $9 noncumulative, convertible, 100,000 authorized, 3,500 issued $ 525,000 Common shares, unlimited number of shares authorized, 1,008,000 issued 4,407,400
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PROBLEM 14-4B (Continued) Taking It Further: Talty may have split the common shares to make the price more affordable. As for the stock dividend, it might have been declared to provide a return to shareholders but without having to reduce cash. Another reason for the stock dividend may be to permanently increase share capital and make the market value of the shares distributed unavailable for cash dividends.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 14-5B (a) COQUITLAM CORPORATION Income Statement Year Ended December 31, 2017 Net sales ........................................................................ $1,750,000 Cost of goods sold ........................................................ 888,000 Gross profit.................................................................... 862,000 Operating expenses ..................................................... 451,000 Profit from operations................................................... 411,000 Other expenses ............................................................. 18,000 Profit before income taxes ........................................... 393,000 Income tax expense* ..................................................... 98,250 Profit from continuing operations................................ 294,750 Discontinued operations Loss on discontinued operations of ceramics division net of $37,500** income taxes...................... $112,500 Gain on disposal of discontinued ceramics division net of $17,500*** income tax savings 52,500 60,000 Profit.......................................................... $234,750 Earnings per share Profit ....................................................................
$ 0.90
$234,750 – $55,000 = $0.90 200,000 * ($393,000 × 25%) = $98,250 ** ($150,000 × 25%) = $37,500 *** ($70,000 × 25%) = $17,500
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PROBLEM 14-5B (Continued) (b) COQUITLAM CORPORATION Statement of Comprehensive Income Year Ended December 31, 2017 Profit.......................................................... Other comprehensive income Gain, net of $11,750* in income tax .................................................... Comprehensive income ...........................
$234,750
35,250 $270,000
*($47,000 × 25%) = $11,750
Taking It Further: A component of an entity is a separate major line of business or geographic area of operations that is clearly distinguishable from the rest of the entity and has its own separate cash flows and operations. Investors use profit (loss) from continuing operations to get a picture of the company’s future growth potential. Profit (loss) from continuing operations is a better indication of ongoing performance of the business on a comparative basis. Discontinued operations represent atypical items. Investors trying to get a picture of the company’s future growth potential should not include discontinued operations in their analysis of future earnings potential because they will not exist in the future.
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PROBLEM 14-6B (a) 2017 Jul. 9 Notes Payable .................................. Income Taxes Payable................ Retained Earnings ...................... ($61,500 × 25% = $14,250) (b) Aug. 7 Common Shares .............................. Retained Earnings ........................... Cash .............................................
61,500 15,375 46,125
57,500 32,500 90,000
(c) Comprehensive Income Year Ended September 30, 2017 Fees earned .....................................................................$1,647,000 Operating expenses ................................ $971,000 Depreciation expense ......................... 74,000 1,045,000 Profit from operations................................................... 602,000 Other revenue ................................................................... 65,000 Profit before income taxes ........................................... 667,000 Income tax expense* .........................................................166,750 Profit...................................................................................$ 500,250 * ($667,000 × 25%) = $166,750
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PROBLEM 14-6B (Continued) (d) WEATHER VANE LIMITED Statement of Retained Earnings Year Ended September 30, 2017 Balance, October 1, 2016 as previously reported Add: Correction of error in recording payment on notes payable in 2016, net of $15,375 income tax expense........................................ Balance, October 1 as adjusted .......................... Add: Profit............................................................. Less: Reacquired common shares $ 32,500 Cash dividends ................... 150,000 Retained earnings, September 30, 2017 .............
$ 845,000
46,125 891,125 500,250 1,391,375 182,500 $1,208,875
Taking It Further: Other comprehensive income (OCI) includes certain gains and losses that are not included in profit, such as unrealized gains and losses from some long-term strategic equity investments and foreign currency translation. OCI is reported on the comprehensive income statement in an all-inclusive format with the income statement or as a separate financial statement. OCI is reported separately on the statement of comprehensive income because it is not closed to retained earnings. OCI is closed to Accumulated Other Comprehensive Income (AOCI), which appears in the equity section of the balance sheet, immediately after Retained Earnings.
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PROBLEM 14-7B (a), (b), and (c) Preferred Shares Date
Explanation
Ref.
Jan.
1 Balance (15,000)
Debit
Credit
Balance 850,000
Common Shares Date
Explanation
Ref.
Jan. Mar. July
1 Balance (255,000) 1 Issue of shares (20,000) 1 Reacquisition of shares (25,000)
J1
Debit
Credit
Balance
3,210,000 310,000 3,520,000 3,200,000
J1 320,000
Contributed Surplus—Reacquisition of Common Shares Date
Explanation
Ref.
Jan. July
1 Balance 1 Reacquisition of shares
J1
Debit
Credit
Balance
20,000
0 20,000
Credit
Balance
Retained Earnings Date Jan. 1 Sept. 1 Dec. 31 31
Explanation
Ref.
980,000 J1 42,000 938,000 J1 525,000 1,463,000 1,418,000 J1 45,000
Balance Correction of error Income Summary Dividends
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PROBLEM 14-7B (Continued) (b)
GENERAL JOURNAL
Date
Account Titles
J1 Debit
Credit
Mar. 1 Cash (20,000 × $15.50) .......................... 310,000 Common Shares ............................... 310,000 Mar. 31 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... 15,000 Cash ...................................................
15,000
Jun. 30 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... 15,000 Cash ...................................................
15,000
July 1 Common Shares (25,000 × $12.801) ....... 320,000 Contributed Surplus—Reacquisition 20,000 of Common Shares ........................... Cash (25,000 × $12) ........................... 300,000 1
($3,210,000 + $310,000) ÷ (255,000 + 20,000) = $12.80
Sep. 1 Retained Earnings [$60,000 × (1 − 30%)] ............................. 42,000 Income Tax Payable (Recoverable) ($60,000 × 30%)...................................... 18,000 Accounts Receivable ........................
60,000
Sep. 30 Cash Dividends—Preferred (15,000 × $4 × ¼) .................................... 15,000 Cash ................................................... 15,000 (c) Dec. 31 Income Summary [$750,000 × (1 − 30%)] ........................... 525,000 525,000 Retained Earnings ............................ 31 Retained Earnings .................................... 45,000 Cash Dividends—Preferred.............. Solutions Manual .
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PROBLEM 14-7B (Continued) (d)
MICHAUD CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017
Balance January 1, as previously reported
Preferred Shares
Common Shares
Contributed Surplus– Reacquisition of Common Shares
$850,000
$3,210,000
$0
Correction for overstatement of 2016 sales, net of $18,000 income tax savings Balance January 1, as adjusted 850,000 Issued for cash Reacquired shares Cash dividends—preferred Profit Balance, December 31 $850,000
3,210,000 310,000 (320,000)
$3,200,000
0
Retained Earnings
Total
$980,000
$5,040,000
(42,000)
(42,000)
938,000
4,998,000 310,000 (300,000) (45,000) 525,000 $ 5,488,000
20,000
$20,000
(45,000) 525,000 $1,418,000
Note X: $15,000 of preferred dividends are in arrears. _ Solutions Manual
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PROBLEM 14-7B (Continued)
Taking It Further: The amount recorded, net of tax, for the effect of the retroactive changes in accounting policy for revenue recognition would appear as an adjustment to the opening balance of retained earnings, in the same way as the correction of the prior year’s sales error. To record the effect in current year accounts would misstate current year results. In addition, comparative figures are restated to adjust for the retroactive change that has been implemented. This treatment enhances comparability and usefulness of the information. A change in accounting policy can be given prospective treatment, the same way as a change in estimate. When new standards are adopted, companies are often given the option to apply the changes required by the new accounting standards on a prospective basis. The other exception to this type of application is when it is impractical to do a retroactive application. This would be the case when significant estimates are required, if the required information is not available, or if the amounts involved are not material
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PROBLEM 14-8B (a) ASTER AUTOMOBILES INC. Statement of Comprehensive Income Year Ended December 31, 2017 Sales .............................................................................. Cost of goods sold ....................................................... Gross profit ................................................................... Operating expenses Depreciation expense ......................... $19,000 Office expense ..................................... 9,000 Advertising expense ........................... 5,860 Profit from operations .................................................. Other revenues Gain on sale of equipment ..................................... Other expenses Interest expense Profit before income taxes ........................................... Income tax expense* .................................................... Profit .............................................................................. Other comprehensive income Loss on equity investment, net of $850 income tax savings** ............................... Comprehensive income................................................
$670,000 356,000 314,000
33,860 280,140 800 280,940 2,650 278,290 69,573 208,717
2,550 $206,167
*$278,290 × 25% = $69,573 **[$3,400 × (1 − 25%)] = $2,550
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PROBLEM 14-8B (Continued) (b) ASTER AUTOMOBILES INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017
Balance, January 1 Dividends Comprehensive income Balance, December 31
Common Shares
Contributed Surplus– Reacquisition of Common Shares
$245,000
$5,500
$245,000
$5,500
Retained Earnings $53,180 (5,000) 208,717 $256,897
Accumulated Other Comprehensive Income (Loss) (2,550) $(2,550)
Total $303,680 (5,000) 206,167 $504,847
.
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PROBLEM 14-8B (Continued) (c) ASTER AUTOMOBILES INC. Partial Balance Sheet December 31, 2017 Shareholders' equity Contributed capital Share capital Common shares, 10,000 shares issued Other contributed capital Contributed surplus—reacquisition of common shares......................................... Total contributed capital ....................................... Retained earnings.................................................. Accumulated other comprehensive income (loss) Total shareholders' equity ....................................
$245,000 5,500 250,500 256,897 (2,550) $504,847
Taking It Further: From the perspective of a shareholder, it is important to find out everything that has occurred in the fiscal year to the different accounts representing the company’s wealth. Issuance of shares for example may be very dilutive to the earnings for each shareholder. A creditor will be looking at other types of transactions during the fiscal year. Repurchases of shares may be draining cash out of the business, for example. Knowing balances is important, and this can be obtained from the balance sheet. Knowing and understanding the transactions that have occurred gives better information to assess trends and make decisions.
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PROBLEM 14-9B KANADA INC. Statement of Changes in Shareholders’ Equity Year Ended September 30, 2017
Balance, October 1, 2016 Cash dividends–preferred Stock dividends Reacquired common shares Comprehensive income Balance, September 30, 2017
Preferred Shares
Common Shares
Retained Earnings
$465,000
$900,000
$540,000 (30,000) 1 (35,000) (8,080) 227,500 4 $694,420
35,000 2 (71,920) 3 $465,000
$863,080
Accumulated Other Comprehensive Income $95,000
18,900 5 $113,900
Total $2,000,000 (30,000) 0 (80,000) 246,400 $2,136,400
1
6,000 × $5 = $30,000 25,000 × 4% × $35 = 1,000 × $35 = $35,000 3 ($900,000+ $35,000) ÷ (25,000 + 1,000) = $35.96, then $35.96 x 2,000 = $71,920, then $80,000 $71,920 = $8,080 4 $325,000 × (1 − 30%) = $227,500 5 $27,000 × (1 − 30%) = $18,900 2
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PROBLEM 14-9B (Continued)
Taking It Further: Other comprehensive income is closed at the end of the year to accumulated other comprehensive income. In turn, accumulated other comprehensive income is an element of shareholders’ equity in the balance sheet. For companies following ASPE, there is no other comprehensive income and consequently no accumulated other comprehensive income either.
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PROBLEM 14-10B (a)
Weighted Average Number of Shares
Date Aug. 1 Nov. 30 Feb. 1 Mar. 1 July 31
Actual Fraction Weighted number of Year Average Beginning balance 350,000 12/12 350,000 Issued 37,500 shares 37,500 8/12 25,000 Reacquired shares (6,000) 6/12 (3,000) Issued 30,000 shares 30,000 5/12 12,500 Ending balance 411,500 384,500
(b) Earnings per Share Preferred dividend not cumulative or declared = Income available to common shareholders ÷ Weighted average number of common shares = $1,022,800 ÷ 384,500 = $2.66 (c)
Preferred dividend noncumulative with partial ($60,000) dividend paid to preferred shareholders = Income available to common shareholders ÷ Weighted average number of common shares = ($1,022,800 − $60,000) ÷ 384,500 = $2.50
(d)
The number of common shares issued at July 31, 2017 is 411,500 as calculated in part (a) above.
Taking It Further: A weighted average number of shares is used in the earnings per share calculation because the issue of shares and other activity affecting the number of shares issued during the period changes the amount of net assets upon which income can be earned. . Solutions Manual .
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PROBLEM 14-11B (a)
($in millions except for market price per share)
Husky Energy Inc. Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio
2014 $1,258 − $13 = $1.27 983.6 $27.50 = 21.65 times $1.27 $1,180 = .94 $1,258
2013 $1,829 − $13 = $1.85 983.0 $33.70 = 18.22 times $1.85 $1,180 = .65 $1,829
2014 $2,699 −$0 = $1.85 1,462 $36.90 = 19.9 times $1.85 $1,490 = .552 $2,699
2013 $3,911 − $0 = $2.61 1,501 $37.24 = 14.3 times $2.61 $1,095 = .280 $3,911
Suncor Energy Inc. Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio
In order to comment on whether a particular ratio has improved or deteriorated, one must take on the role of a user of that ratio. One must also consider the impact of the drop in oil prices during the time period being analyzed. Instead of looking for improvements, a user would look at which company weathered the drop in oil prices better. Both companies experienced a similar percentage drop in profit from 2013 to 2014. Suncor did a better job because its market price per share decreased by a smaller percentage than did Husky’s.
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PROBLEM 14-11B (Continued) (a)
(Continued) From a potential investor’s point of view, the lower the price-earnings ratio, the lower the risk. From that perspective, Husky’s price-earnings ratio has been higher than Suncor’s. This could indicate a better market conception of Husky. In terms of the dividend payout ratio, Husky’s ratio shows a commitment in paying out the same amount of dividends in spite of the reduced earnings. The payout ratio was very high in 2014 as a consequence of this decision. In this case, maintaining the constant dividend would be considered a positive sign even though the ratio looks worse. Suncor’s dividend payout ratio also increased, but by a lower percentage than that of Husky. The absolute amount of the dividend increased in spite of a reduction in the number of shares issued.
(b) Based on earnings and payout ratios, Suncor would be considered the more favourable of the two companies. Suncor demonstrates less volatility between the two years and therefore may be considered more favourable by investors looking for a less risky investment.
Taking It Further: The presentation of earnings per share and fully diluted earnings per share is required. The fully diluted earnings per share ratio shows the “worst-case” scenario if all possible securities are converted into common shares. This allows users to assess the impact of management decisions on their share holding and its potential dilution.
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PROBLEM 14-12B (a) Before Discontinued Operations Ratio 2017 $1,250 − $80 = 34.41% 1. Return on equity $3,400 $1,250 − $80 = $2.60 2. Earnings per share 450 $24.40 3. Price-earnings = 9.38 ratio times $2.60
2016 $1,130 − $80 = 43.75% $2,400 $1,130 − $80 = $2.23 470 $19.88 = 8.91 times $2.23
2015 $990 − $60 = 48.95% $1,900 $990 − $60 = $2.02 460 $21.60 = 10.69 times $2.02
After Discontinued Operations Ratio 2017 $430 − $80 = 10.29% 1. Return on equity $3,400 $430 − $80 2. Earnings per = $0.78 share 450 $24.40 3. Price-earnings = 31.28 ratio times $0.78
2016 $980 − $80 = 37.50% $2,400 $980 − $80 = $1.91 470 $19.88 = 10.41 times $1.91
2015 $810 − $60 = 39.47% $1,900 $810 − $60 = $1.63 460 $21.60 = 13.25 times $1.63
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PROBLEM 14-12B (Continued) (b) Before Discontinued Operations: All Care’s return on equity decreased from 2015 to 2017 due to a larger increase in shareholders’ equity than profit from continuing operations. The earnings per share increased due to larger profit from continuing operations and a decrease in the number of common shares outstanding. The priceearnings ratio showed a slight decrease; an increase in share price was offset by an increase in earnings per share from continuing operations. After Discontinued Operations: The return on equity shows a sharp decrease in 2017 due to losses from discontinued operations. The same loss also causes a large decrease in earnings per share for 2017. This shows a different trend than earnings per share before discontinued operations. The sharp decrease in earnings per share caused a large increase in the price-earnings ratio in 2017. This is also a different trend than the price-earnings ratio from continuing operations.
Taking It Further: If I were a shareholder, I would likely focus my attention on the results before discontinued operations that show substantial increases in return on equity and earnings per share caused by a substantial increase in profits from continuing operations. The price-earnings ratio also remains modest in spite of the increase in the market price of the shares. If I were a creditor, I would likely want to find out more about the circumstances that lead to the discontinuance of the operations at an overall loss. These losses would have brought a large drain on cash. I would want to know that management has taken the necessary measures for this type of event not recurring.
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BYP14-1 FINANCIAL REPORTING PROBLEM (a)
For the 2014 fiscal year of Corus: (1) There were no stock dividends or stock splits. (2) Other comprehensive income in 2014 was an overall loss of $74,000 (3) There were no corrections of prior period errors.
(b) For the 2014 fiscal year, Corus did not repurchase any shares. They did repurchase shares in 2013. The Consolidated Statements of Changes in Shareholders’ Equity reports a reduction in Share Capital of $708,000 and a reduction in Retained Earnings of $756,000 attributed to the repurchase of shares. The two amounts make up the total paid in cash to repurchase the shares of $1,464,000. (c) The basic earnings per share ratio for 2013 was $1.91. The earnings per share weakened in 2014. (d) Fully diluted earnings per share were reported in both years. In 2014, the fully diluted amount was one cent lower than the basic amount, at $1.76 per share. For the 2013 fiscal year, the fully diluted figure was also one cent lower than the basic earnings per share ratio, at $1.90. (e) The price-earnings ratio increased from 13.2 times in 2013 to 13.8 times in 2014. The price-earnings ratio increased from 2013 to 2014 indicating that investors believe the current income levels will continue or increase. This is inconsistent with the answer from part (c) because the basic earnings per share decreased from 2013 to 2014. However, the decrease does not appear to be affecting the market price per share nor the price-earnings ratio. (f)
Corus’ payout ratio for 2013 was 0.53 ($84,452 ÷ $159,895). The causes for the increased payout ratio from 2013 to 2014 is the increase in dividends and decline in profit.
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BYP14-2 INTERPRETING FINANCIAL STATEMENTS (a)
A cash dividend would cause assets (cash) and shareholders’ equity (retained earnings) to decease by the amount of the dividend. There would be no impact on liabilities or on the number of shares issued. Stock dividends have no effect on assets or liabilities. What does change are elements of equity. Retained earnings are reduced and the common shares account increases by the amount of the stock dividend. A stock split would have no impact on assets, liabilities, or shareholders’ equity. All that would change is that the number of shares issued would increase by a multiple.
(b) The reason PotashCorp repurchased shares is likely because management concluded that the stock price was undervalued and the company had excess cash available. (c)
The market reacted favourably to the reacquisition as evidenced by the fact that the stock’s market price post stock repurchase was higher and so was the increase in the dividends per share.
(d) PotashCorp paid more than the average book value per share (average share amount) on the shares repurchased as evidenced by the decrease in the account Contributed Surplus and its corresponding footnote.
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BYP14-2 (Continued) (e) (in millions of US dollars, except per share data): 2014
Ratio Return on shareholders' equity
Earnings per share
Payout ratio
2013
$1,536 = $8,792 + $9,628 2
$1,785 $9,628 + $9,912 2
18.3%
$1,536 838.1
= $1.83
$1,785 864.6
= $2.06
$1,164 $1,536
=
$1,146 $1,785
= 0.64
0.76
Potash’s profit decreased 14% [($1,785 – $1,536) / $1,785] in 2014. This deterioration in profit for the year led to a corresponding decrease in the earnings per share ratio and return on shareholders’ equity.
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BYP14-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.
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BYP14-4 COMMUNICATION ACTIVITY MEMORANDUM To: From: Re:
Student Earnings per Share and Price-Earnings Ratio
Earnings per share is an important ratio for shareholders because it provides investors with a measure of the income earned by each common share. Earnings per share is calculated as earnings available to common shareholders (profit – preferred dividends) divided by the weighted average number of common shares outstanding during the period. The price-earnings ratio is important to investors as it provides investors with a meaningful way of comparing different companies when there are wide variations in the number of shares issued and the share prices. The price-earnings ratio is calculated as the market price divided by the earnings per share. Therefore, the earnings per share must be calculated before the price-earnings ratio can be determined. The price-earnings ratio will vary according to changes in earnings per share. For example, increases in earnings per share without a corresponding increase in the market price of the share will cause the priceearnings ratio to decrease. A high price-earnings ratio indicates that investors are willing to pay a higher price for the company’s shares given its level of earnings per share. A high price-earnings ratio may occur because investors are confident about the company’s potential to earn profit in the future. However, a high price-earnings ratio may also indicate that the company’s shares are currently overpriced. While a low price-earnings ratio may indicate the investors are not confident about the company’s future performance, it may also indicate the company’s shares are undervalued and signal that the shares may currently be a good investment opportunity.
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BYP14-4 (Continued) For companies using ASPE, there is no requirement to present earnings per share. Since private companies do not have their shares traded on the stock market, the share values are not often tested for their market value. Consequently, shareholders are not able to compare earnings per share to the shares’ market value. This means that the usefulness of the earnings per share ratio is substantially diminished. As well, in the case of private enterprises, shareholders are usually limited in number and have more hands-on access to the company’s financial information and are more familiar with its operations. They are; therefore, better equipped to assess profit performance, even though they might not have this ratio for reference.
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BYP14-5 “ALL ABOUT YOU” ACTIVITY (a)
Canadian Tire’s distinct sources of revenue include: 1. Retail: including: a. Canadian Tire b. Petroleum c. Mark’s d. FGL Sports 2. CT REIT segment which holds 273 properties 3. Financial services 4. Foreign operations Knowledge of these distinct sources of revenue will help investors interpret the financial statement information.
(b)
The management’s discussion and analysis includes: 1. A preface 2. Company and industry overview 3. Core capabilities 4. Historical performance highlights 5. Financial aspirations and strategic objectives 6. Financial performance 7. Liquidity, capital resources and contractual obligations 8. Tax matters 9. Accounting policies and estimates 10. Enterprise risk management 11. Controls and procedures 12. Social and environmental responsibility 13. Transactions between related parties 14. Forward-looking statements and other investor communication The information contained in the “Management’s Discussion and Analysis” (MD&A), although delivered from management’s perspective, gives information that is not strictly financial reporting as is the case with the financial statements. The topics covered give a more in-depth understanding of the company’s business model, its history, and aspirations, which might affect your opinion concerning an investment decision.
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BYP14-5 (Continued) (c)
Cash dividends per share in 2014 were $1.9625 and $1.4875 for 2013. This demonstrates an increasing dividend return on your investment. This increase may be an important consideration in your investment decision if the dividend is a substantial component of what the investment is expected to yield.
(d)
The basic earnings per share for 2014 was $7.65.
(e)
The web page under Investors includes links to the following: 1. Overview 2. Financial Reporting 3. Financial News 4. Events & Presentations 5. Shareholders 6. Debtholders 7. Corporate Governance 8. Investor Resources Canadian Tire’s share price at December 31, 2014 was $122.74.
(f)
The price-earnings ratio is $122.74 ÷ $7.65 = 16
(g)
Canadian Tire is listed on the TSX stock exchange under the symbol CTC.A and its auditors are Deloitte LLP.
(h)
Included on SEDAR are documents including: 1. Code of conduct 2. Interim financial statements 3. MD&A 4. News releases 5. Annual reports 6. Proxy forms and 7. Notices of meetings
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BYP14-5 (Continued) (i)
Solutions will vary depending on date retrieved: As of Nov. 25, 2015, the price-earnings ratio was 15.29 and industry 28.36. At that date, from the perspective of a potential investor, Canadian Tire’s price earnings ratio is better (lower) than the industry average.
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BYP14-6 Santé Smoothie Saga (a) 1.
Because Santé Smoothies & Sweets Ltd. is not a public company with its shares traded on a stock exchange, the fair value of the common shares is not easily established. On the other hand, arriving at the fair value can be done the same way someone outside the business might go about coming up with the purchase price of a business. It would be advisable for a business valuation to be done by an expert valuator to arrive at a fair value per share that everyone involved can agree on.
2.
Natalie’s purchase price paid for the shares will not necessarily correspond to the current fair value of the shares at the date of repurchase. Natalie’s investment in the business goes beyond the amount of cash invested in return for the 10 common shares she purchased.
3.
If you assume that $1,200 will be paid for each share repurchased, and since the total number of shares to be repurchased is 180 shares (210 less 30), the amount of cash needed to repurchase the shares will be $216,000 (180 × $1,200).
4.
The difference between the average per share amount of the shares held and the price paid for the reacquisition of the shares will reduce retained earnings. In this case the average per share amount is $58.10 ($12,200 ÷ 210). Since 180 shares will be repurchased, $10,458 will be debited to the Common Shares account, and the remaining $205,542, will be debited to the Retained Earnings account. Since the current balance of retained earnings is $241,026, the balance in retained earnings, after the shares repurchase would be $35,484 ($241,026 – $205,542).
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BYP14-6 (Continued) (a) 4. (Continued) Although there is a sufficient balance of retained earnings to allow the share repurchase, with such a substantial reduction in its balance, it is unlikely that dividends of $85,000 could be paid after the share repurchase. When dividends are declared subsequent to the share repurchase, the amount of dividends received by each of the three shareholders would be equal, as they each would own 10 common shares of the company. 5.
Janet and Brian must consider that the option for the business to repurchase the majority of their shares is limited to the amount of cash available to execute the transaction. Taking out significant amounts of cash from the business cannot be done without borrowing more funds and consequently crippling the operations of the business. It is very unlikely that a bank would lend money to Santé Smoothies & Sweets Ltd. and let it use that cash to repurchase the common shares. The cash borrowed would be leaving the business and not be available to sustain and grow the operations, which would be needed in order to be able to repay the loan principal and interest. The share reacquisition might not be possible under the current set of circumstances, nor would it be wise to do so while trying to ensure the future success of the business. An alternative available to reach the objective of an equal number of voting shares owned by each shareholder is for Janet and Brian to convert their excess common shares (90 shares each) into non-voting preferred shares. These new preferred shares could have a high dividend rate, giving Janet and Brian a continued return on their investment in the form of dividends. While Natalie would not be receiving these preferred share dividends, she would remain a one-third owner of the business and would consequently be motivated to stay on with the business.
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Accounting Principles, Seventh Canadian Edition
BYP14-6 (Continued) (b) Common Shares (180 × $58.10) ..................... 10,458 Retained Earnings .......................................... 205,542 Cash (180 × $1,200)........................... 216,000
(c) Balance of share capital after common share repurchase: Common shares, 30 shares × $58.10 = $1,742 ($1 rounding) alternately $12,200 - $10,458 = $1,742
. Solutions Manual .
14-102
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CHAPTER 15 Non-Current Liabilities ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Questions
Brief Exercises Exercises
Problems Set A
Problems Set B
1. Describe the characteristics of bonds. 2. Calculate the price of a bond. 3. Account for bond transactions.
1, 2, 3
1
1
1, 3, 4
1, 3, 4
4, 5, 6
2, 3
1,2, 3, 4
7, 8
4, 5, 6, 7, 8, 9, 10, 11, 12
1, 2, 3, 4, 5, 6, 7 1, 2, 3, 4, 5, 6, 7, 8
4. Account for the retirement of bonds. 5. Account for instalment notes payable.
9, 10
13, 14
2, 4, 5, 6, 7, 8, 9, 10, 11, 12, 14 13, 14
1, 2, 3, 4, 5, 6, 7 1, 2, 3, 4, 5, 6, 7, 8
5, 6, 7, 8
5, 6, 7, 8
11, 12, 13
15, 16, 17, 18
15, 16, 17, 18, 19
9, 10, 11
9, 10, 11
6. Account for leases.
14, 15, 16
20
12
12
21, 22
1, 2, 7, 8, 9, 13, 14
1, 2, 7, 8, 9, 13, 14
7. Explain and illustrate the methods for the presentation and analysis of non-current liabilities.
Solutions Manual .
19, 20, 21 17, 18, 19, 22, 23 20
15-1
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Prepare entries to record issuance of bonds at par, and interest accrual.
Simple
20-30
2A
Fill in missing amounts in amortization schedule, record bond transactions, and show balance sheet presentation.
Complex
20-30
3A
Describe the features of a bond, calculate the price of a bond, record bond transactions.
Moderate
25-30
4A
Describe the features of a bond, calculate the price of a bond, record bond transactions.
Moderate
20-30
5A
Calculate effective rate using excel or a financial calculator and record bond transactions.
Complex
30-40
6A
Record bond transactions.
Moderate
30-35
7A
Record note transactions, show balance sheet presentation.
Moderate
30-35
8A
Prepare entries to record issuance of bonds, balance sheet presentation, and bond redemption.
Simple
15-20
9A
Prepare instalment payment schedule, record note transactions and show balance sheet presentation.
Moderate
25-30
10A
Record note transactions.
Moderate
25-30
11A
Prepare instalment payment schedule and record note transactions. Show balance sheet presentation.
Moderate
25-30
12A
Analyze lease situations. Discuss financial statement presentation.
Moderate
20-25
13A
Calculate and analyze solvency ratios.
Simple
15-20
14A
Prepare liability section of balance sheet and analyze leverage.
Moderate
25-35
1B
Prepare entries to record issuance of bonds at par, and interest accrual.
Simple
20-30
2B
Fill in missing amounts in amortization schedule, record bond transactions, and show balance sheet presentation.
Complex
20-30
3B
Describe the features of a bond, calculate the price of a bond, record bond transactions.
Moderate
25-30
Solutions Manual .
15-2
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
4B
Describe the features of a bond, calculate the price of a bond, record bond transactions.
Moderate
20-30
5B
Calculate effective rate using excel or a financial calculator and record bond transactions.
Complex
30-40
6B
Record bond transactions.
Moderate
30-35
7B
Record note transactions, show balance sheet presentation.
Moderate
30-35
8B
Prepare entries to record issuance of bonds, balance sheet presentation, and bond redemption.
Simple
15-20
9B
Prepare instalment payment schedule, record note transactions and show balance sheet presentation.
Moderate
25-30
10B
Record note transactions.
Moderate
25-30
11B
Prepare instalment payment schedule and record note transactions. Show balance sheet presentation.
Moderate
25-30
12B
Analyze lease situations. Discuss financial statement presentation.
Moderate
20-25
13B
Calculate and analyze solvency ratios.
Simple
15-20
14B
Prepare liability section of balance sheet and analyze leverage.
Moderate
25-35
Solutions Manual .
15-3
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material. Learning Objectives
Knowledge Q15-3 E15-1
Comprehension Q15-1 Q15-2 BE15-1
Application P15-1A P15-1B P15-3A P15-3B P15-4A P15-4B
2. Calculate the price of a bond.
Q15-4 Q15-5 E15-1
Q15-6
BE15-2 BE15-3 E15-2 E15-3 E15-4 E15-6 E15-7 E15-8 P15-1A P15-2A P15-3A
P15-4A P15-5A P15-6A P15-7A P15-1B P15-2B P15-3B P15-4B P15-5B P15-6B P15-7B
3. Account for bond transactions.
Q15-7
Q15-8
BE15-4 BE15-5 BE15-6 BE15-7 BE15-8 BE15-9 BE15-10 BE15-11 BE15-12 E15-2 E15-4 E15-5 E15-6 E15-7 E15-8 E15-9 E15-10 E15-11
E15-12 E15-14 P15-1A P15-2A P15-3A P15-4A P15-5A P15-6A P15-7A P15-8A P15-1B P15-2B P15-3B P15-4B P15-5B P15-6B P15-7B P15-8B
Q15-10
Q15-9 BE15-13 BE15-14 E15-13 E15-14 P15-5A
P15-6A P15-7A P15-8A P15-5B P15-6B P15-7B P15-8B
1. Describe the characteristics of bonds.
4. Account for the retirement of bonds.
Solutions Manual .
15-4
Analysis
Synthesis
Chapter 15
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Learning Objectives
Knowledge
Comprehension
5. Account for instalment notes payable.
Q15-10 Q15-11
6. Account for leases.
Q15-14 Q15-15 Q15-16
7. Explain and illustrate the methods for the presentation and analysis of non-current liabilities. Broadening Your Perspective
Solutions Manual .
Q15-17 Q15-18 Q15-19
Accounting Principles, Seventh Canadian Edition
Application Q15-11 Q15-12 Q15-13 BE15-15 BE15-16 BE15-17 BE15-18 E15-15 E15-16 E15-17 E15-18 E15-19 BE15-19 BE15-20 BE15-21
P15-6A P15-7A P15-8A P15-9A P15-10A P15-11A P15-6B P15-7B P15-8B P15-9B P15-10B P15-11B E15-20 P15-12A P15-12B
Q15-20
BE15-22 BE15-23 E15-21 E15-22 P15-1A P15-2A P15-7A P15-8A
P15-9A P15-14A P15-1B P15-2B P15-7B P15-8B P15-9B P15-14B
BYP15-5
BYP15-1 BYP15-4
15-5
Analysis
Synthesis
P15-13A P15-13B
BYP15-2 BYP15-3 BYP15-6
Chapter 15
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Current liabilities are obligations that are expected to be settled within one year from the balance sheet date, or the company’s normal cycle, whichever is longer. Examples include accounts payable and interest payable. Non-current liabilities are obligations that are expected to be settled later than one year from the balance sheet date. Examples include non-current mortgage payable and bonds payable.
2. (a) Secured bonds have specific assets pledged as collateral by the bond issuer while unsecured bonds do not. (b) Convertible bonds have a conversion feature allowing the bondholder to exchange the bond, usually to common shares while callable bonds (also known as redeemable bonds) are bonds that the issuing company can redeem (buy back) at a stated dollar amount, prior to maturity. 3. (a) Face value of a bond: the amount of principal that the issuer must pay at the bond’s maturity date. (also known as the maturity value or par value). (b) Contractual interest rate: the rate that determines the amount of interest the borrower pays and the investor receives. (also known as the coupon interest rate or stated interest rate). (c) Bond certificate: a legal document indicating the name of the issuer, the face value of the bond, and other data such as the contractual interest rate and maturity date of the bond. 4. The two major obligations incurred by a company when bonds are issued are the interest payments due on a periodic basis and the principal repayment at maturity. Both of these cash flows are used to determine the market price of a bond. 5. The issue price at par is determined before the bond is made available for sale. By the time company is ready to issue the bond and bondholders are ready to invest in the bond, the market rate of interest may have changed and be different than the contractual rate of interest offered in the bond. Changes in interest rates will cause the price of the bond at issue to be higher or lower than the face value in order to meet the market’s needs. 6.
Investors paid $2,000 ($102,000 – $100,000) more than the face value. The market interest rate must have been lower than the contractual interest rate. These bonds are said to have been sold at a premium.
Solutions Manual .
15-6
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 7.
When bonds are issued at a discount, the proceeds from the issuance of the bonds are lower than the face value of the bonds. The difference in these two amounts represents additional interest expense to the business over the term of the bonds. When using the effective-interest method, the carrying value of the bonds is multiplied by the periodic market rate of interest to determine the interest expense. The difference between the interest expense and the cash paid to the bondholders is the amount of the discount amortized for the period.
8.
Because the bond has been issued at a premium, the annual interest expense will decrease over the life of the bond since the carrying amount of the bond decreases with each payment due to the amortization of the bond premium.
9.
When bonds sold at a premium are redeemed at 97 immediately following the payment of interest, the Bonds Payable account will be debited for the carrying amount of the bond. On the credit side, cash will be credited for 97% of the face value of the bond and a Gain on Bond Redemption will be credited for the difference between the cash paid and the bonds’ carrying amount.
10.
When a bond reaches maturity, any premium or discount will have been fully amortized, so the carrying value of the bond will be equal to its face value. This will result in no gain or loss when the principal is repaid at maturity. When bonds are retired prior to maturity however, the amount paid will rarely equal the amortized cost of the bonds, which will cause a gain or loss to occur.
11.
For notes payable with fixed principal payments, each payment will reduce the principal by the same amount, and interest is added to that amount. Since the periodic interest will drop as the loan principal is repaid, the periodic payment will get smaller each time a payment is made. For notes payable with blended principal and interest payments, the periodic payments are the same each period. Since the periodic interest will drop as the loan principal is repaid, the amount of the principal repayment each period will increase.
12.
In order to calculate the annual fixed principal payment, the principal amount of the note of $15,000 must be divided by 3. The annual principal repayment is therefore $5,000.
Solutions Manual .
15-7
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 13.
I disagree. Each payment made by Bob consists of (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest portion of the payment decreases each period (as the principal owing is reduced) while the portion applied to the loan principal increases each period.
14.
A lease agreement is a contract in which the lessor gives the lessee the right to use an asset for a specified period, in return for one or more periodic rental payments. The lessor is the owner of the property and the lessee is the renter or tenant. The two major types of leases are operating leases and finance leases. In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A finance lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so that the lease effectively results in a purchase of the property.
15.
Off-balance sheet financing refers to situations where a company has liabilities or obligations that are not recorded on the balance sheet. Offbalance sheet transactions arise when a company is able to structure its financing so that it does not meet the criteria under IFRS or ASPE that would require the transaction to be recorded as debt. For operating leases, no asset or liability is recorded on the balance sheet. Lease payments are recorded as expenses. Thus, even though the company may have a contractual obligation, no liability appears on the balance sheet.
16.
While assets are not legally owned by a business, the substance of the lease contract is equivalent to the purchase of an asset. The accounting guidelines require that the substance of the transaction is the determining factor in accounting for the lease. If the asset is essentially being purchased by the lessee, the lease must be accounted as a finance lease and the asset must be included on the lessee’s balance sheet.
17.
The notes to the financial statements provide the user of the financial statements with additional relevant information concerning non-current liabilities such as the amount of the payments that will be due in each of the next five fiscal years and beyond. Other information such as interest rate, maturity date, redemption price, convertibility, and any assets pledged as collateral is also provided in the notes to the financial statements.
Solutions Manual .
15-8
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 18.
Current liabilities include those principal payments on the mortgage note payable that are going to be due for payment within one year of the balance sheet date. The principal payments appearing under non-current debt are those amounts to be paid beyond one year of the balance sheet date. When looking at the balance owing on a mortgage note, care must be taken to disaggregate the balance to ensure that the current portion of the debt is properly classified as a current liability as this affects the liquidity position of the business.
19.
Liquidity ratios measure the short-term ability of a company to repay its maturing obligations. Ratios such as the current ratio, receivables turnover, and inventory turnover can be used to assess liquidity. Solvency ratios measure the ability of a company to repay its non-current debt and survive over a long period of time. Ratios that are commonly used to measure solvency include debt to total assets and times interest earned.
20.
The debt to total assets and interest coverage ratios help assess solvency by providing insight into the ability of a company to repay its non-current debt. Debt to total assets measures the percentage of total assets provided by creditors. The higher this is, the greater the risk that the company may be unable to meet its maturing obligations. The ability of the company to meet its interest obligations as they come due is measured by the interest coverage ratio. A company may have a high debt to total assets ratio and still be able to pay its interest payments. Alternatively, a company may have a low debt to total assets ratio and struggle to cover its interest payments. Therefore, the debt to total assets ratio should always be interpreted with reference to the interest coverage ratio.
Solutions Manual .
15-9
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 15-1 1.
2. 3. 4.
5.
False. Lenders do not have voting rights. By issuing bonds, there is no change to the voting rights of an entity and therefore there is no change to the ownership structure. This is an advantage of issuing bonds over shares. True. True. False. Convertible bonds can be converted into common shares at the bondholder’s option. Callable bonds are bonds that the issuing company can redeem (buy back) at a stated amount before the bonds reach maturity. True.
BRIEF EXERCISE 15-2 (a) Face value of the bond: $900,000 When will it be paid: January 1, 2027 (b) Interest rate for pricing the bond: Will be the yield rate of 6%. (c) Number of interest payments: 10 years semi-annual 10 x 2 = 20 (d) Interest payments each six months: Face value x coupon rate x 6/12 $900,000 x 5% x 6/12 = $22,500
Solutions Manual .
15-10
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-3 (a)
($500,000 × 0.67297) + ($500,000 × 2.5% × 16.35143) = $540,878 Using a financial calculator: Yields $540,879 PV $? I 2% N 20 PMT $ (12,500) FV $ (500,000) Type 0
(b) ($500,000 × 0.61027) + ($500,000 × 2.5% × 15.58916) = $500,000 (rounded) Using a financial calculator: Yields $500,000 PV $? I 2.5% N 20 PMT $ (12,500) FV $ (500,000) Type 0
(c)
($500,000 × 0.55368) + ($500,000 × 2.5% × 14.87747) = $462,808 Using a financial calculator: Yields $462,806 PV $? I 3% N 20 PMT $ (12,500) FV $ (500,000) Type 0
Solutions Manual .
15-11
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-4 (a)
Jan. 1 Cash .......................................... 2,000,000 Bonds Payable .................... 2,000,000
(b) July 1 Interest Expense ....................... Cash ..................................... ($2,000,000 × 3% × 6/12)
30,000
(c) Dec. 31 Interest Expense ....................... Interest Payable ................... ($2,000,000 × 3% × 6/12)
30,000
30,000
30,000
BRIEF EXERCISE 15-5 Mar. 1 Cash ($300,000 × 98%) ................ 294,000 Bonds Payable .....................
294,000
BRIEF EXERCISE 15-6 June 1 Cash ($400,000 × 101%) .............. 404,000 Bonds Payable .....................
Solutions Manual .
15-12
404,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-7 (a)
Jan. 1 Cash (1,000 x $1,000) ............... 1,000,000 Bonds Payable ..................... 1,000,000
(b) July 1 Cash ($900,000 × 102%) ........... Bonds Payable .....................
918,000
(c)
392,000
Sept. 1 Cash ($400,000 × 98%) ............. Bonds Payable .....................
918,000
392,000
BRIEF EXERCISE 15-8 (a)
Interest Expense .......................... Bonds Payable............................. Cash .........................................
3,256 744
Interest Expense .......................... Bonds Payable............................. Cash .........................................
3,234 766
4,000
4,000
(b) Because the bonds were issued at a premium, the premium amortization must be deducted from the amount paid on the bonds to arrive at the interest expense. (c)
The effective interest expense decreases each period as the amortization of the bond premium is deducted from the carrying amount (amortized cost) of the bond, which then draws a lower amount of interest expense.
Solutions Manual .
15-13
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-9 (a) 1.
Discount
2.
Payment
3.
Expense
4.
Interest expense = $47,812 ($40,000 + $7,812)
5.
Discount amortization = $8,007 ($48,007 – $40,000)
6.
Bond amortized cost = $1,928,298 ($1,920,291 + $8,007)
(b) Face value = $2,000,000 (c) Contractual interest rate: ($40,000 × 2) ÷ face value $2,000,000 = 4% Market interest rate = 5.0% [($47,812 ÷ $1,912,479) × 2] (d) Apr. 30 Interest Expense ............................ 47,812 Bonds Payable ........................ Cash .........................................
7,812 40,000
Oct. 31 Interest Expense ............................ 48,007 Bonds Payable ........................ Cash .........................................
8,007 40,000
Solutions Manual .
15-14
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-10 (a)
The bond was issued at a discount. The amortization for each period is added to the bond’s amortized cost.
(b) 2017 July 1 Interest Expense .............................. 7,172 Bonds Payable ........................ Cash ......................................... (c) 2017 Dec. 31 Interest Expense .............................. 7,201 Bonds Payable ........................ Interest Payable ...................... (d) 2018 Jan. 1 Interest Payable ............................... 6,000 Cash .........................................
1,172 6,000
1,201 6,000
6,000
BRIEF EXERCISE 15-11 ELSWORTH LTD. Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 3%
Date
May 1, 2017 Nov. 1, 2017 May 1, 2018 Nov. 1, 2018
Solutions Manual .
(A) (B) (C) Interest Interest Premium Payment Expense $1,000,000 × (D) × 3% × Amortization 6/12 (A) – (B) 4% × 6/12 $20,000 20,000 20,000
$15,692 15,627 15,561
15-15
$4,308 4,373 4,439
(D) Bond Amortized Cost (D) – (C) $1,046,110 1,041,802 1,037,429 1,032,990
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-12 (a) VILLA CORPORATION Bond Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 6%
Date
Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018
(A) (B) (C) Interest Interest Discount Payment Expense $3,000,000 × (D) × 6% × Amortization 6/12 (B) – (A) 4% × 6/12 $60,000 60,000 60,000
$79,834 80,429 81,041
$19,834 20,429 21,041
(b) 2017 July 1 Interest Expense ............................ 79,834 Bonds Payable ........................ Cash ......................................... (c) 2017 Dec. 31 Interest Expense ............................ 80,429 Bonds Payable ........................ Interest Payable ...................... (d) 2018 Jan. 1 Interest Payable ............................. 60,000 Cash .........................................
Solutions Manual .
15-16
(D) Bond Amortized Cost (D) + (C) $2,661,118 2,680,952 2,701,381 2,722,422
19,834 60,000
20,429 60,000
60,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-13 July 1
Bonds Payable ............................. 940,000 Loss on Bond Redemption* .......... 70,000 Cash ($1,000,000 × 101%)....... 1,010,000 * ($1,010,000 – $940,000)
BRIEF EXERCISE 15-14 Bonds Payable ............................. 390,000 Gain on Bond Redemption *... Cash ($400,000 × 97%)............ * ($390,000 - $388,000)
2,000 388,000
BRIEF EXERCISE 15-15
Monthly Interest Period Issue Date 1 2 3 4
Solutions Manual .
(A) Cash Payment $105.09 105.09 105.09 105.09
(B) Interest (C) (D) Expense Reduction Principal (D) × 4.8% × of Principal Balance 1/12 (A) – (B) (D) – (C) $10,000.00 $40.00 $65.09 9,934.91 39.74 65.35 9,869.56 39.48 65.61 9,803.95 39.22 65.87 9,738.08
15-17
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-16 (a) Monthly Interest Period Nov. 30, 2017 Dec. 31, 2017 Jan. 31, 2018
(C) Cash Payment (A) + (B) $4,800 4,785
(B) Interest (D) Expense (A) Principal (D) × 6% × Reduction Balance 1/12 of Principal (D) – (A) $360,000 $1,800 $3,000 357,000 1,785 3,000 354,000
2017 Nov. 30 Cash .................................................... 360,000 Mortgage Note Payable .................
360,000
Dec. 31 Interest Expense ..................................... 1,800 Mortgage Note Payable .......................... 3,000 Cash................................................
4,800
2018 Jan. 31 Interest Expense ..................................... 1,785 Mortgage Note Payable .......................... 3,000 Cash................................................
4,785
Solutions Manual .
15-18
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-16 (Continued) (b) Monthly (A) Interest Cash Period Payment Nov. 30, 2017 Dec. 31, 2017 $3,997 Jan. 31, 2018 3,997
(B) Interest (C) Expense Reduction (D) × 6% × of Principal 1/12 (A) – (B) $1,800 1,789
2017 Nov. 30 Cash .......................................... Mortgage Note Payable ....... Dec. 31 Interest Expense....................... Mortgage Note Payable ............ Cash...................................... 2018 Jan. 31 Interest Expense....................... Mortgage Note Payable ............ Cash......................................
$2,197 2,208
(D) Principal Balance (D) – (C) $360,000 357,803 355,595
360,000 360,000 1,800 2,197 3,997 1,789 2,208 3,997
BRIEF EXERCISE 15-17 (a) December 31, 2017 Current liabilities Interest payable .......................................................... Current portion of notes payable ..............................
$2,000 10,000
Non-current liabilities Note payable, 5%, due 2021, net of current portion .
$30,000
(b) December 31, 2020 Current liabilities Interest payable .......................................................... Current portion of notes payable ..............................
$500 10,000
There is no non-current portion on December 31, 2020. Solutions Manual .
15-19
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-18 (a) 2017 Mar. 31 Cash .......................................... Note Payable ........................ 2018 Mar. 31 Note Payable............................. Interest Expense* ..................... Cash...................................... *($600,000 × 4%)
600,000 600,000
150,000 24,000 174,000
(b) ELBOW LAKE CORP. Balance Sheet (Partial) March 31, 2018 Current liabilities Current portion of note payable................................... $150,000 Non-current liabilities Note payable, net of current portion.............................. 300,000
BRIEF EXERCISE 15-19 (a)
Equipment Rental Expense ......................... 80,000 Cash........................................................
80,000
(b) Leased Asset—Equipment ........................ 700,000 Lease Liability ........................................
700,000
BRIEF EXERCISE 15-20 Rent Expense ................................................. 2,500 Cash........................................................ Solutions Manual .
15-20
2,500 Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-21 (a)
Lessor: Lessee:
Bracer Construction Inc. Chang Corp.
(b) Leased Asset—Equipment ........................ 300,000 Lease Liability ........................................
300,000
BRIEF EXERCISE 15-22 WAUGH CORPORATION Balance Sheet (Partial) December 31, 2017 Current liabilities Accounts payable ..................................................... $ Income tax payable..................................................... Interest payable .......................................................... Current portion of lease liability ................................ Current portion of notes payable .............................. Total current liabilities ...........................................
48,000 8,000 26,000 25,000 25,000 132,000
Non-current liabilities Bonds payable, due 2028 .............................................1,035,000 Notes payable, net of current portion............................ 145,000 Lease liability, net of current portion* ....................... 50,000 Total non-current liabilities .....................................1,230,000 Total liabilities ..................................................$1,362,000 * ($75,000 - $25,000) = $50,000
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 15-23 ($ in U.S. millions) (a)
Debt to total assets = Total debt ÷ Total assets $6,110.2 $13,996.3
=
43.7%
(b) Interest coverage = EBIT ÷ Interest expense ($513.5 + $145.0 + $69.0) $145.0
Solutions Manual .
15-22
=
5.02 times
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 15-1 1. 2. 3.
True True False
4. 5.
True False
6. 7.
True True
Unsecured bonds are also known as debenture bonds. The stated rate is the rate used to determine the amount of cash interest the borrower pays.
EXERCISE 15-2 (a) 3 years quarterly = 3 years x 4 payments/year = 12 payments (b) $500,000 × 4% × 3/12 = $5,000 (c)
Market interest rate 8% ($500,000 × 0.78849) + ($5,000 × 10.57534) = $447,121.70 Using a financial calculator: PV $ ? Yields $447,123.29 I 2.0% N 12 PMT $ (5,000) FV $ (500,000) Type 0
(d) 2017 May 1
Solutions Manual .
Cash ............................................. 447,123 Bonds Payable ........................
15-23
447,123
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-3 (a) (1)
Market interest rate 5% ($1,000,000 × 0.61027) + ($1,000,000 × 3% × 15.58916) = $1,077,945 Using a financial calculator: PV $ ? Yields $1,077,946 I 2.5% N 20 PMT $ (30,000) FV $ (1,000,000) Type 0
(2)
Market interest rate 6% Since the market rate is the same as the contractual rate of interest, the issue price will be the same as the face value of $1,000,000.
(3)
Market interest rate 7% ($1,000,000 × 0.50257) + ($1,000,000 × 3% × 14.21240) = $928,942 Using a financial calculator: Yields $928,938 PV $? I 3.5% N 20 PMT $ (30,000) FV $ (1,000,000) Type 0
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-4 (a)
Market interest rate 4% ($400,000 × 0.82035) + ($400,000 × 2.5% × 8.98259) = $417,966 Using a financial calculator: PV $ ? Yields $417,965.17 I 2% N 10 PMT $ (10,000) FV $ (400,000) Type 0 Cash ............................................. 417,965 Bonds Payable ........................
(b)
Market interest rate 5% Since the market rate is the same as the contractual rate of interest, the issue price will be the same as the face value of $400,000. Cash ......................................... 400,000 Bonds Payable ........................
(c)
417,965
400,000
Market interest rate 6% ($400,000 × 0.74409) + ($400,000 × 2.5% × 8.53020) = $382,938 Using a financial calculator: PV $ ? Yields $382,939.59 I 3% N 10 PMT $ (10,000) FV $ (400,000) Type 0
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-4 (Continued) (c) (Continued) Cash ............................................. 382,940 Bonds Payable ........................
382,940
EXERCISE 15-5 (a)
2017 Jan. 1
Cash ............................................. 400,000 Bonds Payable ........................
(b) 2017 Dec. 31 Interest Expense .......................... 32,000 Interest Payable ...................... ($400,000 × 8%) (c)
2018 Jan. 1
Interest Payable .......................... 32,000 Cash .........................................
(d) 2017 Sept. 30 Interest Expense .......................... 24,000 Interest Payable ..................... ($400,000 × 8% × 9/12) 2018 Jan. 1
Solutions Manual .
Interest Expense* ........................ 8,000 Interest Payable ........................... 24,000 Cash ......................................... *($400,000 × 8% × 3/12)
15-26
400,000
32,000
32,000
24,000
32,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-6 (a)
The market rate of interest is higher than the contract rate of 3% interest, which explains why the bonds were sold at a discount.
(b) 2017 Sept. 1 Cash ($600,000 × 96%) ................ 576,000 Bonds Payable ........................ 2018 Feb. 28 Interest Expense ............................ 10,014 Bonds Payable ........................ Interest Payable ...................... ($600,000 × 3% × 6/12) (d) 2018 Mar. 1 Interest Payable ............................... 9,000 Cash .........................................
576,000
(c)
1,014 9,000
9,000
EXERCISE 15-7 (a) The market rate of interest is lower than the contract rate of 4% interest, which explains why the bonds were sold at a premium. (b) 2017 July 31 Cash ($500,000 × 102%) .............. 510,000 Bonds Payable ........................ (c)
2018 Jan. 31 Interest Expense .............................. 9,077 Bonds Payable............................. 923 Cash ($500,000 × 4% × 6/12)...
Solutions Manual .
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510,000
10,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-8 (a)
The bonds were issued at a premium. Note that the bond amortized cost is decreasing from periods 1 through 6, and will continue to decrease until the maturity date in five years. At that time, the carrying amount will equal the face value of the bond.
(b) $400,000, as given in the description of the bonds. (c)
The bond amortized cost will be $400,000 at the maturity date.
(d) Total interest payment = $80,000 $400,000 × 4% × 5 years = $80,000 or $8,000 × 10 semi-annual periods = $80,000 Total interest expense = $61,556 $80,000 (interest payment) – $18,444 (premium) = $61,556 (e)
2016 Apr. 1 Cash ............................................. 418,444 Bonds Payable ........................ 2016 (f) Oct. 1 Interest Expense ........................ 6,277 Bonds Payable ........................... 1,723 Cash ....................................... (g) 2016 Dec. 31 Interest Expense ($4,000 - $875) 3,125 Bonds Payable ($1,749 × 3/6) ... 875 Interest Payable..................... (h) 2017 Apr. 1 Interest Expense ........................ 3,126 Bonds Payable ........................... 874 Interest Payable ......................... 4,000 Cash .......................................
Solutions Manual .
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418,444
8,000
4,000
8,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-9 (a) Market interest rate 7% ($600,000 × 0.62275) + ($600,000 × 8% × 5.38929) = $632,336 Using a financial calculator: PV $ ? Yields $632,335.74 I 7% N 7 PMT $ (48,000) FV $ (600,000) Type 0 (b) MESSER COMPANY Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 8% Bonds Issued at market rate of 7%
Date
Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024
(A) Interest Payment $600,000 × 8%
(B)
(C)
Interest Expense (D) × 7%
Premium Amortization (A) – (B)
$48,000 48,000 48,000 48,000 48,000 48,000 48,000
$44,264 44,002 43,722 43,423 43,102 42,759 42,393
$3,736 3,998 4,278 4,577 4,898 5,241 5,607
(D) Bond Amortized Cost (D) - (C) $632,336 628,599* 624,601 620,323 615,746 610,848 605,607 600,000
*Due to rounding
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-10 (a) Market interest rate 8% ($800,000 × 0.58349) + ($800,000 × 7% × 5.20637) = $758,349 Using a financial calculator: PV $ ? Yields $758,349.04 I 8% N 7 PMT $ (56,000) FV $ (800,000) Type 0 (b) KORMAN COMPANY Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 7% Bonds Issued at market rate of 8%
Date
Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 Jan. 1, 2023 Jan. 1, 2024
Solutions Manual .
(A) Interest Payment $800,000 × 7%
(B)
(C)
Interest Expense (D) × 8%
Discount Amortization (B) – (A)
$56,000 56,000 56,000 56,000 56,000 56,000 56,000
$60,668 61,041 61,445 61,880 62,351 62,859 63,407
$4,668 5,041 5,445 5,880 6,351 6,859 7,407
15-30
(D) Bond Amortized Cost (D) + (C) $758,349 763,017 768,058 773,503 779,383 785,734 792,593 800,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-11 (a) Market interest rate 5% ($800,000 × 0.78353) + ($800,000 × 6% × 4.32948) = $834,639 Using a financial calculator: PV $ ? Yields $834,635.81 I 5% N 5 PMT $ (48,000) FV $ (800,000) Type 0 2017 Jan. 1 Cash ............................................. 834,636 Bonds Payable ........................
834,636
(b) WESTERN INC. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 6% Bonds Issued at market rate of 5%
Date
Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022
Solutions Manual .
(A) Interest Payment $800,000 × 6%
(B)
(C)
Interest Expense (D) × 5%
Premium Amortization (A) – (B)
$48,000 48,000 48,000 48,000 48,000
$41,732 41,418 41,089 40,744 40,381
$6,268 6,582 6,911 7,256 7,619
15-31
(D) Bond Amortized Cost (D) - (C) $834,636 828,368 821,786 814,875 807,619 800,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-11 (Continued) (c) 2018 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... (d) 2017 Oct. 31 Interest Expense *...................... Bonds Payable ** ....................... Interest Payable *** ............... * ($41,732 x 10/12) **($6,268 x 10/12) *** ($48,000 x 10/12)
Solutions Manual .
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41,732 6,268 48,000 41,418 6,582 48,000 41,089 6,911 48,000
34,777 5,223 40,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-12 (a) Market interest rate 9% ($500,000 × 0.64993) + ($500,000 × 7% × 3.88965) = $461,103 Using a financial calculator: PV $ ? Yields $461,103.49 I 9% N 5 PMT $ (35,000) FV $ (500,000) Type 0 2017 Jan. 1 Cash ............................................. 461,103 Bonds Payable ........................
461,103
(b) AMLANI COMPANY Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 7% Bonds Issued at market rate of 9%
Date
Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2021 Jan. 1, 2022 * Rounded Solutions Manual .
(A) Interest Payment $500,000 × 7%
(B)
(C)
Interest Expense (D) × 9%
Discount Amortization (B) – (A)
$35,000 35,000 35,000 35,000 35,000
$41,499 42,084 42,722 43,417 44,175*
$6,499 7,084 7,722 8,417 9,175
15-33
(D) Bond Amortized Cost (D) + (C) $461,103 467,602 474,686 482,408 490,825 500,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-12 (Continued) (c) 2018 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... (d) 2017 Oct. 31 Interest Expense *...................... Bonds Payable **................... Interest Payable *** ............... * ($41,499 x 10/12) ** ($6,499 x 10/12) *** ($35,000 x 10/12)
41,499 6,499 35,000 42,084 7,084 35,000 42,722 7,722 35,000
34,583 5,416 29,167
EXERCISE 15-13 (1) 2017 June 30 Bonds Payable .............................. 117,500 Loss on Bond Redemption ....... 15,100 Cash ($130,000 x 102%) ..........
132,600
(2) 2017 June 30 Bonds Payable .............................. 151,000 Gain on Bond Redemption ... Cash ($150,000 x 98%) ..........
4,000 147,000
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-14 (a)
2017 July 1
Interest Expense .......................... 14,360 Bonds Payable ........................ Cash .........................................
1,860 12,500
(b) 2017 Dec. 31 Interest Expense .......................... 14,416 Bonds Payable ........................ Interest Payable ......................
1,916 12,500
(c)
2018 Jan. 1
(d) 2019 Jan. 1
(e)
2019 Jan. 1
Solutions Manual .
Interest Payable ........................... 12,500 Cash ......................................... Bonds Payable............................. 486,457 Loss on Bond Redemption *....... 13,543 Cash ($500,000 × 100%).......... * ($500,000 – $486,457) Bonds Payable............................. 486,457 Gain on Bond Redemption *... Cash ($500,000 × 96%)............ * ($486,457 – $480,000)
15-35
12,500
500,000
6,457 480,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-15 (a)
Semi-annual (A) Interest Cash Period Payment Dec. 31, 2017 June 30, 2018 $14,400 Dec. 31, 2018 14,190
(B) Interest (C) (D) Expense Reduction Principal (D) × 7% × of Principal Balance 1/2 (A) – (B) (D) – (C) $240,000 $8,400 $6,000 234,000 8,190 6,000 228,000 Issue of Note
2017 Dec. 31
Cash ................................................... 240,000 Mortgage Note Payable ............
240,000
First Instalment Payment 2018 June 30
Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
8,400 6,000 14,400
Second Instalment Payment Dec. 31
Solutions Manual .
Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
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8,190 6,000 14,190
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-15 (Continued) (b) (B) Interest (C) Semi-annual (A) Expense Reduction Interest Cash (D) × 7% × of Principal Period Payment 1/2 (A) – (B) (D) – (C) Dec. 31, 2017 June 30, 2018 $11,239 $8,400 $2,839 Dec. 31, 2018 11,239 8,301 2,938
(D) Principal Balance $240,000 237,161 234,223
Issue of Note 2017 Dec. 31
Cash ................................................... 240,000 Mortgage Note Payable .................
240,000
First Instalment Payment 2018 June 30
Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
8,400 2,839 11,239
Second Instalment Payment Dec. 31
Solutions Manual .
Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
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8,301 2,938 11,239
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-16 (a) This is a blended payment loan as the payments are constant at $23,097 per year. (b) The interest rate is 5% ($5,000 ÷ $100,000). (c)
Interest Expense............................................. 5,000 Notes Payable ............................................... 18,097 Cash........................................................
23,097
(d) Current portion = $19,952 Non-current portion = $62,901 – $19,952 = $42,949
EXERCISE 15-17 (a)
This is a fixed principal loan as principal is being reduced by $21,750 each six-month period.
(b) The annual interest rate is 8% ($6,960 ÷ $174,000) x 2. (c)
The number of semi-annual payments for the instalment note will be ($174,000 ÷ $21,750 = 8) and so the maturity date of the note will be January 1, 2021.
(d) Interest Expense............................................. 6,960 Notes Payable ............................................... 21,750 Cash........................................................
28,710
(e) Current portion = $21,750 x 2 = $43,500 Non-current portion = $130,500 – $43,500 = $87,000
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-18 (a)
Period Jan. 1, 2017 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019
Cash Payment
Interest Expense 7%
Reduction of Principal
$6,859 6,859 6,859
$ 1,260 868 449
$5,599 5,991 6,410
Principal Balance $18,000 12,401 6,410 0
(b) 2017 Jan. 1 Cash .......................................... Notes Payable ......................
(c)
18,000 18,000
Dec. 31 Interest Expense ....................... Notes Payable ........................... Cash ......................................
1,260 5,599
Current liability ........................................ Non-current liability ................................
$5,991 6,410
Solutions Manual .
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6,859
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-19 (a)
The amount of the annual principal payments will be $2,800 ($8,400 ÷ 3 years).
(b)
Period Jan. 1, 2017 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019
Cash Payment
Interest Expense 3%
Reduction of Principal
$3,052 2,968 2,884
$ 252 168 84
$2,800 2,800 2,800
Principal Balance $8,400 5,600 2,800 0
(c) 2017 Jan. 1 Cash .......................................... Notes Payable ......................
8,400 8,400
Dec. 31 Interest Expense ....................... Notes Payable ........................... Cash ......................................
252 2,800
(d) Current liability ........................................ Non-current liability ................................
$2,800 2,800
Solutions Manual .
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3,052
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-20 (a)
Dumfries has an operating lease. In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A one-year lease does not meet any of the criteria for a finance lease. InSynch Ltd. has a finance lease. A finance lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so the lease effectively results in a purchase of the property. In this case, the present value of the lease payments is very near the fair value of the computers. This criteria having been met, the treatment of the lease is to record the computers as assets.
(b) 1. There is no journal entry to record the lease. However, the first rental payment would be recorded as follows: May 21 Equipment Rental Expense .......... Cash ...........................................
750 750
2. Jan. 1 Leased Asset—Equipment ........... 118,000 Lease Liability ........................... 118,000
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-21 (a)
[dollar figures in millions] 2015 Debt to total assets =
Interest coverage = 2014 Debt to total assets = Interest coverage =
$960.3 $1,700.8
=
56.5%
($295.4 + $19.9 + $107.1) = $19.9 $702.6 $1,566.8
=
21.2 times
44.8%
($250.0 + $11.6 + $92.7) $11.6
=
30.5 times
The debt to total asset ratio has increased significantly indicating solvency deterioration for the year. The interest coverage has also decreased, also indicating that Dollarama’s solvency deteriorated. (b) The use of the operating leases improves the company’s solvency ratios. If the operating leases were treated as finance leases, the debt to total assets ratio would be much worse. Since operating leases are accounted for as rent expense, Dollarama can avoid reporting the lease obligations on its balance sheet. As well, because the company has less debt, its interest expense is lower, which causes its interest coverage ratio to be higher than it would have been had the leases been accounted for as finance leases.
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 15-22 (a) RAY CORPORATION Balance Sheet (Partial) July 31, 2017 Non-current liabilities Bonds payable, due 2021 ......................................... $205,000 Note payable, net of current portion* ........................ 120,000 Lease liability, net of current portion** .................. 48,750 Total non-current liabilities ............................ $373,750 * ($140,000 – $20,000) = $120,000 ** ($65,000 – $16,250) = $48,750 (b)
Accounts payable and interest payable should be classified as current liabilities. Unearned revenue should likely be classified as a current liability depending on when the revenue will be earned. Similarly, the portion of the lease liability due within one year and the note payable due within one year should be classified as current liabilities. Accounts receivable, and note receivable should be classified as current assets.
Solutions Manual .
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Chapter 15
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 15-1A (a) Because it is unsecured, the bond would be considered a debenture bond. 2017 (b) May 1 Cash............................................... 600,000 Bonds Payable ...................... (c) Dec. 31 Interest Expense ........................ Interest Payable..................... ($600,000 x 9% x 8/12) = $36,000
600,000
36,000 36,000
(d) HERRON CORP. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................
$36,000
Non-current liabilities Bonds payable, due 2022 ........................................
$600,000
2018 (e) May 1 Interest Expense ........................ Interest Payable ......................... Cash .......................................
18,000 36,000
(f)
36,000
Dec. 31 Interest Expense ........................ Interest Payable..................... ($600,000 x 9% x 8/12) = $36,000
Solutions Manual .
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54,000
36,000
Chapter 15
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-1A (Continued) Taking It Further: The major advantages of issuing debt instead of issuing shares include: 1. Interest is tax deductible. 2. Issuing debt does not affect the percentage ownership of existing shareholders. 3. Issuing bonds may have a positive effect on the earnings per share ratio. 4. The return on equity ratio may be higher, as a result of financial leverage. The major disadvantages of issuing debt instead of issuing shares include: 1. The debt to total assets will be adversely affected. 2. The principal amount is due at maturity. 3. The corporation is not required to pay dividends on issued shares but interest on bonds cannot be avoided.
Solutions Manual .
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Chapter 15
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-2A (a)
The bonds were issued at a discount. Note that the bond amortized cost is increasing and will continue to increase until the maturity date in ten years’ time, when the carrying amount will equal the face value of the bond of $1,400,000.
(b) The face value of the bond is $1,400,000. (c)
Contractual interest rate = 6% $42,000 ÷ $1,400,000 = 3% semi-annually × 2 = 6 % annually
(d) [1] [2] [3] [4] [5] (e)
(f)
$42,000 $42,000 + $3,518 = $45,518 $45,769 – $42,000 = $3,769 $45,900 – $42,000 = $3,900 $1,311,442 + $3,900 = $1,315,342
Market interest rate = 7% [2] $45,518 ÷ $1,300,514 = 3.5% semi-annually × 2 = 7% annually 2017 Jan 1 Cash............................................ 1,300,514 Bonds Payable ...................... 1,300,514
2017 (g) July 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2017 (h) Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable.....................
Solutions Manual .
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45,518 3,518 42,000 45,641 3,641 42,000
Chapter 15
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-2A (Continued) (i) GLOBAL SATELLITES Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................
$42,000
Non-current liabilities Bonds payable, due 2027 ...........................................$1,307,673
Taking It Further: The legal documents, which state the contractual interest rate, are often prepared well in advance of the actual bond issue and the market rate of interest fluctuates on a daily basis. It is nearly impossible to predict, weeks or months in advance, what the market interest rate will be on the date of issue. In this case, the market rate of interest increased after the contractual rate was set.
Solutions Manual .
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Chapter 15
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-3A (a)
The bonds are unsecured debenture bonds that are redeemable (callable).
(b)
Market interest rate 6% ($3,000,000 × 0.74726) + ($3,000,000 × 5% × 4.21236) = $2,873,634 Using a financial calculator: PV $ ? Yields $2,873,629.09 I 6% N 5 PMT $ (150,000) FV $ (3,000,000) Type 0
2017 Jan. 1 Cash............................................ 2,873,629 Bonds Payable ...................... 2,873,629 (c) PARIS PRODUCTS LTD. Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 6% Date
(A) Interest Payment $3,000,000 × 5%
Jan. 1, 2017 Jan. 1, 2018 $150,000 Jan. 1, 2019 150,000 Jan. 1, 2020 150,000 Jan. 1, 2021 150,000 Jan. 1, 2022 150,000 * Rounded Solutions Manual .
(B)
(C)
Interest Expense (D) × 6%
Discount Amortization (B) – (A)
$172,418 173,763 175,189 176,700 178,301*
$22,418 23,763 25,189 26,700 28,301*
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(D) Bond Amortized Cost (D) + (C) $2,873,629 2,896,047 2,919,810 2,944,999 2,971,699 3,000,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-3A (Continued) (d) 2017 Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2018 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2019 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2020 Jan. 1 Interest Payable ......................... Cash .......................................
172,418 22,418 150,000 150,000 150,000 173,763 23,763 150,000 150,000 150,000 175,189 25,189 150,000 150,000 150,000
Taking It Further: The contractual interest rate (also called the coupon rate) is set before the bonds are issued. It is used to determine the cash interest that will be paid on the bonds, and it does not vary during the time the bond is outstanding. The market rate of interest is the rate that investors demand for lending their money and it can vary during the term of the bond. The contractual rate does not vary because it is the rate that was agreed to when the bond contract was drawn up. The market rate will vary due to such things as changes in the creditworthiness of the issuer, inflation, or the state of the economy.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-4A (a)
The bonds are secured bonds that are convertible into common shares.
(b)
Market interest rate 4% ($1,800,000 × 0.82193) + ($1,800,000 × 5% × 4.45182) = $1,880,138 Using a financial calculator: PV $ ? Yields $1,880,132.80 I 4% N 5 PMT $ (90,000) FV $ (1,800,000) Type 0
2017 Jan. 1 Cash............................................ 1,880,133 Bonds Payable ...................... 1,880,133 (c) COLTON CARS CO. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 4% (A) (B) (C) (D) Date Interest Bond Interest Premium Amortized Payment $1,800,000 Expense Amortization Cost × 5% (D) × 4% (A) – (B) (D) - (C) Jan. 1, 2017 $1,880,133 Jan. 1, 2018 $90,000 $75,205 $14,795 1,865,338 Jan. 1, 2019 90,000 74,614 15,386 1,849,952 Jan. 1, 2020 90,000 73,998 16,002 1,833,950 Jan. 1, 2021 90,000 73,358 16,642 1,817,308 Jan. 1, 2022 90,000 72,692 17,308 1,800,000 Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-4A (Continued) (d) 2018 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................ Bonds Payable ........................... Cash .......................................
75,205 14,795 90,000 74,614 15,386 90,000 73,998 16,002 90,000
Taking It Further: The legal documents, which state the contractual interest rate, are often prepared well in advance of the actual bond issue and the market rate of interest fluctuates on a daily basis. It is nearly impossible to predict, weeks or months in advance, what the market interest rate will be on the date of issue.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-5A 2017 (a) May 1 Cash ($900,000 × 98%) ................. 882,000 Bonds Payable ......................
882,000
(b) The market rate of interest on May 1, 2017 was 7.4943%. Using Excel or a financial calculator: PV $ 882,000 I ? Yields 7.4943% N 5 PMT $(63,000) FV $(900,000) Type 0 (c) MEM CORP. Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 7% Bonds Issued at market rate of 7.4943%
Date
May 1, 2017 May 1, 2018 May 1, 2019 May 1, 2020 May 1, 2021 May 1, 2022
(A) Interest Payment $500,000 × 7%
(B) Interest Expense (D) × 7.4943%
(C) Discount Amortization (B) – (A)
$63,000 63,000 63,000 63,000 63,000
$66,100 66,332 66,582 66,850 67,136*
$3,100 3,332 3,582 3,850 4,136
(D) Bond Amortized Cost (D) + (C) $882,000 885,100 888,432 892,014 895,864 900,000
*Rounded $3
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-5A (Continued) 2018 (d) Apr. 30 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... (e)
(f)
66,100 3,100 63,000
May 1 Interest Payable ......................... Cash .......................................
63,000
Dec. 31 Interest Expense*....................... Bonds Payable**.................... Interest Payable*** ................ *($66,100 x 8/12) ** ($3,100 x 8/12) ***($900,000 × 7% x 8/12)
44,067
May 1 Interest Expense*....................... Interest Payable ......................... Bonds Payable**.................... Cash ....................................... *($66,100 x 4/12) ** ($3,100 x 4/12)
22,033 42,000
63,000 2,067 42,000
(g) May 1 Bonds Payable .............................. 885,100 Loss on Bond Redemption* ...... 50,900 Cash ($900,000 × 104%) ........ *($936,000 – $885,099)
1,033 63,000
936,000
Taking It Further: A company may elect to redeem outstanding bonds early if there is a decrease in the market interest rates. It may be to their advantage to redeem the bonds and issue new bonds at a lower interest rate.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-6A (a) 2017 1. July
1 Cash ....................................... Bonds Payable ..................
4,327,029 4,327,029
(b) WEBHANCER CORP. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 4%
Date
July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019 July 1, 2019 Jan. 1, 2020
(A) (B) Interest Interest Payment Expense $800,000 × (D) × 4% x 5% X 6/12 6/12 $100,000 100,000 100,000 100,000 100,000
(C) Premium Amortization (A) – (B)
$86,541 86,271 85,997 85,717 85,431
$13,459 13,729 14,003 14,283 14,569
(D) Bond Amortized Cost (D) - (C) $4,327,029 4,313,570 4,299,841 4,285,838 4,271,555 4,256,986
(c) 2017 Dec. 31 Interest Expense...................... Bonds Payable......................... Interest Payable .................. 2018 Jan.
Solutions Manual .
86,541 13,459 100,000
1 Interest Payable .............................. 100,000 Cash....................................... 100,000
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PROBLEM 15-6A (Continued) (d) 2017 Aug. 31 Interest Expense*....................... Bonds Payable** ........................ Interest Payable*** ................ *($86,541 x 2/6) ** ($13,459 x 2/6) ***($4,000,000 × 2.5% x 2/6) 2018 Jan.1 Interest Expense*....................... Interest Payable ......................... Bonds Payable** ........................ Cash ....................................... *($86,541 x 4/6) ** ($13,459 x 4/6)
28,847 4,486 33,333
57,694 33,333 8,973 100,000
Taking It Further: $4,000,000 × 0.55368 = $4,000,000 × 2.5% × 14.87747 = (n = 20, I = 3%)
$ 2,214,720 1,487,747 $3,702,467
Using a financial calculator: PV $ ? Yields $3,702,450.50 I 3% N 20 PMT $ (100,000) FV $ (4,000,000) Type 0
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PROBLEM 15-7A (a) ($8,000,000 × 0.67297) + ($8,000,000 × 2.5% × 16.35143) = $8,654,046 (n = 20, i = 2%) Using a financial calculator: PV $ ? Yields $8,654,057 I 2% N 20 PMT $ (200,000) FV $ (8,000,000) Type 0 (b) ALBERTA HYDRO LTD. Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 4% (c) Date
Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019
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(A) (B) (C) Interest Interest Payment Expense Premium $8,000,000 × (D) × 4% × Amortization (A) – (B) 5% × 6/12 6/12 $200,000 200,000 200,000 200,000
$173,081 172,543 171,994 171,434
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$26,919 27,457 28,006 28,566
(D) Bond Amortized Cost (D) – (C) $8,654,057 8,627,138 8,599,681 8,571,675 8,543,109
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-7A (Continued) (c) 2017 Jan. 1 Cash............................................ 8,654,057 Bonds Payable ................... 8,654,057 July 1 Interest Expense .................... Bonds Payable ....................... Cash ....................................
173,081 26,919
Dec. 31 Interest Expense .................... Bonds Payable ....................... Interest Payable..................
172,543 27,457
200,000
200,000
(d) ALBERTA HYDRO LTD. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable ................................... Non-current liabilities Bonds payable, due 2027 ....................
2018 (e) Jan. 1 Interest Payable ............................ 200,000 Cash .......................................
(f)
2019 Jan. 1
2027 (g) Jan. 1
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$200,000 8,599,681
200,000
Bonds Payable .............................8,543,109 Gain on Bond Redemption*.... 383,109 Cash ($8,000,000 × 102%)....... 8,160,000 * ($8,543,109 – $8,160,000) Bonds Payable .............................8,000,000 Cash ......................................... 8,000,000
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PROBLEM 15-7A (Continued) (h) The total amount of interest payment: Contractual rate (5% × $8,000,000 × 10 years)
$4,000,000
Total interest expense: Interest paid ............................................. Less: premium ($8,654,057 – $8,000,000) Total interest expense ............................
$4,000,000 654,057 $3,345,943
Taking It Further: Because the bonds were issued at a premium, the additional proceeds from the issuance of the bond served to effectively reduce the amount of interest expense incurred by Alberta Hydro Ltd. over the term of the bond. The total amount of the interest payments is fixed to the contractual rate. The total interest expense is only the same as the contractual amount of interest paid if the bonds are issued at par.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 1559A 2017 (a) Jan. 1 Cash ($6,000,000 x .98) .............. 5,880,000 Bonds Payable ................... 5,880,000 (b) KERSHAW ELECTRIC Balance Sheet (Partial) December 31, 2017 Non-current liabilities Bonds payable, due 2027 ...........................................$5,888,000 (c) 2019 Jan. 1 Bonds Payable ........................... 5,896,000 Loss on Bond Redemption .... 224,000 Cash*................................... 6,120,000 *($6,000,000 x 1.02) Taking It Further: (a) When bonds are sold at a discount, the overall cost of borrowing is increased by the amount of the discount. (b) When bonds are sold at a premium, the overall cost of borrowing is reduced by the amount of the premium.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-9A (a) 2017 April 1 Cash .......................................... 1,000,000 Notes Payable .................... 1,000,000 (b) Annual fixed principal payment is $250,000. ($1,000,000 ÷ 4) (c) (A) Cash Payment (B) + (C)
Period Apr. 1, 2017 Mar. 31, 2018 $300,000 Mar. 31, 2019 287,500 Mar. 31, 2020 275,000 Mar. 31, 2021 262,500 Total $1,125,000
(B) Interest Expense (D) × 5% $50,000 37,500 25,000 12,500 $125,000
(C)
(D)
Principal Reduction
Balance (D) – (C) $1,000,000 $ 250,000 750,000 250,000 500,000 250,000 250,000 250,000 0 $1,000,000
(d) 2017 Dec. 31 Interest Expense ..................... Interest Payable ................. ($1,000,000 × 5% × 9/12) 2018 Mar. 31 Notes Payable ......................... Interest Expense ..................... Interest Payable ...................... Cash .................................... (e)
37,500 37,500
250,000 12,500 37,500 300,000
Current liabilities Interest payable .......................................................... $37,500 Current portion of instalment note payable.............. 250,000 Non-current liabilities Instalment note payable, net of current portion ....... 750,000
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PROBLEM 15-9A (Continued) (f) 2018 Dec. 31 Interest Expense ..................... Interest Payable ................. ($750,000 × 5% × 9/12) 2019 Mar. 31 Notes Payable ......................... Interest Expense ..................... Interest Payable ...................... Cash ....................................
28,125 28,125 250,000 9,375 28,125 287,500
Taking It Further: (A)
(B) Interest Portion (D) × 5%
Date Payment Apr. 1, 2017 Mar. 31, 2018 $ 282,012 $50,000 Mar. 31, 2019 282,012 38,399 Mar. 31, 2020 282,012 26,219 Mar. 31, 2021 282,012 * 13,430 $1,128,048 *$128,048
(C) Principal Portion (A) – (B)
(D) Note Payable Balance (D) – (C) $1,000,000 $ 232,012 767,988 243,613 524,375 255,793 268,582 * 268,582 0 $1,000,000
* rounded Where the note is repaid in fixed principal payments, the reduction of the principal is the same ($250,000) each period. Where the note is repaid in blended principal and interest payments, the reduction of the principal increases each period. Because the principal balance changes each period, the amount of interest expense changes each period. In both situations, the interest expense declines each period. In total, the payment is higher with blended payments, as the total interest cost is higher ($128,048 versus $125,000).
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-10A (a) 2017 Sept. 30 Equipment ................................. Mortgage Note Payable ....... Cash ......................................
905,000 768,000 137,000
(b) (A) Monthly Interest Period
Cash Payment
Oct. 31 Nov. 30
$14,006 14,006
(B) (C) (D) Interest Reduction Principal Expense (D) × 3.6% × of Principal Balance 1/12 (A) – (B) (D) – (C) $768,000 $2,304 $11,702 756,298 2,269 11,737 744,561
2017 Oct. 31 Interest Expense ........................ Mortgage Note Payable ............. Cash ....................................... Nov. 30 Interest Expense ........................ Mortgage Note Payable ............. Cash .......................................
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2,304 11,702 14,006 2,269 11,737 14,006
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-10A (Continued) (c) (A) Monthly Interest Period
Cash Payment (B) + (C)
Oct. 31 Nov. 30
$15,104 15,066
(B) (C) (D) Interest Expense Principal (D) × 3.6% × Reduction Balance 1/12 of Principal (D) – (C) $768,000 $2,304 $12,800 755,200 2,266 12,800 742,400
Oct. 31 Interest Expense ........................ Mortgage Note Payable ............. Cash .......................................
2,304 12,800
Nov. 30 Interest Expense ........................ Mortgage Note Payable ............. Cash .......................................
2,266 12,800
15,104
15,066
Taking It Further: With the fixed payment of principal, a larger amount of principal is paid in the earlier portion of the loan, and so the principal balance reduces more quickly. As a result, the interest paid will be less if the instalments are fixed principal payments of $12,800.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-11A (a) (A) Semi-annual Interest Period Dec. 31, 2017 June 30, 2018 Dec. 31, 2018 June 30, 2019 Dec. 31, 2019
(b)
Cash Payment
(B) (C) Interest Reduction Expense of Principal (D) × 4.5% (A) – (B)
$46,126 46,126 46,126 46,126
$27,000 26,139 25,240 24,300
$19,126 19,987 20,886 21,826
(D) Principal Balance (D) – (C) $600,000 580,874 560,887 540,001 518,175
2017 Dec. 31 Cash ............................................. 600,000 Mortgage Note Payable .......
600,000
(c) KINYAE ELECTRONICS Balance Sheet (Partial) December 31, 2017 Current liabilities Current portion of mortgage note payable* ................. $ 39,113 Non-current liabilities Mortgage note payable, net of current portion** .......... 560,887 * $19,126 + $19,987 = $39,113 ** $600,000 – $19,126 – $19,987 = $560,887 or see Dec. 31, 2018 balance.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-11A (Continued) (d) 2018 June 30 Interest Expense .......................... 27,000 Mortgage Note Payable .............. 19,126 Cash .....................................
46,126
Dec. 31 Interest Expense .......................... 26,139 Mortgage Note Payable .............. 19,987 Cash .....................................
46,126
Taking It Further: The advantage in making fixed principal payments is that over the term of the loan, the total amount of interest paid is reduced. The disadvantage of the fixed principal payment is that the amount of the payment at the beginning of the term of the loan is larger than with the blended payments, reducing available cash when the business likely needs it most. A benefit of blended payments is that the amount of the payment is constant which helps with cash budgeting.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-12A (a)
In order for Manitoba Enterprises, a public company, to record a lease as a finance lease, one of the following criteria needs to be met. (1) there will be a transfer of ownership, (2) there is a bargain purchase option, (3) the lease term is for the major part of the economic life, (4) the present value of the lease payments amounts to substantially all of the fair value of the leased property, or (5) the asset is a specialized asset. Criteria 1, 2, and 5 are not present on any of the three leases. Criteria 3 and 4 are present in the case of the vehicle lease and so it should be treated as a finance lease. Both the manufacturing and office equipment leases should be reported as operating leases, because none of the criteria are met to require treatment as a finance lease. It should be noted that only one condition needs to be met to require capitalization.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-12A (Continued) (b) Equipment Rental Expense .......................... 14,000 Cash .....................................................
14,000
Equipment Rental Expense ............................ 3,900 Cash .....................................................
3,900
The vehicle lease is a finance lease. The entry to record the finance lease on January 1, 2017 is as follows: Leased Asset—Vehicles............................... 74,800 Lease Liability .....................................
74,800
Lease Liability ............................................... 14,981 Cash ....................................................................... 14,981 (c)
Since the manufacturing and office equipment leases do not qualify as finance leases, nothing would appear on Manitoba’s balance sheet regarding either one. The annual rental fees would be charged to expense when they are paid each year and reported on the income statement as: Equipment Rental Expense $17,900 ($14,000 + $3,900), or possibly expensed monthly. The vehicle lease is a finance lease. Therefore, the vehicles would be recorded as assets on Manitoba’s balance sheet, along with other assets in property, plant, and equipment. The amount recorded would be the present value of the lease rental payments of $74,800, reduced by any accumulated depreciation recorded in 2017. The amount of the depreciation would be reported on the income statement. A corresponding liability for leased assets would also be recorded in the amount $74,800. This amount would be reduced by the principal portion of the annual lease payment. Interest expense accrued for 2017 would also appear on the income statement.
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PROBLEM 15-12A (Continued)
Taking It Further: The adjusting journal entry on December 31, 2017 for the accrual of interest on the lease liability would be as follows: Interest Expense ............................................. 4,786 Interest Payable................................... [($74,800 – $14,981) × 8% = $4,786]
4,786
Since the rental cost of the manufacturing and office equipment has been paid and expensed during the year, no accruals need be recorded for the two remaining leases.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-69A (a)
($ in millions) Debt to total assets = Total debt ÷ Total assets 2014 2013
$20,897 ÷ $33,684 = 62.0% $13,741 ÷ $20,741 = 66.3%
Interest coverage = EBIT ÷ Interest expense 2014 2013
($53 + $466 + $25) ÷ $466 = 1.2 times ($627 + $287 + $226) ÷ $287 = 4.0 times
(b) With the acquisition of Shoppers Drug Mart, Loblaw increased its assets and debts considerably. The debt to total assets ratio improved somewhat. On the other hand, due to minimal profit in 2014, Loblaw’s interest coverage ratio dropped dramatically. Assuming the profit performance of 2014 is a one-time event, Loblaw’s solvency improved overall.
Taking It Further: The use of operating leases improves the company’s solvency ratios. Since operating leases are accounted for as rent expense, Loblaw Companies Limited can avoid reporting the lease obligations on its balance sheet. In terms of assessing solvency, the use of operating leases causes the debt to total assets ratio to be lower because of the off-balance sheet financing (keeping liabilities off the balance sheet). As well, because the company has less debt, its interest expense is lower than it would be if the leases were considered to be finance leases. This causes its interest coverage ratio to be higher than it would have been if the leases had been accounted for as finance leases. However, it would still appear that Loblaw does not have concerns about solvency.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-14A (a) SYKES LTD. Balance Sheet (Partial) October 31, 2017 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income tax payable............................................. Unearned revenue .............................................. Current portion of lease liability ........................ Current portion of note payable ........................ Total current liabilities ............................................
$57,000 15,000 5,900 10,000 26,430 9,675 1 124,005
Non-current liabilities Bonds payable, due 2020 ................................... Note payable, net of current portion ................. Lease liability, net of current portion ................ Total non-current liabilities .................................... Total liabilities .........................................................
500,000 220,536 2 13,813 3 734,349 858,354
1
$20,800 – $11,125 = $9,675 $230,211 – $9,675 = $220,536 3 $40,243 – $26,430 = $13,813 2
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PROBLEM 15-14A (Continued) (b) Debt to total assets = Total debt ÷ Total assets Total debt = $57,000 + $500,000 + $15,000 + $5,900 + $230,211 + $40,243 + $10,000 = $858,354. $858,354 ÷ $2,044,147 = 42% Interest coverage = EBIT ÷ Interest expense ($36,000 + $53,330 + $11,800) ÷ $53,330 = 1.9 times
(c)
Sykes’s debt to total assets shows reasonable solvency, but Sykes’s interest coverage is somewhat low. The number of times interest can be paid is likely low due to low profitability.
Taking It Further: It would be useful to know the amount and details of Sykes’s assets. If the majority of the assets owned are non-current, one could conclude that although the debt to total assets ratio appears strong, Sykes’s ability to pay debt when due may be poor. It would be useful to determine any off-balance sheet financing obtained through operating leases. As well, details of the income statement would be useful in determining the cause of the low interest coverage ratio. Finally, comparative financial information would be useful to assess any trends in Sykes’s liquidity position and ability to pay interest.
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PROBLEM 15-1B (a) Because it is unsecured, the bond would be considered a debenture bond. 2017 (b) Mar.
1 Cash............................................... 200,000 Bonds Payable ......................
(c) June 30 Interest Expense ........................ Interest Payable..................... ($200,000 x 7% x 4/12) = $4,667
200,000
4,667 4,667
(d) JADE CORP. Balance Sheet (Partial) June 30, 2017 Current liabilities Interest payable .......................................................
$4,667
Non-current liabilities Bonds payable, due 2022 ........................................
$200,000
(e) 2017 Sept. 1 Interest Expense ........................ Interest Payable ......................... Cash ....................................... (f) 2018 Mar.
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1 Interest Expense ........................ Cash ...................................... ($200,000 x 7% x 6/12) = $7,000
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2,333 4,667 7,000
7,000 7,000
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-1B (Continued) Taking It Further: The major advantages of issuing debt instead of issuing shares include: 1. Interest is tax deductible. 2. Issuing debt does not affect the percentage ownership of existing shareholders. 3. Issuing bonds may have a positive effect on the earnings per share ratio. 4. The return on equity ratio may be higher, as a result of financial leverage. The major disadvantages of issuing debt instead of issuing shares include: 1. The debt to total assets will be adversely affected. 2. The principal amount is due at maturity. 3. The corporation is not required to pay dividends on shares but interest on bonds cannot be avoided.
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PROBLEM 15-2B (a)
The bonds were issued at a premium. Note that the bond amortized cost is decreasing and will continue to decrease until the maturity date in ten years’ time at which time the carrying amount will equal the face value of the bond of $2,500,000.
(b) The face value of the bond is $2,500,000. (c)
Contractual interest rate = 5% $62,500 ÷ $2,500,000 = 2.5% semi-annually × 2 = 5% annually
(d) [1] [2]
$2,695,981 + $8,412 = $2,704,393. $62,500 – $8,412 = $54,088
[3] [4] [5]
$62,500 $62,500 – $53,573 = $8,927 $2,678,649 – $8,927 = $2,669,722
(e)
Market interest rate = 4% [2] $54,088 ÷ $2,704,393 = 2% semi-annually × 2 = 4% annually
(f) 2017 Jan 1 Cash............................................ 2,704,393 Bonds Payable ...................... 2,704,393 (g) 2017 July 1 Interest Expense ........................ Bonds Payable ........................... Cash .......................................
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54,088 8,412 62,500
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-2B (Continued) (h) 2017 Dec. 31 Interest Expense ........................ Bonds Payable ........................... Interest Payable.....................
53,920 8,580 62,500
(i) PONASIS CORPORATION Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................
$62,500
Non-current liabilities Bonds payable, due 2027 ...........................................$2,687,401 Taking It Further: The legal documents, which state the contractual interest rate, are often prepared well in advance of the actual bond issue and the market rate of interest fluctuates on a daily basis. It is nearly impossible to predict, weeks or months in advance, what the market interest rate will be on the date of issue. In this case, the market rate of interest decreased after the contractual rate was set.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-3B (a)
The bonds are unsecured debenture bonds that are redeemable (callable).
(b)
Market interest rate 4% ($2,000,000 × 0.67556) + ($2,000,000 × 5% × 8.11090) = $2,162,210 Using a financial calculator: PV $ ? Yields $2,162,217.92 I 4% N 10 PMT $ (100,000) FV $ (2,000,000) Type 0
2017 Jan. 1 Cash............................................ 2,162,218 Bonds Payable ...................... 2,162,218 (c) UNIVERSAL CORPORATION Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 4%
Date
Jan. 1, 2017 Jan. 1, 2018 Jan. 1, 2019 Jan. 1, 2020 Jan. 1, 2020 Jan. 1, 2021
Solutions Manual .
(A) Interest Payment $2,000,000 × 5%
(B)
(C)
Interest Expense (D) × 4%
Premium Amortization (A) – (B)
$100,000 100,000 100,000 100,000 100,000
$86,489 85,948 85,386 84,802 84,194
$13,511 14,052 14,614 15,198 15,806
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(D) Bond Amortized Cost (D) - (C) $2,162,218 2,148,707 2,134,655 2,120,041 2,104,843 2,089,037
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-3B (Continued) (d)2 017 Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2018 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2019 Jan. 1 Interest Payable ......................... Cash ....................................... Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable..................... 2020 Jan. 1 Interest Payable ......................... Cash .......................................
86,489 13,511 100,000 100,000 100,000 85,948 14,052 100,000 100,000 100,000 85,386 14,614 100,000 100,000 100,000
Taking It Further: When bonds are issued at a discount, the proceeds from the issuance of the bonds are lower than the face value and corresponding maturity amount of the bonds. The difference in these two amounts has to be absorbed as interest expense to the business over the term of the bonds, using the effectiveinterest method. When bonds are issued at a premium, the proceeds of the bonds are higher than the face value and corresponding maturity amounts. The difference in these two amounts reduces the amount of interest expense recognized over the life of the bond.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-4B (a)
The bonds are secured bonds that are convertible into common shares.
(b)
Market interest rate 7% ($3,500,000 × 0.71299) + ($3,500,000 × 6% × 4.10020) = $3,356,507 Using a financial calculator: PV $ ? Yields $3,356,493.09 I 7% N 5 PMT $ (210,000) FV $ (3,500,000) Type 0
2017 Jan. 1 Cash............................................ 3,356,493 Bonds Payable ...................... 3,356,493 (c) GLOVER CORPORATION Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 6% Bonds Issued at market rate of 7% Date
(A) Interest Payment $3,500,000 × 6%
Jan. 1, 2017 Jan. 1, 2018 $210,000 Jan. 1, 2019 210,000 Jan. 1, 2020 210,000 Jan. 1, 2020 210,000 Jan. 1, 2021 210,000 * Rounded by $1 Solutions Manual .
(B)
(C)
Interest Expense (D) × 7%
Discount Amortization (B) – (A)
$234,955 236,701 238,570 240,570 242,710
$24,955 26,701 28,570 30,570 32,710
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(D) Bond Amortized Cost (D) + (C) $3,356,493 3,381,448 3,408,149 3,436,719 3,467,289 3,500,000*
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-4B (Continued) (d) 2018 Jan. 1 Interest Expense ........................... 234,955 Bonds Payable ...................... Cash ....................................... 2019 Jan. 1 Interest Expense ........................... 236,701 Bonds Payable ...................... Cash ....................................... 2020 Jan. 1 Interest Expense ........................... 238,570 Bonds Payable ...................... Cash .......................................
24,955 210,000
26,701 210,000
28,570 210,000
Taking It Further: A bondholder would request to have bonds held converted to common shares if, after conversion, the market price of the shares obtained exceeds the market price of the bonds given up in exchange for the shares.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-5B (a) 2017 Oct. 1 Cash ($800,000 × 98%) ................ 784,000 Bonds Payable ..................... (b) The market rate of interest on Oct 1, 2017 was 5.26%.
784,000
Using Excel or a financial calculator: PV $ 784,000 I ? Yields 5.2623% N 10 PMT $(40,000) FV $(800,000) Type 0 (c) PFQ CORP. Bond Discount Amortization Table Effective Interest Method—Annual Interest Payments 5% Bonds Issued at market rate of 5.2623%
Date
Oct. 1, 2017 Oct. 1, 2018 Oct. 1, 2019 Oct. 1, 2020
(A) Interest Payment $800,000 × 5%
(B) Interest Expense (D) × 5.2623%
(C) Discount Amortization (B) – (A)
$40,000 40,000 40,000
$41,256 41,323 41,392
$1,256 1,323 1,392
(d) 2018 Sep. 30 Interest Expense ....................... Bonds Payable ..................... Interest Payable * ................. *($800,000 × 5%) Solutions Manual .
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(D) Bond Amortized Cost (D) + (C) $784,000 785,256 786,579 787,971
41,256 1,256 40,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-5B (Continued) (e)
(f)
2018 Oct. 1 Interest Payable ........................ Cash ...................................... 2017 Dec. 31 Interest Expense*....................... Bonds Payable**.................... Interest Payable*** ................ *($41,256 x 3/12) **($1,256 x 3/12) ***($800,000 × 5% x 3/12) 2018 Oct. 1 Interest Expense*....................... Interest Payable ......................... Bonds Payable**.................... Cash ....................................... *($41,256 x 9/12) **($1,256 x 9/12)
(g) 2018 Oct. 1 Bonds Payable.......................... Gain on Bond Redemption*. Cash ($800,000 × 97%)......... *($785,256 – $776,000)
40,000 40,000
10,314 314 10,000
30,942 10,000 942 40,000
785,256 9,256 776,000
Taking It Further: A company may elect to redeem outstanding bonds early if there is a decrease in the market interest rates. It may be to their advantage to redeem the bonds and issue new bonds at a lower interest rate.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-6B (a)
2017 July 1 Cash .............................................. 3,449,427 Bonds Payable ..................... 3,449,427
(b) WAUBONSEE LTD. Bond Premium Amortization Table Effective Interest Method—Annual Interest Payments 6% Bonds Issued at market rate of 5% (A) (B) Interest Interest Payment Expense $3,200,000 (D) × 5% x × 6% X 6/12 6/12
Date
July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019 July 1, 2019 Jan. 1, 2020 (c)
$96,000 96,000 96,000 96,000 96,000
(C) Premium Amortization (A) – (B)
$86,236 85,992 85,741 85,485 85,222
Dec. 31 Interest Expense ...................... Bonds Payable.......................... Interest Payable .................. 2018 Jan 1 Interest Payable ........................ Cash ......................................
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$9,764 10,008 10,259 10,515 10,778
(D) Bond Amortized Cost (D) - (C) $3,449,427 3,439,663 3,429,655 3,419,396 3,408,881 3,398,103
86,236 9,764 96,000 96,000 96,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-6B (Continued) (d) 2017 Oct. 31 Interest Expense*....................... Bonds Payable** ........................ Interest Payable*** ................ *($86,236 x 4/6) ** ($9,764 x 4/6) ***($3,200,000 × 6% x 4/12) 2018 Jan. 1 Interest Expense*....................... Interest Payable ......................... Bonds Payable** ........................ Cash ....................................... *($86,236 x 2/6) ** ($9,764 x 2/6)
(e)
57,491 6,509 64,000
28,745 64,000 3,255 96,000
Jan 1 Bonds Payable ........................... 3,439,663 Gain on Bond Redemption*.. 175,663 Cash ($3,200,000 × 102%) ..... 3,264,000 *($3,439,663 – $3,264,000)
Taking It Further: $3,200,000 × 0.45639 = $3,200,000 × 3.0% × 13.59033 = (n = 20, i = 4.0%)
$1,460,448 1,304,672 $2,765,120
Using a financial calculator: PV $ ? Yields $2,765,109.56 I 4.0% N 20 PMT $ (96,000) FV $ (3,200,000) Type 0
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-7B (a) ($5,000,000 × 0.78120) + ($5,000,000 × 2% × 8.75206) = $4,781,206 (n = 10, i = 2.5%) Using a financial calculator: PV $ ? Yields $4,781,198 I 2.5% N 10 PMT $ (100,000) FV $ (5,000,000) Type 0 (b) VISION INC. Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 5%
Date
Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019
Solutions Manual .
(A) (B) (C) Interest Interest Payment Expense Discount $5,000,000 (D) × 5% × Amortization × 4% × 6/12 (B) – (A) 6/12 $100,000 100,000 100,000 100,000
$119,530 120,018 120,519 121,032
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$19,530 20,018 20,519 21,032
(D) Bond Amortized Cost (D) + (C) $4,781,198 4,800,728 4,820,746 4,841,265 4,862,297
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-7B (Continued)
(c) 2017 Jan. 1 Cash............................................ 4,781,198 Bonds Payable ................... 4,781,198 July 1 Interest Expense .................... Bonds Payable .................. Cash ....................................
119,530
Dec. 31 Interest Expense .................... Bonds Payable .................. Interest Payable..................
120,018
19,530 100,000
20,018 100,000
(d) VISION INC. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable ................................... Non-current liabilities Bonds payable, due 2022 ....................
$100,000 4,820,746
(e) 2018 Jan. 1 Interest Payable ............................ 100,000 Cash ......................................
100,000
(f) 2019 Jan. 1 Bonds Payable ........................... 4,862,297 Loss on Bond Redemption* ..... 37,703 Cash ($5,000,000 × 98%) ...... 4,900,000 *($4,900,000 – $4,862,297)
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-7B (Continued) (g) 2022 Jan. 1 Bonds Payable ........................... 5,000,000 Cash ...................................... 5,000,000 (h) The total amount of interest payment: Contract rate (4% × $5,000,000 × 5 years)
$1,000,000
Total interest expense: Interest paid ............................................ Add: discount ($5,000,000 – $4,781,198) Total interest expense ............................
$1,000,000 218,802 $1,218,802
Taking It Further: Because the bonds were issued at a discount, the reduction in the proceeds from the issuance of the bond served to effectively increase the amount of interest expense incurred by Vision Inc. over the term of the bond. The total amount of the interest payments is fixed to the contractual rate. The total interest expense is only the same as the contractual amount of interest paid if the bonds are issued at par.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 1587B (a) 2017 Jan. 1 Cash ($600,000 x 1.05)............ Bonds Payable ...................
630,000 630,000
(b) LOPEZ CO. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................
$27,000
Non-current liabilities Bonds payable, due 2027 ........................................
$628,000
(c) 2019 Jan. 1 Bonds Payable ........................ Loss on Bond Redemption .... Bonds Payable* .................. *($600,000 x 1.05)
624,000 6,000 630,000
Taking It Further: The bond redemption would result in a gain or a loss for Lopez Co. because the face value of the bonds times the redemption price stated in the bond contract will be different than the amortized cost of the bond at the date of redemption.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-9B (a) 2017 May
1 Cash ........................................... 120,000 Note Payable .......................
120,000
(b) (A) Cash Payment
Period May 1, 2017 Oct. 31, 2017 $22,520 Apr. 30, 2018 22,520 Oct. 31, 2018 22,520 Apr. 30, 2019 22,520 Oct. 31, 2019 22,520 Apr. 30, 2020 22,520 Total $135,120 *rounded
(B) (C) (D) Interest Principal Expense Reduction Balance (D) × 7% × 6/12 (A) – (B) (D) – (C) $120,000 $4,200 $18,320 101,680 3,559 18,961 82,719 2,895 19,625 63,094 2,208 20,312 42,782 1,497 21,023 21,759 761* 21,759 0 $15,120 $120,000
(c) 2017 Oct. 31
2018 Apr. 30
(d)
Note Payable ................................ 18,320 Interest Expense ..................... 4,200 Cash.....................................
22,520
Note Payable ................................ 18,961 Interest Expense ..................... 3,559 Cash.....................................
22,520
Current liabilities Current portion of instalment note payable.............. $39,937 ($19,625 + $20,312 = $39,937) Non-current liabilities Instalment note payable, net of current portion... 42,782
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-9B (Continued) (e) Principal portion = $120,000 ÷ (3 × 2) = $20,000 each payment period. Oct. 31:
$20,000 + [$120,000 × 7% × 6/12] = $24,200
Apr. 30: $20,000 + [($120,000 – $20,000) × 7% × 6/12] = $23,500
Taking It Further: Where the note is repaid in fixed principal payments, the reduction of the principal is the same ($20,000) each period. With the fixed payment of principal each payment, a larger amount of principal is paid in the earlier portion of the loan, and so the principal balance reduces more quickly. Where the note is repaid in blended principal plus interest payments, the reduction of the principal balance increases each period and the principal component in the final blended payment will be larger than the fixed principal payment.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-10B (a) 2017 Sep. 30 Equipment .................................... 900,000 Cash ...................................... Mortgage Note Payable ....... (A) Quarterly Interest Period Sep. 30, 2017 Dec. 31, 2017 Mar. 31, 2018
Cash Payment $66,216 66,216
(B) (C) (D) Interest Expense Reduction Principal (D) × 3.6% of Principal Balance × 3/12 (A) – (B) (D) – (C) $750,000 $6,750 $59,466 690,534 6,215 60,001 630,533
(b) Dec. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ...................................... 2018 Mar. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ......................................
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150,000 750,000
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6,750 59,466 66,216
6,215 60,001 66,216
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-10B (Continued) (c) (A) Monthly Interest Period
Cash Payment (B) + (C)
Dec. 31 Mar. 31
$69,250 68,688
(B) (C) (D) Interest Expense Principal (D) × 3.6% × Reduction Balance 3/12 of Principal (D) – (C) $750,000 $6,750 $62,500 687,500 6,188 62,500 625,000
2017 Dec. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ......................................
6,750 62,500
2018 Mar. 31 Interest Expense ....................... Mortgage Note Payable ............ Cash ......................................
6,188 62,500
69,250
68,688
Taking It Further: Total payments ($66,216 × 4 × 3) Less: Principal repayment Total interest expense of note
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$794,592 750,000 $ 44,592
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 15-11B (a) (A) Semi-annual Interest Period Dec. 31, 2017 June 30, 2018 Dec. 31, 2018 June 30, 2019 Dec. 31, 2019 (b)
Cash Payment (B) + (C) $39,375 38,531 37,688 36,844
(B) (C) (D) Interest Expense Principal (D) × 7.5% Reduction Balance × 6/12 of Principal (D) – (C) $450,000 $16,875 $22,500 427,500 16,031 22,500 405,000 15,188 22,500 382,500 14,344 22,500 360,000
2017 Dec. 31 Cash ............................................. 450,000 Mortgage Note Payable ..........
450,000
(c) ELITE ELECTRONICS Balance Sheet (Partial) December 31, 2018 Current liabilities Current portion of mortgage note payable................... $ 45,000 ($22,500 + $22,500 = $45,000) Non-current liabilities Mortgage notes payable, 7.5% ...................................... *360,000 * $405,000 – $45,000 = $360,000 or see Dec. 31, 2019 balance (d) 2018 June 30 Interest Expense .......................... 16,875 Mortgage Note Payable ............... 22,500 Cash .........................................
39,375
Dec. 31 Interest Expense .......................... 16,031 Mortgage Note Payable ............... 22,500 Cash .........................................
38,531
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PROBLEM 15-11B (Continued)
Taking It Further: If the semi-annual payments were blended, (calculated to be $32,382.94) the amount of the payment for the first two instalments would be smaller than the amounts using the fixed principal payment in (a) above. The trend reverses to the end of the term of the note and so the last instalment payment is greater with the blended payments.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-12B (a)
In order for Klippert Inc., a public company, to record a lease as a finance lease, one of the following criteria needs to be met: (1) there will be a transfer of ownership, (2) there is a bargain purchase option, (3) the lease term is for the major part of the economic life, (4) the present value of the lease payments amounts to substantially all of the fair value of the leased property, or (5) the asset is a specialized asset. Criteria 1, 2, and 5 are not present on any of the three leases. Criteria 3 and 4 are present in the case of the vehicles lease and so it should be treated as a finance lease. Both the manufacturing and office equipment leases should be reported as operating leases, because none of the criteria are met to require treatment as a finance lease. It should be noted that only one condition needs to be met to require capitalization.
(b) Equipment Rental Expense........................ Cash .....................................................
13,260
Equipment Rental Expense........................ Cash .....................................................
4,092
13,260
4,092
The vehicles lease is a finance lease. The entry to record the finance lease on January 1, 2017 is as follows: Leased Asset—Vehicles............................. Lease Liability .....................................
75,379
Lease Liability ............................................. Cash .....................................................
13,929
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75,379 13,929
Chapter 15
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-12B (Continued) (c) Since the manufacturing and office equipment leases do not qualify as finance leases, nothing would appear on Klippert Inc.’s balance sheet for either one. The annual rental fees would be charged to expense when they are paid each year and reported on the income statement as: Equipment Rental Expense $17,352 ($13,260 + $4,092), or expensed monthly. The vehicles lease is a finance lease. Therefore, the vehicles would be recorded as an asset on Klippert’s balance sheet, along with other assets, in property, plant, and equipment. The amount recorded would be the present value of the lease rental payments of $75,379, reduced by any accumulated depreciation recorded in 2017. The amount of the depreciation would be reported on the income statement. A corresponding liability for leased assets of $75,379 would be recorded on January 1, 2017. This would be reduced by the principal portion of the annual lease payment. Interest expense accrued for 2017 would also appear on the income statement.
Taking It Further: The adjusting journal entry on December 31, 2017 for the accrual of interest on the lease liability would be as follows: Interest Expense on Finance Leases ............ 4,302 Interest Payable................................... (($75,379 – $13,929) × 7% = $4,032)
4,302
Since the rental cost of the manufacturing and office equipment have been paid and expensed during the year, no accruals need be recorded for the two remaining leases.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-96B (a)
($ in millions) Debt to total assets = Total debt ÷ Total assets 2014 2013
$38,068 ÷ $79,671 = 47.8% $37,135 ÷ $78,315 = 47.4%
Interest coverage = EBIT ÷ Interest expense 2014 2013
($2,699 + $1,429 + $1,891) ÷ $1,429 = 4.2 times ($3,911 + $1,162 + $2,465) ÷ $1,162 = 6.5 times
(b) With the substantial decline in profit in 2014, Suncor experienced a corresponding decline in its ability to pay interest. On the other hand, the debt to total assets ratio worsened only slightly. Taking It Further: The use of operating leases improves the company’s solvency ratios. Since operating leases are accounted for as rent expense, Suncor can avoid reporting the lease obligations on its balance sheet. In terms of assessing solvency, the use of operating leases causes the debt to total assets ratio to be lower because of the off-balance sheet financing (keeping liabilities off the balance sheet). As well, because the company has less debt, its interest expense is lower than it would be if the leases were considered to be finance leases. This causes its interest coverage ratio to be higher than it would have been had the leases been accounted for as finance leases. The company’s worsening ability to pay interest in 2014, as revealed by the ratios, could be even worse.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 15-14B (a) CAREY CORPORATION Balance Sheet (Partial) December 31, 2017 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income tax payable............................................. Unearned revenue .............................................. Current portion of lease liability ........................ Current portion of note payable ........................ Total current liabilities ............................................
$76,000 30,000 37,176 25,000 22,800 16,920 1 207,896
Non-current liabilities Bonds payable, due 2022 ................................... Note payable, net of current portion ................. Lease liability, net of current portion ................ Total non-current liabilities .................................... Total liabilities .........................................................
1,000,000 141,746 2 77,069 3 1,218,815 1,426,711
1
$24,400 – $7,480 = $16,920 $158,666 – $16,920 = $141,746 3 $99,869 – $22,800 = $77,069 2
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PROBLEM 15-14B (Continued) (b) Debt to total assets = Total debt ÷ Total assets Total debt = $76,000 + $1,000,000 + $30,000 + $37,176 + $158,666 + $99,869 + $25,000 = $1,426,711 $1,426,711 ÷ $2,594,031 = 55% Interest coverage = EBIT ÷ Interest expense ($173,500 + $49,568 + $74,353) ÷ $49,568 = 6 times
(c)
Carey’s debt to total assets and interest coverage show excellent solvency.
Taking It Further: Long-term creditors and investors are more interested in solvency ratios, which measure a company’s ability to repay its non-current liabilities and survive over a long period of time. They are particularly interested in a company’s ability to pay interest when it is due and to repay its debt at maturity.
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BYP15-1 FINANCIAL REPORTING PROBLEM * dollar amounts are in thousands (a)
Corus’ long-term debt
Aug. 31, 2014 $874,251
Aug. 31, 2013 $538,966
Total long-term debt increased by $335,285 or 62.2 %. (b) Corus’ statement of cash flows indicates that notes were redeemed at an amount of $500,000,000 in the 2013 fiscal year but there were no redemptions in 2014. (c) 2013 Debt to total assets = Total debt ÷ Total assets Debt to total assets
=
$946,304 $2,167,137
=
43.7%
Interest coverage = EBIT ÷ Interest expense =
($165,749 + $44,795 + $34,462) = $44,795
5.5
times
Corus took on a higher proportion of debt in 2014. Debt to total assets went from 43.7% in 2013 to 53% in 2014. Its interest coverage stayed about the same, decreasing from 5.5 times in 2013 to 5.3 times in 2014, while interest expense slightly increased. This would suggest solvency deteriorated slightly in 2014.
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BYP15-2 INTERPRETING FINANCIAL STATEMENTS (a)
($ in millions) U.S. Gap Inc.
Debt to total assets Times interest earned
$2,473 $7,690
= 32.2%
($1,262 + $75 + $751) = 27.8 times $75
lululemon athletica inc. $207
Debt to total assets
$1,296
Times interest earned
($239 + $14 + 114) $14
= 16.0%
=
26.2 times
(b) Gap Inc. relied more heavily on debt financing; 32.2% of every dollar of assets was financed with debt versus only 16.0% by lululemon. In spite of having a higher debt to total asset ratio, Gap Inc. has a slight edge for its interest coverage ratio compared to lululemon. Both companies appear to be very solvent. (c)
Operating leases give the appearance that a company’s solvency is better than it really is. Even though they are not shown on the balance sheet or used in the standard ratio calculations, they are a commitment the company must meet.
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BYP15-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.
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BYP15-4 COMMUNICATION ACTIVITY To:
Mr. Sam Masasi, President Masasi Corporation
From: Accounting student Re:
Financing of expansion
As you have requested, I have prepared the following list of considerations concerning your expansion financing plans. (1)
The major advantages of bonds over common share financing are: a) Shareholder control is not affected—bondholders (lenders) do not have voting rights, so current shareholders retain full control over the company. b) Income tax savings result—interest is deductible for tax purposes; dividends on shares are not. c) Earnings per share may be higher—although interest expense will reduce profit, earnings per share will often be higher under debt financing, because no additional common shares are issued. d) Return on equity may be higher—although profit is lower, return on equity is often higher because of financial leverage.
(2) The major disadvantages of bonds over common share financing are: a) b) c) d) e)
Using bonds is riskier. Interest must be paid on a periodic basis. The principal (face value) of the bond must be repaid. These are binding legal obligations. Bonds may negatively affect the debt to total assets ratio.
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BYP15-4 (Continued) (3) The types of bonds that Masasi Corporation may issue include: a) Secured bonds have specific assets pledged as collateral secured by the bond issuer. b) Unsecured bonds which are more risky to the bondholder as there is no collateral provided by the bond issuer. c) Convertible bonds, which have a conversion feature allowing the bondholder to exchange the bond usually to common shares. d) Callable bonds (also known as redeemable bonds) are bonds that the issuing company can redeem (buy back) at a stated dollar amount, prior to maturity. (4) In the case of a corporation, the board of directors must approve the bond issue. In authorizing the bond issue, the board of directors must state the number of bonds to be authorized (the total number of bonds the company is allowed to sell), the total face value, the contractual interest rate, and the maturity date. The total number of bonds authorized is often more than the number of bonds the company plans to issue immediately.
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BYP15-5 “ALL ABOUT YOU” ACTIVITY (a)
Answers will vary by student, depending on the interest rate assumed. The following answers assume a prime interest rate of 3%: 1. 2.
(b)
Monthly payment = $261.07 Interest payable = $8,962 (rounded) (114 × $261.07 – $20,800 including grace period interest)
Answers will vary by student, depending on the interest rate assumed. The following answers assume a prime interest rate of 3%: 1. 2.
Monthly payment = $202.34 Interest payable = $14,408 (rounded) (174 × $202.34 – $20,800 including grace period interest)
(c) The choice of the better option is dependent on the
personal situation of the student making the choice.
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BYP15-6 Santé Smoothie Saga (a) Alternative 1
Interest Period
May 1, 2018 Nov. 1, 2018 May 1, 2019 Nov. 1, 2019 May 1, 2020 Nov. 1, 2020 May 1, 2021 Totals
(A)
(B)
(C)
Cash Payment
Interest Expense
(B) + (C)
(D) × 4% × 6/12
Reduction of Principal
$3,920 3,850 3,780 3,710 3,640 3,570 $22,470
$420 350 280 210 140 70 $1,470
$3,500 3,500 3,500 3,500 3,500 3,500 $21,000
(D) Principal Balance (D) – (C) $21,000 17,500 14,000 10,500 7,000 3,500 0
Alternative 2
Interest Period
(A) Cash Payment
May 1, 2018 Nov. 1, 2018 $3,749 May 1, 2019 3,749 Nov. 1, 2019 3,749 May 1, 2020 3,749 Nov. 1, 2020 3,749 May 1, 2021 3,749 Totals $22,494 *$1 rounding difference
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(B) Interest Expense
(C) Reduction of Principal
(D) Principal Balance
(D) × 4% × 6/12
(A) – (B)
(D) – (C) $21,000 17,671 14,275 10,812 7,279 3,676 0
$420 353 286 216 146 73* $1,494
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$3,329 3,396 3,463 3,533 3,603 3,676 $21,000
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BYP15-6 (Continued) (b) 2018 May 1 Equipment ................................. Cash ...................................... Notes Payable ...................... (c)
25,000 4,000 21,000
Alternative 1 2018 Nov. 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... 2019 May 1 Notes Payable ........................... Interest Expense ....................... Cash ......................................
3,500 420 3,920 3,500 350 3,850
Alternative 2 2018 Nov. 1 Notes Payable ........................... Interest Expense ....................... Cash ...................................... 2019 May 1 Notes Payable ........................... Interest Expense ....................... Cash ......................................
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BYP15-6 (Continued) (d) 1
Current Portion Non-current Portion 1
(e)
Alternative 1 $7,000 7,000 $14,000
Alternative 2 $6,996 7,279 $14,275
$3,500 + $3,500 = $7,000 $3,463 + $3,533 = $6,996
Alternative 1 2019 May 31 Interest Expense ....................... Interest Payable ................... ($14,000 × 4% × 1/12) = $47
47 47
Alternative 2 May 31 Interest Expense ....................... Interest Payable ................... ($14,275 × 4% × 1/12) = $48 (f)
48 48
The alternatives are almost identical when it comes to cost. In Alternative 1 the total cash paid is $22,470 and in Alternative 2 total cash paid is $22,494, a difference of only $24. There is a difference when it comes to the cash flow, however. Alternative 1 requires higher payments at the beginning, and lower ones at the end of the loan. Alternative 2 requires a steady payment and may be easier for budgeting purposes, given the fixed payment.
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CHAPTER 16 Investments ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Questions
Brief Problems Exercises Exercises Set A
1. Identify reasons to invest, and classify investments.
1, 2, 3, 4
1, 2
1, 2
2. Demonstrate the accounting for debt investments that are reported at amortized cost.
5, 6, 7
3, 4, 5
3, 4, 5, 6
1, 2, 3, 6
1, 2, 3, 6
3. Demonstrate the accounting for fair value investments.
8, 9, 10, 11, 14
6, 7, 8, 9, 10
7, 8, 9, 10
2, 4, 5, 6, 7
2, 4, 5, 6, 7
4. Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence.
12, 13, 14, 11, 12, 15, 16 13
11, 12
6, 7, 8
6, 7, 8
5. Explain how investments are reported in the financial statements.
17, 18, 19
14, 15, 16
10, 12, 13, 14
1, 2, 3, 4, 5, 6, 8, 9, 10
1, 2, 3, 4, 5, 6, 8, 9, 10
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A
Description Record debt investments at amortized cost; show statement presentation.
Difficulty Level Moderate
Time Allotted (min.) 30-40
2A
Record debt investments at amortized cost; show statement presentation.
Moderate
20-25
3A
Record debt investment at amortized cost, prepare bond amortization schedule, and record liability; show statement presentation.
Moderate
40-45
4A
Record equity and debt investments categorized as fair value through profit or loss; show statement presentation.
Moderate
30-40
5A
Record equity investments; show statement presentation.
Moderate
35-45
6A
Identify impact of investments on financial statements.
Complex
20-25
7A
Analyze investment and compare fair value, equity method, and cost method.
Complex
35-45
8A
Assess strategic investments, record investment using equity method. Show statement presentation.
Moderate
20-25
9A
Prepare income statement and statement of comprehensive income.
Simple
20-30
10A
Prepare statement of comprehensive income and balance sheet.
Moderate
40-50
1B
Record debt investments; show statement presentation.
Moderate
30-40
2B
Record debt investments; show statement presentation.
Moderate
20-25
3B
Record debt investment at amortized cost, prepare bond amortization schedule, and record liability; show statement presentation.
Moderate
40-45
4B
Record debt and equity investments categorized at fair value through profit or loss; show statement presentation.
Moderate
30-40
5B
Record equity trading investments; show statement presentation.
Moderate
35-45
6B
Identify impact of investments on financial statements.
Complex
20-25
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 7B
Description Analyze investment and compare fair value, equity method, and cost method.
Difficulty Level Complex
Time Allotted (min.) 35-45
8B
Record strategic equity investments, use fair value, cost, and equity method. Show statement presentation.
Moderate
20-25
9B
Prepare income statement and statement of comprehensive income.
Simple
20-30
10B
Prepare statement of comprehensive income and balance sheet.
Moderate
40-50
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Learning Objectives and End-ofChapter Material Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Identify reasons to Q16-1 Q16-2 invest, and classify BE16-1 investments. Q16-3 Q16-4 BE16-2 E16-1 E16-2 2. Demonstrate the Q16-5 Q16-6 BE16-3 P16-2A accounting for debt Q16-7 BE16-4 P16-3A investments that BE16-5 P16-6A are reported at P16-1B E16-3 amortized cost. P16-2B E16-4 P16-3B E16-6 P16-1A P16-6B 3. Demonstrate the Q16-8 Q16-10 BE16-6 P16-3A accounting for fair Q16-9 Q16-11 BE16-7 P16-4A value investments. Q16-14 BE16-8 P16-5A BE16-9 P16-6A BE16-10 P16-7A P16-1B E16-7 E16-8 P16-3B P16-4B E16-9 E16-10 P16-5B P16-1A P16-6B P16-2A P16-7B 4. Explain how to Q16-16 Q16-12 BE16-11 P16-6A account for Q16-13 BE16-12 P16-7A strategic Q16-14 BE16-13 P16-8A investments and Q16-15 E16-11 P16-6B demonstrate the E16-12 P16-7B accounting for P16-8B strategic investments with significant influence. 5. Explain how Q16-17 Q16-19 BE16-14 P16-6A investments are Q16-18 BE16-15 P16-9A reported in the BE16-16 P16-10A financial E16-10 P16-1B statements. E16-12 P16-2B E16-13 P16-3B E16-14 P16-4B P16-1A P16-5B P16-2A P16-6B P16-3A P16-9B P16-4A P16-10B P16-5A Broadening Your BYP 16-1 BYP 16-4 BYP 16-2 Perspective BYP 16-5 BYP16-6 BYP 16-3
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ANSWERS TO QUESTIONS 1.
A corporation would purchase debt or equity securities of another corporation to provide a source of income (dividends and interest) from investing excess cash held by the business in the short term. The corporation might hope to sell the securities at a higher price than they originally paid for them and thereby generate some gains on the sale. Lastly, companies might buy common shares of another company as a strategic investment that will bring business advantages to the corporation.
2.
Non-strategic investments are made to earn investment income. Strategic investments are made to influence or control the operations of another company in some way.
3.
This is a strategic investment by Uram Mining Ltd. because the purpose of the investment is to secure for the investor a source for the necessary parts and supplies to keep their mining operations going.
4.
Fair value is the amount the investment can be sold for in the market and is usually established by an active stock or bond market for investments.
5.
The method of accounting for bonds depends on management’s intention when purchasing the bonds. If the bonds are purchased for holding for a short term and for trading, they are reported at fair value through profit or loss. On the other hand, if the bonds are purchased to earn interest revenue, they are reported at amortized cost.
6.
Reporting investments held to earn interest at amortized cost provides the users of financial statements more relevant information than if they were reported at fair value since these investments are held to earn interest income over long periods of time. It is not management’s intention to resell these investments at a gain and so the debt investments are best reported at amortized cost.
7.
A gain on sale of bond investment would be recorded when an investor sells a bond investment before maturity and the proceeds on the sale are greater than the amortized cost (carrying amount) of the bonds on the investors books. The opposite situation would require a loss on sale of bond investment. That is, if the investor sells the bond before maturity and the proceeds on the sale are less than the amortized cost (carrying amount) of the bonds.
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QUESTIONS (Continued) 8.
As far as measurement of the fair value of an investment, the amount arrived at will be the same under fair value through profit or loss or fair value through other comprehensive income. Where the adjustment to fair value is classified will be different. For fair value through profit or loss, any fair value adjustment recorded will be classified under other revenues or other expenses in the income statement. For investment adjustments to fair value under the fair value through other comprehensive income, the amounts recorded will be classified under other comprehensive income in the statement of comprehensive income.
9.
Non-strategic investments in debt or equity should be designated and classified as fair value through income or loss investments.
10.
Management would designate investments in equity securities as fair value through other comprehensive income when those investments are longterm and are going to be held and not sold. In this case, it may be inappropriate to affect a company’s profit with the gains and losses on fair value adjustments caused by market fluctuations. The fair value adjustment may; therefore, be kept out of profit, but instead reflected in other comprehensive income on the statement of comprehensive income.
11.
The journal entries involved in the purchase and sale of these investments should be to a dedicated account for financial reporting called FVTOCI Investments, which is the short form for the caption that will appear on the balance sheet: Fair value through other comprehensive income. Fair value adjustments will be recorded to temporary accounts called OCI—Gain on Fair Value Adjustment or OCI Loss on Fair Value Adjustments. These temporary accounts will be closed at the end of the fiscal year to the account Accumulated Other Comprehensive Income, which is a separate equity account.
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QUESTIONS (Continued) 12. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the associate. The general guideline for use of the equity method is more than 20% ownership interest. Companies are required to use judgement: however, rather than to blindly follow the 20% guideline. For example, 25% ownership in a company that is 75% controlled by another company would not necessarily indicate significant influence. Other factors involved in determining if an investor can exercise significant influence over its investee include: a) Does the investor have representation on the investee’s board of directors? b) Does the investor participate in the investee’s policy-making process? c) Are there material transactions between the investor and investee? d) Are the common shares that are held by other shareholders concentrated among a few investors or dispersed among many? 13. The equity method is used when an investor has significant influence over the affairs of an associate, its investee. Because management’s intent is to hold or possibly grow the investment over the long term, reporting at fair value would not be relevant to the financial statement users. Two transactions need to be recorded to the investment account each year. One is an increase by the percentage ownership times the amount of profit earned by the investee in the year. A decrease is recorded in the case of a loss. Since the value of the investment increases with the increase in the investee’s equity, it is appropriate to recognize a corresponding proportionate increase in the investment account. When debiting the Investment in Associate account, a credit to the Revenue from Investment in Associate will also be recorded. Similarly, dividends paid by the investee to the investor will cause the associate’s equity to decrease. Using the same logic, a dividend is treated as a return of investment. Dividends received from the associate will be credited to the Investment in Associate account.
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QUESTIONS (Continued) 14. Investments in associates differ from investments reported at cost or at fair value. Investments recorded at cost have no adjustments recorded to the investment account neither for any changes in the financial performance of the investee nor for any changes in the investment’s fair value. Investments accounted for using FVTPL or FVTOCI are adjusted to their market value at the end of each accounting period. Investments in associates are not purchased with the intention of receiving dividends or for realizing gains through the resale of the shares at a higher price. They usually involve a significant investment to acquire a high enough percentage in the associate. Because of the intention of management, it is more relevant for the financial statement users to be informed of the status of the investment, including increases for profits or decreases for losses, than to have a fair value determined by the stock market as would be the case for held for trading or fair value through other comprehensive income investments. 15.
(a) Under the cost model, the company’s initial investment is recorded at cost. That value does not change with the change in fair value, nor from the performance of the investee, nor from payment of dividends as is the case in the equity method. (b) Under the equity method, the investment is also recorded at cost on the day the investment is made. However, the investment account is increased or decreased by the investor’s share of the associate’s profit or loss for the period. The investing company would reduce the carrying value of its investment by any dividends received from the investee, since the value of the latter’s net assets decreases as it pays dividends. The investment account is not revalued to fair value at the balance sheet dates.
16. An investee is referred to as an associate in the case where significant influence is present over the associate by the investor. In order for the investee to be a subsidiary, the investor must control the investee by owning at least 50% plus one share of voting shares.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 17.17. Investment category Amortized cost
Fair value through profit or loss (FVTPL)
Fair value through other comprehensive income (FVTOCI)
Associate Subsidiary
Valuation method IFRS
Description
Non-strategic Amortized cost using A debt security held to the effective interest earn interest income. method Any investment in debt or Fair value; gains and equity that is not an losses included in amortized cost or profit or loss FVTOCI investment. Includes those investments held for trading purposes. Any equity investment Fair value; gains and that is designated by losses included in management to this other comprehensive category that is not held income for trading purposes. Strategic investments Strategic investment with Equity significant influence Strategic Investment with Consolidation control
Valuation method ASPE Amortized cost
Fair value; gains and losses included in profit or loss if security is actively traded on an organized exchange. N/A
FVTPL, or cost or equity method FVTPL or cost or equity or consolidation
18. (a) Investments held for trading are classified as current assets and reported at fair value. (b) Short-term debt investments purchased to earn interest are classified as current assets and reported at amortized cost. (c) Debt investments purchased to earn interest with maturities longer than 12 months are classified as long-term investments and reported at amortized cost. (d) Strategic investments accounted for using the equity method are classified as long-term investments. 19. Gains and losses on fair value adjustments of long-term strategic equity investments can be reported as other comprehensive income in the statement of comprehensive income if the investor is a public company following IFRS. If the strategic equity investment is going to be held and not sold, then it may be inappropriate to affect a company’s profit with the gains and losses on fair value adjustments caused by market fluctuations.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 (a) (b) (c) (d)
4. Long-term investments at amortized cost (AC) 1. Strategic investments 3. Short-term investments at fair value through profit or loss (FVTPL) 2. Non-strategic investments
BRIEF EXERCISE 16-2
1.
120-day treasury bill
2.
Common shares purchased by a bank for resale in the near future at a gain 15% of the common shares of a public company designated as FVTOCI Five-year bonds purchased by a company to hold and earn interest 10-year bonds purchased to sell in the near future at a gain
3.
4.
5.
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(a) Reason Nonstrategic Nonstrategic
(b) (c) Classification Valuation Current asset Amortized cost Current asset Fair value
Strategic
Non-current asset
Fair value
Nonstrategic
Non-current asset
Amortized cost
Nonstrategic
Current asset
Fair value
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BRIEF EXERCISE 16-3 (a) Dec. 2 Short-Term Investment at AC—Treasury Bill........................ 148,900 Cash ............................................. (b) Dec. 31 Short-Term Investment at AC—Treasury Bill ................... 275 Interest Revenue ......................... (c) Apr. 1 Short-Term Investment at AC—Treasury Bill ................... 825 Interest Revenue ......................... Cash ..................................................... 150,000 Short-Term Investment at AC—Treasury Bill ...................
148,900
275
825
150,000
BRIEF EXERCISE 16-4 (a) Jan. 1 Long-Term Investments at AC—Bonds 600,000 Cash .................................................. 600,000 (b) July 1 Cash ($600,000 × 4% × 6/12)................. 12,000 Interest Revenue .............................. 12,000 (c) Dec. 31 Interest Receivable ............................... 12,000 Interest Revenue .............................. 12,000 Since the bonds are held to earn interest income, there is no fair value adjustment at December 31.
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BRIEF EXERCISE 16-5 (a) June 30 Long-Term Investments at AC—Bonds ...................................297,000 Cash ($300,000 × .99)..................... 297,000 (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. Long-Term Investments at AC—Bonds ............................ Interest Revenue ............................
6,000 273 6,273
Since the bonds are being held to earned interest income, there is no fair value adjustment on December 31.
BRIEF EXERCISE 16-6 2017 July 1 Long-Term Investments at AC—Bonds .................................420,000 Cash................................................ 420,000
Dec. 31 Interest Receivable* ....................... 12,000 Long-Term Investments at AC—Bonds***
Interest Revenue** .................. *($400,000 x 6% x 6/12 = $12,000) **($420,000 x 5% x 6/12 = $10,500) ***($12,000 - $10,500 = $1,500)
1,500 10,500
2018 June 30 Cash ................................................ 24,000 Long-Term Investments at AC—Bonds
Interest Receivable ................. Interest Revenue .....................
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BRIEF EXERCISE 16-7 (a) June 30 Short-Term Investments at FVTPL—Bonds .........................297,000 Cash ($300,000 × .99)..................... 297,000 (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. Interest Revenue ............................ (c) Dec. 31 Loss on Fair Value Adjustment ......... Short-Term Investments at FVTPL—Bonds .................... (($300,000 × .98) – $297,000)
6,000 6,000
3,000 3,000
BRIEF EXERCISE 16-8 Aug.
1 Short-Term Investments at FVTPL—Equity .................... 114,000 Cash................................................
114,000
Oct. 15 Cash (3,000 × $2.75) ............................... 8,250 Dividend Revenue..........................
8,250
Dec.
1 Cash .................................................... 120,000 Short-Term Investments at FVTPL—Equity.................. Gain on Sale of FVTPL Investments
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BRIEF EXERCISE 16-9 Apr.
1 Long-Term Investments at FVTOCI—Equity ........................ Cash................................................ (40,000 x $15)
Dec. 15 Cash (40,000 × $0.10) ......................... Dividend Revenue..........................
600,000 600,000
4,000
Dec. 31 Long-Term Investments at FVTOCI— 80,000 Equity....................... OCI—Gain on Fair Value Adjustment [(40,000 x $17) - $600,000 = $80,000]
4,000
80,000
BRIEF EXERCISE 16-10 Jan. 15 Cash........................................................... 690,000 OCI—Gain on Sale of FVTOCI Investments 10,000 Long-Term Investments at FVTOCI—Equity ........................ 680,000
BRIEF EXERCISE 16-11 Jan. 1 Investment in Associate...................... 250,000 Cash .................................................
250,000
Dec. 31 Investment in Associate ........................ 44,000 Income from Investment in Associate (20% × $220,000) ......
44,000
Dec. 31 Cash (20% × $15,000) .............................. 3,000 Investment in Associate .................
3,000
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BRIEF EXERCISE 16-12 Jan. 1 Investment in Associate...................... 175,000 Cash .................................................
175,000
Dec. 31 Cash ($12,000 × 25%) .............................. 3,000 Dividend Revenue ...........................
3,000
BRIEF EXERCISE 16-13 (a) Equity Method Balance Sheet: Non-current assets Investment in Associate, Dong Ltd., at cost Investment in Associate, Dong Ltd., at equity Income Statement: Dividend revenue Income from investment in associate * Investment in Associate, at equity Less dividend (20% × $20,000) Add: associate’s profit (20% × $250,000) Carrying value of investment
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(b) Cost Method
$300,000 $346,000 * 0 $50,000
$4,000
$300,000 (4,000) 50,000 $346,000
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 16-14 ATWATER CORPORATION Statement of Comprehensive Income (Partial) Year Ended April 30, 2017 Profit from operations................................................ Other expenses Loss on fair value adjustment— FVTPL .............. Profit before income taxes ........................................ Income tax expense* .................................................. Profit............................................................................ Other comprehensive income Gain on fair value adjustment of investments, net of income tax of $24,769** ............................. Comprehensive income .............................................
$650,000 50,000 600,000 210,000 390,000
46,000 $436,000
*($600,000 x 35% = $210,000) ** ($46,000 ÷ (1-35%) = $70,769) tax is $70,769 x 35% = $24,769
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Chapter 16
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 16-15 Financial Statement
Classification
Short-term investments at FVTPL—bonds Balance Sheet
Current assets
Dividend revenue
Income Statement
Other revenue
Investment in associate
Balance Sheet
Long-term investments
Long-Term investments at AC— bonds
Balance Sheet
Long-term investments
Gain on sale of FVTPL investments
Income Statement
Other revenue
Other comprehensive income—gain on fair value adjustment
Statement of Comprehensive Income
Other comprehensive gains
Loss on fair value adjustment — FVTPL
Income Statement
Other expenses
Interest revenue
Income Statement
Other revenue
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Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 16-16 SABRE CORPORATION Balance Sheet (Partial) November 30, 2017 Assets Current assets Short-term investment at amortized cost—treasury bill .............................................. Short-term investments at fair value through profit or loss* ......................................................
$25,125 74,000 99,125
Non-Current assets Long-term investments at fair value through other comprehensive income—equity .............. 105,000 Long-term investments at amortized cost—bonds ........................................................ 150,000 Investment in associate ............................................... 250,000 505,000 *($26,000 + $48,000) = $74,000
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Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 16-1 1.
2.
3.
4.
5.
15% of the common shares of Lewis Telecommunications Inc. 100% of 15-year bonds of Li Internet Ltd.
Strategic investment Management’s intention is to influence the operations of Lewis Telecommunications. Non-Strategic investment The purpose is to generate investment income. Since the investment is in bonds, influence on the operations of Li Internet Ltd. cannot be exercised. Strategic investment 95% of the common shares of Barlow The percentage of ownership Internet Services Inc. gives Awisse Telecommunications control over the operations of Barlow. 120-day treasury bill Non-Strategic investment The investment does not consist of common shares and the intention is to generate interest income. 10% of the common Non-Strategic investment shares of Talk to Us The investment was made with Ltd. the intention to generate gains from trading the investment.
Solutions Manual .
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Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 16-2 1.
10-year BCE bonds
2.
10-year GE bonds
3.
One-year Government of Canada bonds 180-day treasury bill
4. 5. 6. 7. 8.
*
Bank of Montreal preferred shares Loblaw common shares Pizzutto Holdings common shares Kesha Inc., common shares – 22% interest *
(a) Nonstrategic Nonstrategic Nonstrategic Nonstrategic Nonstrategic Nonstrategic Strategic
(b) (c) Amortized cost Noncurrent NonFair value current Current Amortized cost Current Amortized cost Current Fair value Current Fair value
Noncurrent Strategic Noncurrent
N/A (consolidated) Equity method
Assume exercise significant influence and have quoted market price (if no quoted market price, must use cost method under ASPE).
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Chapter 16
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-3 (a) Jan.
2 Short-Term Investment at AC—Treasury Bills ...................... 39,760 Cash...............................................
39,760
1 Cash ...................................................... 40,000 Short-Term Investment at AC—Treasury Bills................... Interest Revenue ...........................
39,760 240
1 Short-Term Investment—Money Market Fund ................................... Cash...............................................
65,000 65,000
31 Short-Term Investment—Money Market Fund ................................... Interest Revenue ...........................
163
Sept. 30 Short-Term Investment—Money Market Fund ................................... Interest Revenue ...........................
163
May
Aug.
Oct.
1 Short-Term Investments at AC— Treasury Bills .................... Cash...............................................
163
163
29,821 29,821
15 Cash ................................................... 65,408 Interest Revenue ........................... Short-Term Investments—Money Market Fund* ............................ *($65,000 + $163 + $163) (b) Oct. 31 Short-Term Investments at AC—Treasury Bills* ...................... Interest Revenue ........................... * ($29,821 x 2.4% x 1/12)
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82 65,326
60 60
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-4 (a) (1) Imperial (investor) July 1 Long-Term Investments at AC—Bonds .................................... 461,000 Cash................................................ 461,000 (2) Acme (investee) July 1 Cash ........................................................ 461,000 Bonds Payable ............................... 461,000 (b) (1) Imperial (investor) Dec. 31 Interest Receivable 10,000 ($500,000 × 4% × 6/12)........................ 1,525 Long-Term Investments at AC—Bonds 11,525 Interest Revenue ........................... ($461,000 × 5% × 6/12) (2) Acme (investee) Dec. 31 Interest Expense................................. Bonds Payable ............................... Interest Payable ............................. (c) (1) Imperial (investor) Jan. 1 Cash .................................................... Interest Receivable ........................ (2) Acme (investee) Jan. 1 Interest Payable.................................. Cash................................................
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11,525 1,525 10,000
10,000 10,000
10,000 10,000
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 16-5 (a)
The carrying value at April 1, 2017 of $418,444 is higher than the face or maturity value of $400,000, which indicates that the bonds were purchased at a premium.
(b) $400,000, as given in the description of the bonds. (c)
The bonds’ amortized cost will be $400,000 at the maturity date.
(d) Contractual interest rate = 4% $8,000 ÷ $400,000 = 2% semi-annually; 2% × 2 = 4% annually Market interest rate = 3% $6,277 ÷ $418,444 = 1.5% semi-annually; 1.5% × 2 = 3% annually (e) 2017 Apr. 1 Long-Term Investments at AC—Bonds .................................... 418,444 Cash................................................ 418,444 Oct. 1
Cash .................................................... Long-Term Investments at AC—Bonds ............................. Interest Revenue..........................
2018 Mar. 31 Interest Receivable............................. Long-Term Investments at AC—Bonds ............................. Interest Revenue.......................... Apr. 1
Solutions Manual .
Cash .................................................... Interest Receivable ......................
16-23
8,000 1,723 6,277 8,000 1,749 6,251 8,000 8,000
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 16-6 (a) 2017 Jan. 1 Long-Term Investments at AC—Bonds ................................ 135,666 Cash ....................................................
135,666
July 1 Cash ($120,000 × 7% × 6/12) .................... 4,200 Long-Term Investments at AC—Bonds Interest Revenue ($135,666 x 5% x 6/12)
808 3,392
Dec. 31 Interest Receivable ................................... 4,200 Long-Term Investments at AC—Bonds Interest Revenue ................................ [($135,666 - $808) x 5% x 6/12] = $3,371 2018 Jan. 1 Cash .......................................................... 4,200 Interest Receivable ............................ July 1 Cash .......................................................... 4,200 Long-Term Investments at AC—Bonds Interest Revenue ................................ [($135,666 - $808 - $829) x 5% x 6/12] = $3,351 July 2 Cash ...................................................... 131,000 Loss on Sale of Bond Investments ......... 2,180 Long-Term Investments at AC—Bonds
829 3,371
4,200 849 3,351
133,180
(b) Purchase price of bonds Jan. 1, 2017 $135,666 Amortization of bond premium July 1, 2017 (808) Amortization of bond premium Dec. 31, 2017 (829) Balance of investments in bonds Dec. 31, 2017 $134,029
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Chapter 16
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-7 (a) 2017 Aug. 1
Short-Term Investments at FVTPL—Bonds .............................100,000 Cash................................................ 100,000
(b) Dec. 31 Interest Receivable............................. Interest Revenue ............................ ($100,000 x 7% x 5/12)
2,917 2,917
Dec. 31 Short-Term Investments at FVTPL—Bonds ......................... 1,000 Gain on Fair Value Adjustment—FVTPL
1,000
(c) The investment would be reported in Chen’s balance sheet as Fair value through profit or loss investments of $101,000 under current assets. (d) 2018 Jan. 31
Cash ($100,000 x 7% x 6/12) .............. Interest Receivable ........................ Interest Revenue ...........................
3,500 2,917 583
(e) 2018 Feb. 1
Solutions Manual .
Cash ....................................................... 102,000 1,000 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL—Bonds ................... 101,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-8 2017 Sept. 28 Short-Term Investments at FVTPL—Equity ......................... 140,000 Cash (3,500 × $40)........................... 140,000 Oct.
1 Short-Term Investments at FVTPL— 300,000 Bonds .......................... Cash................................................. 300,000
Nov. 12 Cash (1,900 × $42) ............................... 79,800 Short-Term Investments at ............ FVTPL—Equity .......................... Gain on Sale of FVTPL Investments *($140,000 ÷ 3,500 × 1,900) Dec.
1 Cash [(3,500 – 1,900) × $1.50] ............. Dividend Revenue...........................
2,400
31 Interest Receivable.............................. Interest Revenue ($300,000 × 4% × 3/12) ....................
3,000
31 Short-Term Investments at FVTPL— Bonds*.......................... Loss on Fair Value Adjustment –FVTPL ........................................ Short-Term Investments at FVTPL—Equity [(3,500 – 1,900) × ($40 – $38)]……… *(($300,000 × 1.01) – $300,000)
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16-26
76,000 3,800
2,400
3,000
3,000 200
3,200
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 16-8 (Continued) 2018 Mar. 31 Cash (1,600 × $40) ............................... 64,000 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL–Equity (1,600 × $38)....... Apr.
3,200 60,800
1 Cash ($300,000 × 4% × 6/12) .................. 6,000 Interest Receivable ............................ Interest Revenue ................................
3,000 3,000
1 Cash ($300,000 × 4% × 6/12) .................. 6,000 Interest Revenue ................................
6,000
Dec. 31 Interest Receivable................................. 3,000 Interest Revenue ($300,000 × 4% × 3/12) .......................
3,000
Oct.
31 Short-Term Investments 3,000 at FVTPL—Bonds*...................... Gain on Fair Value Adjustment—FVTPL *(($300,000 × 1.02) – $303,000)
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3,000
Chapter 16
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-9 (a)
The cash amount received on the sale of the investment is the carrying value of the investment sold of $4,000 less the loss on sale of the FVTPL investment of $3,000 which is equal to $1,000.
(b) 2017 Dec. 31 Cash ......................................................... Loss on Sale of FVTPL Investments ...... Short-Term Investments at FVTPL—Equity..........................
1,000 3,000 4,000
Dec. 31 Short-Term Investments at FVTPL—Equity ........................... 2,500 Gain on Fair Value Adjustment—FVTPL
2,500
(c) Short-Term Investments at FVTPL—Equity Dec.31, 2016 Dec. 31, 2017 Purchases Dec.31, 2017 (d)
11,000 2,500 5,500* 15,000
Dec. 31, 2017
Short-Term Investments at FVTPL—Equity ........................... Cash.................................................
4,000
5,500 5,500
*($11,000+$2,500)-$4,000 = $9,500 $15,000 - $9,500 = $5,500
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Chapter 16
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-10 (a) Dec. 31 Loss on Fair Value Adjustment—FVTPL OCI—Loss on Fair Value Adjustment .. Short-Term Investments at FVTPL—Equity ..................... Long-Term Investments at FVTOCI—Equity ........................ (b) YANIK INC. Balance Sheet (Partial) December 31, 2017
1,000 4,000 1,000 4,000
Current assets Short-term investments at fair value through..... profit or loss—equity ........................................ $30,000 Non-Current assets Long-term investments at fair value through other comprehensive income—equity ............... 19,000 YANIK INC. Comprehensive Income Statement (Partial) Year Ended December 31, 2017 Other expenses Loss on fair value adjustment—FVTPL ................... $1,000 Other comprehensive income Loss on fair value adjustment ................................. $4,000 (c) 2018 Mar. 20 Cash .......................................................... 13,500 Loss on Sale of FVTPL Investments .... 500 Short-Term Investments at FVTPL—Equity ........................... 14,000
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Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 16-11 (a) 2017 Jan.
2 Investment in Associate ........................ 216,000 Cash (30,000 × 40% × $18) .............. 216,000
June 15 Cash ($30,000 × 40%) ............................... 12,000 Investment in Associate.................. 12,000 Dec. 31 Investment in Associate ........................ 152,000 Income from Investment in Associate ($380,000 × 40%) ........ 152,000 (b) Investment in Associate Jan. 2, 2017 Dec. 31, 2017 Dec.31, 2017
Solutions Manual .
216,000 June 15, 2017 12,000 152,000 356,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-12 (a) Jan.
1 Investment in Associate ..................... 480,000 Cash .............................................. 480,000
Dec. 31 Cash ($35,000 × 25%) .......................... Investment in Associate...............
8,750
Dec. 31 Investment in Associate ..................... Income from Investment in Associate ($280,000 × 25%) ......
70,000
(b)
(c) Jan.
8,750
70,000
Balance Sheet Non-current assets Investment in associate ($480,000 – $8,750 + $70,000) ...............
$541,250
Income Statement Other revenue Income from investment in associate
$70,000
1 Investment in Associate ....................... 480,000 Cash .............................................. 480,000
Dec. 31 Cash ($35,000 × 25%) .......................... Dividend Revenue ........................
8,750 8,750
Balance Sheet Non-current assets Investment in associate ........................
$480,000
Income Statement Other revenue Dividend revenue ..............................
$8,750
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Chapter 16
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-13 NEW BAY INC. Balance Sheet December 31, 2017 Assets Current assets Cash........................................................................... $ 22,000 Short-term investments at fair value through profit or loss—equity ............................. 48,500 Accounts receivable ...................................... $60,000 Less: Allowance for doubtful accounts ... 10,000 50,000 Interest receivable .................................................... 1,500 Total current assets ............................................. 122,000 Non-Current assets Long-term investments at fair value through other comprehensive income—equity ........................ 25,000 Note receivable, 5%, due April 21, 2020 .................. 60,000 Long-term investments at amortized cost—bonds 180,000 Investment in associate ........................................... 55,000 Equipment 66,000 Less: Accumulated depreciation ............... 40,000 26,000 Total non-current assets ....................... 346,000 Total assets ..............................................................$ 468,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 16-13 (Continued) NEW BAY INC. Balance Sheet (Continued) December 31, 2017 Liabilities and Shareholders' Equity Current liabilities Accounts payable ..................................................... Interest payable ........................................................ Total current liabilities ......................................... Long-term liabilities Bonds payable, 8%, due 2019 .................................. Total liabilities ...................................................... Shareholders' equity Common shares, no par value, unlimited shares authorized, 10,000 shares issued ...................................................................... Retained earnings..................................................... Accumulated other comprehensive income ........... Total shareholders' equity ................................... Total liabilities and shareholders' equity ...........
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$ 35,000 18,000 53,000 268,000 321,000
100,000 45,000 2,000 147,000 $468,000
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 16-14 (a)
Oakridge uses IFRS. Other Comprehensive Income account does not exist under ASPE.
(b) OAKRIDGE LTD. Statement of Comprehensive Income (Partial) Year Ended December 31, 2017 Profit from operations ......................................................... $125,000 Other revenue Interest revenue .................................................. $5,000 Gain on sale of fair value through profit or loss investments ..................................... 1,500 6,500 131,500 Other expenses Interest expense .............................................. 8,000 Loss on fair value adjustment—FVTPL ........ 7,500 15,500 Profit before income tax ....................................................... 116,000 Income tax ($116,000 × 30%) ............................................. 34,800 Profit................................................................................... 81,200 Other comprehensive income: Gain on fair value adjustment (net of $900 income tax)* 2,100 Comprehensive income ........................................................ $83,300 * [$3,000 – ($3,000 × 30%)]
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 16-1A (a) Jan. 1 Short-Term Investment at AC— Treasury Bill ..................................... 98,039 Cash ...................................................
98,039
June 30 Cash ........................................................ 100,000 Interest Revenue ............................... Short-Term Investment at AC— Treasury Bill .........................
98,039
July 5 Short-Term Investment—Money Market Fund............................................. 25,000 Cash ...................................................
25,000
Oct.
1,961
1 Cash .......................................................... 25,185 Short-Term Investment—Money Market Fund .................................... Interest Revenue ...............................
25,000 185
1 Short-Term Investment— Term Deposit .................................... 75,000 Cash ...................................................
75,000
Dec. 31 Interest Receivable ($75,000 × 3% × 3/12) Interest Revenue .................................
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563 563
Chapter 16
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Accounting Principles, Seventh Canadian Edition
PROBLEM 16-1A (Continued) (b) LIU CORPORATION Partial Balance Sheet December 31, 2017 Current assets Interest receivable...................................................... $ 563 Short-term investment—term deposit .......................... 75,000
LIU CORPORATION Income Statement (Partial) Year Ended December 31, 2017 Other revenue Interest revenue ($1,961 + $185 + $563) ........................... $2,709
Taking It Further: Interest earned ($100,000 – $98,039) Principal Annual rate ($1,961 ÷ $98,039) × 12/6
Solutions Manual .
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$1,961 $98,039 4.0%
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 16-2A 2017: (a) Jan. 1 Long-Term Investments at AC—Bonds ......................... 627,660 Cash ......................................... (b) Jul. 1 Cash ($600,000 × 4% × 6/12) ............ 12,000 Long-Term Investments at AC—Bonds ..................... Interest Revenue ..................... ($627,660 × 3% × 6/12) (c) Dec. 31 Interest Receivable .......................... 12,000 Long-Term Investments at AC—Bonds ....................... Interest Revenue ..................... [($627,660 – $2,585) × 3% × 6/12]
627,660
2,585 9,415
2,624 9,376
(d) MORRISON INC. Partial Balance Sheet December 31, 2017 Non-current assets Long-term investments at amortized cost—bonds ($627,660 – $2,585 – $2,624)
(e) 2018: Jan. 1 Cash ...................................................... 12,000 Interest Receivable..................
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$622,451
12,000
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 16-2A (Continued) (f) 2022: Jan. 1 Cash .................................................... 600,000 Long-Term Investments at AC—Bonds..................
600,000
(g) 2017: Jan. 1 Short-Term Investments at FVTPL—Bonds ............................... 627,660 Cash ......................................... Jul.
1 Cash ($600,000 × 4% × 6/12) ............ Short-Term Investments at FVTPL—Bonds ................... Interest Revenue ..................... ($627,660 × 3% × 6/12)
12,000
Dec. 31 Interest Receivable ........................... 12,000 Short-Term Investments at FVTPL—Bonds ................... Interest Revenue ..................... [($627,660 – $2,585) × 3% × 6/12] Dec. 31 Loss on Fair Value Adjustment —FVTPL .............................................. *2,451 Short-Term Investments at FVTPL—Bonds ...................... Fair value adjustment: Carrying value of bond, January 1 Amortization of premium, July 1 Amortization of premium, Dec. 31 Carrying value of bond, Dec. 31 Fair value of bond, Dec.31 Fair value adjustment (loss), Dec. 31 Solutions Manual .
16-38
627,660
2,585 9,415
2,624 9,376
2,451
$627,660 (2,585) (2,624) 622,451 (620,000) $ 2,451* Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 16-2A (Continued)
Taking It Further: The market rate of interest was 3.108% per year. The interest calculated below of 1.554% × 2 for the semi-annual interest payments. Using a financial calculator: PV $ (620,000) I/Y ? Yields 1.554% N 8 PMT $12,000 FV $600,000 Type 0
Solutions Manual .
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Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 16-3A (a) Finance Company paid $959,400 for the Power bonds purchased $4,797,000 ÷ 5 = $959,400 or ($5,000,000 ÷ $4,797,000 = 0.9594), and ($1,000,000 × 0.9594) = $959,400 (b) 2017 – Finance Company Jan. 1 Long-Term Investments at AC—Bonds ............................... 959,400 Cash .......................................
959,400
(c) Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 7% Bonds Issued at market rate of 8% Date
Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019
Solutions Manual .
(A) (B) (C) Interest Interest Received Revenue Discount $1,000,000 × (D) × 8% × Amortization 7% × 6/12 6/12 (B) – (A) $35,000 35,000 35,000 35,000
$38,376 38,511 38,651 38,798
16-40
$3,376 3,511 3,651 3,798
(D) Bond Amortized Cost (D) + (C) $959,400 962,776 966,287 969,938 973,736
Chapter 16
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Accounting Principles, Seventh Canadian Edition
PROBLEM 16-3A (Continued) (d) 2017 – Finance Company July 1 Cash ........................................... Long-term investments at AC—Bonds ................................... Interest Revenue ...................
35,000 3,376 38,376
Dec. 31 Interest Receivable .................... Long-term investments at AC—Bonds .................................. Interest Revenue ................... 2018 – Finance Company Jan. 1 Cash ........................................... Interest Receivable ...............
35,000 3,511 38,511
35,000 35,000
(e) FINANCE COMPANY Balance Sheet (Partial) December 31, 2017 Non-current assets Long-term investments at amortized cost—bonds
$966,287
FINANCE COMPANY Income Statement (Partial) Year Ended December 31, 2017 Other revenues Interest revenue ($38,376 + $38,511) .......................
$76,887
(f) 2017 – Power Ltd. Jan. 1 Cash ............................................... 4,797,000 Bonds Payable ......................
4,797,000
Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 16-3A (Continued) (g) 2017 – Power Ltd. Jul. 1 Interest Expense ($38,376 × 5).. Bonds Payable ($3,376 × 5) .. Cash ($5,000,000 × 7% × 6/12) ....... Dec. 31 Interest Expense ($38,511 × 5).. Bonds Payable ($3,511 × 5) .. Interest Payable ($5,000,000 × 7% × 6/12) ....... 2018 – Power Ltd. Jan. 1 Interest Payable ......................... Cash .......................................
191,880 16,880 175,000 192,555 17,555 175,000
175,000 175,000
(h) POWER LTD. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable .......................................................
$175,000
Non-current liabilities Bonds payable, 8%, due 2022 ................................... $4,831,435* *($966,287 × 5) POWER LTD. Income Statement (Partial) Year Ended December 31, 2017 Other expenses Interest expense [($38,376 + $38,511) × 5] ..............
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$384,435
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 16-3A (Continued)
Taking It Further: Cash received for interest $35,000 x 10 Cash received at maturity January 1, 2022 Total cash inflows
Solutions Manual .
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$350,000 1,000,000 $1,350,000
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 16-4A (a) Feb. 1 Short-Term Investments at FVTPL—Equity .............................. 25,300 Cash ...................................................
25,300
Mar. 1 Short-Term Investments at FVTPL—Equity .............................. 48,000 Cash ...................................................
48,000
Apr. 1 Short-Term Investments at FVTPL—Bonds .............................. 200,000 Cash ................................................... 200,000 July 1 Cash (575 × $1.50) ................................. Dividend Revenue .............................
863 863
Aug. 1 Cash (250 × $48) .................................... 12,000 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL—Equity .............................. [($25,300 575) × 250] Oct.
1 Cash ($200,000 × 3% × 6/12) ................. Interest Revenue ...............................
1,000 11,000
3,000 3,000
1 Cash ........................................................ 205,000 Gain on Sale of FVTPL Investments 5,000 Short-Term Investments at FVTPL—Bonds............................. 200,000
Solutions Manual .
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Accounting Principles, Seventh Canadian Edition
PROBLEM 16-4A (Continued) (a) (Continued) Dec. 31 Loss on Fair Value Adjustment—FVTPL 4,050 Short-Term Investments at FVTPL—Equity($62,300 – $58,250) Common Shares IBF Raimundo
Cost $14,300* 48,000 $62,300 * $25,300 – $11,000
(b)
Fair Value $16,250 42,000 $58,250
4,050
(325 × $50) (1,500 × $28)
RAKAI CORPORATION Balance Sheet (Partial) December 31, 2017 Current assets Short-term investments at fair value through profit or loss—equity................................ $58,250
RAKAI CORPORATION Income Statement (Partial) Year Ended December 31, 2017 Other revenue Interest revenue .................................. Dividend revenue ................................ Gain on sale of fair value through profit or loss investments ............... Other expenses Loss on fair value adjustment—FVTPL
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$3,000 863 5,000
$8,863
4,050
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PROBLEM 16-4A (Continued)
Taking It Further: If the company needs cash in the near future, it is usually not recommended to invest in equity securities. Equity securities tend to fluctuate suddenly and dramatically, when compared to fixed income investments. The principal amount invested may not be fully recovered. Money-market instruments are recommended because they are low-risk and highly liquid.
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PROBLEM 16-5A (a) FINANCIAL HOLDINGS Balance Sheet (Partial) December 31, 2016 Current assets Short-term investments at fair value through profit or loss—equity ...................................................... $38,000 (b) 2017 Jan. 15 Long-Term Investments at FVTOCI—Equity ............................ 22,500 Cash (1,500 × $15) ............................
22,500
Mar. 20 Cash ....................................................... 3,000 Dividend Revenue (2,000 × $1.50)....
3,000
June 15 Cash (750 × $15.75) ............................... 11,813 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL—Equity .......................... ($13,500 ÷ 1,000 × 750) Aug. 5 Cash ....................................................... Dividend Revenue (250 × $2.50).......
1,688 10,125
625 625
Oct. 15 No entry is necessary for the stock split. The number of shares held is now doubled to 3,000 (1,500 × 2), at a carrying amount of $7.50 per share ($22,500 ÷ 3,000).
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PROBLEM 16-5A (Continued) (b) (Continued) Number of Shares Market Price $16.00 250 13.75 2,000
Sabo PYK Total * $13,500 – $10,125 = $3,375 Hazmi
$7.00
3,000
Carrying Amount $ 3,375* 24,500 $27,875
Fair Value $4,000 27,500 $31,500
$22,500
$ 21,000
Dec. 31 Short-Term Investments at FVTPL—Equity ............................. 3,625 Gain on Fair Value Adjustment—FVTPL ($31,500 – $27,875)...........................
3,625
Dec. 31 OCI—Loss on Fair Value Adjustment .. 1,500 Long-Term Investments at FVTOCI—Equity ($22,500 – $21,000)
1,500
(c) FINANCIAL HOLDINGS Income Statement (Partial) Year Ended December 31, 2017 Other revenue Dividend revenue ................................ Gain on fair value adjustment - FVTPL Gain on sale of fair value through profit or loss investments ...............
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$3,625 3,625 1,688 $8,938
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PROBLEM 16-5A (Continued) (c) (Continued) FINANCIAL HOLDINGS Statement of Comprehensive Income (Partial) Year Ended December 31, 2017
Other comprehensive income: Loss on fair value adjustment (net of tax)
$1,500
Taking It Further: 750 Sabo common shares cost ($15,000 x 750 ÷ 1,000)
$11,250
Loss on fair value adjustment—FVTPL Dec. 31, 2016 ($1,500 x 750 ÷ 1,000) .......................... Gain on Sale of FVTPL Investments June 15, 2017 Net profit .........................................................
$(1,125) 1,688 $563
Profit as a percentage of cost ...........................
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5%
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PROBLEM 16-6A
Balance Sheet
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
Assets + + NE (+/–) + + NE (+/–) +(+/–) – (+/–) + NE + + NE
Liabilities NE NE NE NE NE NE NE NE NE NE NE NE NE NE
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Income Statement
Shareholders’ Equity + + NE + + NE + + NE + + NE
16-50 .
Revenues Expenses and and Gains Losses + NE + NE NE NE + NE + NE NE NE + NE NE NE + NE NE NE NE NE NE + + NE NE NE
Profit + + NE + + NE + NE + NE NE + NE
Statement of Comprehensive Income Other Comprehensive Income NE NE NE NE NE NE NE NE NE + NE NE NE
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Accounting Principles, Seventh Canadian Edition
PROBLEM 16-6A (Continued)
Taking It Further: If Corded Industries Ltd. is a private company reporting using ASPE, there is no Other Comprehensive Income. Therefore, transaction #8 would be affected. The loss from the sale of the fair value through other comprehensive income investment in Cedarshakes would instead be reported as a loss in the income statement. As well, transaction #11 would be affected. Corded’s investment in Cedarshakes’s common shares would be reported at fair value in its balance sheet and the gain on the fair value adjustment would be reported in the income statement if a quoted market price is available or at cost if none is available. Corded would also have a choice in the way in which it accounts for investment with significant influence in Diane’s Cosmetics Inc. It could account for the investment using the equity method as given, but could also account for the investment at fair value if the shares’ quoted market price is readily available or at cost if the shares’ quoted market price is not readily available.
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PROBLEM 16-7A (a)
Kang purchased 30,000 shares [($1,320,000 – $120,000) ÷ $40].
(b)
Kang owns 25% (30,000 ÷ 120,000) of Sandhu shares.
(c)
The cash dividend per share was $3.00 ($90,000 ÷ 30,000 shares).
(d)
The fair value per share was $44 ($1,320,000 ÷ 30,000).
(e)
Because Kang can exercise significant influence over the Sandhu Ltd., the equity method will be used to account for the long-term investment. Accordingly, the investment account will be increased for the acquisition of shares and for Kang‘s share of Sandhu’s profits for the year that it held the investment in Sandhu. The investment account will be decreased when Sandhu pays dividends. Accordingly, the investment account contains the following: Investment in Sandhu Ltd. (30,000 shares × $40) Less: cash dividends received Plus: 25% of Sandhu Ltd.’s earnings for the year that the investment was owned (derived) Balance of investment, December 31, 2017
$1,200,000 (90,000) 1,110,000 290,000 $1,400,000
If $290,000 is 25% of Sandhu’s income for the year, then the Sandhu Ltd. must have earned $1,160,000 throughout the year ($290,000 ÷ 25%).
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PROBLEM 16-7A (Continued) (f)
Under the equity method, Kang would report its share of Sandhu Ltd.’s profits as follows: KANG INC. Income Statement (Partial) Year Ended December 31, 2017 Other revenues Income from investment in associate .........
(g)
$290,000
Under the cost model, Kang would report only the dividends received as revenues as follows: KANG INC. Income Statement (Partial) Year Ended December 31, 2017 Other revenues Dividend revenue..........................................
$90,000
Taking It Further: The potential advantages of having significant influence over another company include: a) The investor’s ability to secure a relationship with the associate as an essential source of supply for a key raw material in a manufacturing process. b) The investor’s ability to secure a relationship with the associate as a key customer. c) The investor and associate could exchange key management personnel for their mutual benefit. d) The investor could provide its associate with key technological information that will help the associate become more profitable and the investment more lucrative for the investor.
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PROBLEM 16-8A (a)
The presence of significant influence is not a matter of what percentage ownership one business has of another, but rather it is based on the investor’s ability to participate in the associate’s operating and policy decisions. In this case, this influence has been exercised. The owner of the shares, Neitzche Company, is a customer of the Associate, Triple Titanium, and holds two of the ten board of directors positions.
(b) Jan. 1 Investment in Associate......................... 525,000 Cash ................................................... 525,000 Cash ($65,000 x 35%) ............................... 22,750 Investment in Associate ...................
22,750
Investment in Associate......................... 105,000 Income from Investment in Associate ($300,000 x 35%)........... 105,000 (c) Cash ($80,000 x 35%) ............................... 28,000 Investment in Associate ...................
28,000
Investment in Associate........................... 84,000 Income from Investment in Associate ($240,000 x 35%)...........
84,000
(d) Beginning balance ......................... Purchase of shares ....................... Less dividends received................ Share of income of associate........ Ending balance ..............................
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2017 2018 0 $607,250 $525,000 (22,750) (28,000) 105,000 84,000 $607,250 $663,250
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PROBLEM 16-8A (Continued) (e) NEITZCHE COMPANY Balance Sheet (Partial) December 31, 2017
Non-current assets Investment in associate ............................................... $607,250 NEITZCHE COMPANY Income Statement (Partial) Year Ended December 31, 2017 Other revenues Income from investment in associate ...............
$105,000
Taking It Further: If Neitzche Company were to purchase an additional 30% of the common shares of Triple Titanium it would have control over the company since it would own well over half of the shares issued, with a total 65% ownership interest. In this case the operations of Triple Titanium would be consolidated with those of Neitzche for financial reporting purposes.
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PROBLEM 16-9A (a) SILVER LINING CORPORATION Income Statement Year ended September 30, 2017 (in millions) Silver sales Cost of sales Gross profit Operating expenses Profit from operations Other revenue Dividend revenue Interest revenue
$3,350 2,214 1,136 639 497 $6 38
Other expenses Loss from investment in associate Loss on fair value adjustment—FVTPL Interest expense Income before income tax Income tax expense Profit
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6 27 7
44 541
40 501 60 $ 441
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PROBLEM 16-9A (Continued) (a) (Continued) SILVER LINING CORPORATION Statement of Comprehensive Income Year ended September 30, 2017 (in millions) Profit Other comprehensive income Gain on fair value adjustment (net of tax of $5) Comprehensive income
(b)
Accumulated other comprehensive income ($49 + $12)
$441 12 $453
$61 million
Taking It Further: Standard setters are concerned about the manipulation of profit through reclassifications. The classification of investments is based on management’s intention at the time the investment is purchased.
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PROBLEM 16-10A STINSON CORPORATION Statement of Comprehensive Income Year Ended April 30, 2017 Service revenue ................................................................. $550,000 Operating expenses Salaries expense........................................... $235,000 Rent expense ............................................. 79,000 Depreciation expense................................ 27,500 341,500 Profit from operations ......................................................... 208,500 Other revenues Dividend revenue ....................................... 11,000 Gain on sale of fair value through profit or loss investments ................................ 3,000 Gain on fair value adjustment—FVTPL .... 1,500 Interest revenue ......................................... 3,360 18,860 227,360 Other expenses Loss on fair value adjustment—FVTPL.... 1,500 Interest expense ........................................ 7,500 9,000 Profit before tax ................................................................... 218,360 Income tax expense ........................................................... 82,860 Profit..................................................................................... 135,500 Other comprehensive income Loss on fair value adjustment, net of $3,600 tax ....... 12,000 Comprehensive income .................................................... $123,500
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PROBLEM 16-10A (Continued) STINSON CORPORATION Balance Sheet April 30, 2017 Assets Current assets Cash............................................................................. $ 100,480 Short-term investments at fair value through profit or loss ........................................................... 76,000* Accounts receivable ................................................... 48,000 Interest receivable ......................................................... 1,680 Total current assets ................................................... 226,160 Non-current assets Long-term investments Long-term investments at fair value through other comprehensive income, equity $220,000 Investment in associate ................................ 170,000 Long-term investments at amortized cost, bonds ............................................. 24,000 Total investments ....................................................... 414,000 Property, plant, and equipment Equipment ...................................................... 275,000 Less: Accumulated depreciation ................ 72,000 203,000 Total assets ................................................................... $843,160 * ($15,000 + $61,000 = $76,000)
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PROBLEM 16-10A (Continued) STINSON CORPORATION Balance Sheet (Continued) April 30, 2017 Liabilities and Shareholders' Equity Current liabilities Accounts payable ...................................................... $ 65,000 Income tax payable ..................................................... 25,000 Total current liabilities .......................................... 90,000 Long-term liabilities Bonds payable, due 2021 ............................................ 150,000 Total liabilities ......................................................... 240,000 Shareholders' equity Share capital Common shares, no par value, unlimited authorized, 200,000 shares issued ..................................................... Retained earnings* ................................................... Accumulated other comprehensive income** Total shareholders' equity .................................... Total liabilities and shareholders' equity ............
300,000 297,160 6,000 603,160 $843,160
* $161,660 + $135,500 Profit = $297,160 ** $18,000 – $12,000 = $6,000
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PROBLEM 16-10A (Continued)
Taking It Further:
Return on equity
=
$135,500 ($603,160 + $510,400) ÷ 2
=
24.34%
Given that Stinson’s return on equity is 24.34% and the industry average is 18%, we can conclude that Stinson’s operating performance is excellent.
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PROBLEM 16-1B (a) Feb. 1 Short-Term Investment— Term Deposit ...................................... 50,000 Cash .................................................
50,000
Aug. 1 Cash ....................................................... 51,250 Short-Term Investment— Term Deposit ............................... Interest Revenue .............................
50,000 1,250
Aug. 1 Short-Term Investment— Money Market Fund.......................... 55,000 Cash .................................................
55,000
Dec. 1 Cash ..................................................... 55,735 Short-Term Investment— Money Market Fund .................... Interest Revenue .............................
55,000 735
1 Short-Term Investment at AC— Treasury Bill........................................ 99,260 Cash .................................................
99,260
31 Short-Term Investment at AC— Treasury Bill ($99,508 – $99,260)..... Interest Revenue .............................
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PROBLEM 16-2B (Continued) (b) LANNAN CORP. Partial Balance Sheet (Partial) December 31, 2017 Current assets Short-term investment at amortized cost —treasury bill ............................................................... $99,508
LANNAN CORPORATION Income Statement (Partial) Year Ended December 31, 2017 Other revenue Interest revenue ($1,250 + $735 + $248) ........................... $2,233
Taking it Further: Interest earned (February 1 to August 1)—6 months $1,250 Principal $50,000 Annual Rate ($1,250 ÷ $50,000) × 2 5.0%
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PROBLEM 16-2B 2017: (a) July 1
Long-Term Investments at AC— 275,400 Bonds................................. Cash ($300,000 × .918) ............
(b) Dec. 31 Interest Receivable ($300,000 × 3% × 6/12) ................. Long-Term Investments at AC—Bonds ........................... Interest Revenue ...................... ($275,400 × 4% × 6/12)
275,400
4,500 1,008 5,508
(c) GIVARZ CORPORATION Partial Balance Sheet (Partial) December 31, 2017 Current assets Interest receivable .................................................... Non-current assets Long-term investments at amortized cost—bonds ($275,400 + $1,008) 2018: (d) Jan. 1 Cash .............................................. Interest Receivable..................
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$276,408
4,500
(e) July 31 Cash .............................................. 4,500 Long-Term Investments at AC— 1,028 Bonds......................... Interest Revenue ..................... [($275,400 + $1,008) × 4% × 6/12]
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$4,500
4,500
5,528
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PROBLEM 16-2B (Continued) (f) 2027: July 1 Cash .................................................... 300,000 Long-Term Investments at AC—Bonds .....................
300,000
(g) 2017: (a) July 1 Short-Term Investments at FVTPL—Equity ............................ 275,400 Cash ($300,000 × .918) ............ (b) Dec. 31 Interest Receivable ($300,000 × 3% × 6/12) ................. Short-Term Investments at FVTPL—Equity ................. Interest Revenue ...................... ($275,400 × 4% × 6/12)
4,500 1,008 5,508
Dec. 31 Short-Term Investments at FVTPL— Bonds ...........................................*11,592 Gain on Fair Value Adjustment—FVTPL ......... Fair value adjustment: Carrying value of bond, July 1 Amortization of discount, Dec. 31 Carrying value of bond, Dec. 31 Fair value of bond, Dec.31 ($300,000 x .96) Fair value adjustment, Dec. 31
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275,400
11,592
$275,400 1,008 276,408 (288,000) $ 11,592*
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PROBLEM 16-2B (Continued)
Taking It Further: The market rate of interest was 3.4986 % per year. The interest calculated below of 1.7493% × 2 for the semiannual interest payments. Using a financial calculator: PV $ (288,000) I/Y ? Yields 1.7493% N 19 PMT $4,500 FV $300,000 Type 0
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PROBLEM 16-3B (a) Treasury Ltd. paid $2,080,000 for the Surge bonds purchased ($2,000,000 × 1.04) (b) 2017 – Treasury Ltd. Jan. 1 Long-Term Investments at AC—Bonds ............................... 2,080,000 Cash ......................................... 2,080,000 (c) Bond Premium Amortization Table Effective-Interest Method—Semi-annual Interest Payments 5% Bonds Issued at market rate of 4.5%
Date
Jan. 1, 2017 July 1, 2017 Jan. 1, 2018 July 1, 2018 Jan. 1, 2019
(A) (B) Interest Interest Received Revenue $2,000,000 × (D) × 4.5% × 5% × 6/12 6/12 $50,000 50,000 50,000 50,000
$46,800 46,728 46,654 46,579
(d) 2017 – Treasury Ltd. July 1 Cash ............................................. Long-Term Investments at AC—Bonds...................... Interest Revenue ..................... Dec. 31 Interest Receivable ...................... Long-Term Investments at AC—Bonds....................... Interest Revenue .....................
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(C) Premium Amortizatio n (A)-(B) $3,200 3,272 3,346 3,421
(D) Bond Amortized Cost (D) - (C) $2,080,000 2,076,800 2,073,528 2,070,182 2,066,761
50,000 3,200 46,800 50,000 3,272 46,728
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PROBLEM 16-3B (Continued) (d) (Continued) 2018 – Treasury Ltd. Jan. 1 Cash ........................................... Interest Receivable ...............
50,000 50,000
TREASURY LTD. Balance Sheet (Partial) December 31, 2017 Non-current assets Long-term investments at amortized cost -bonds
$2,073,528
TREASURY LTD. Income Statement (Partial) Year Ended December 31, 2017 Other revenues Interest revenue ($46,800 + $46,728) .......................
$93,528
(e) 2017 – Surge Ltd. Jan. 1 Cash ($6,000,000 × 1.04) ............... 6,240,000 Bonds Payable ......................
6,240,000
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PROBLEM 16-3B (Continued) (f) 2017 – Surge Ltd. Jul. 1 Interest Expense (1) .................. 140,400 Bonds Payable........................... 9,600 Cash ($6,000,000 × 5% × 6/12) (1) ($6,240,000 X 4.5% X 6/12) = $140,400
150,000
Dec. 31 Interest Expense (2) .................. 140,184 Bonds Payable........................... 9,816 Interest Payable ($6,000,000 × 5% × 6/12) ....... 150,000 (2) [($6,240,000 - $9,600) X 4.5% X 6/12] = $140,184 2018 – Surge Ltd. Jan. 1 Interest Payable ......................... Cash .......................................
150,000 150,000
(g) SURGE LTD. Balance Sheet (Partial) December 31, 2017 Current liabilities Interest payable ............................................................ $150,000 Non-current liabilities Bonds payable, 5%, due 2027 .................................... $6,220,584* *($6,240,000 - $9,600 - $9,816) SURGE LTD. Income Statement Year Ended December 31, 2017 Other expenses Interest expense ($140,400 + $140,184) ..................
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$280,584
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PROBLEM 16-3B (Continued)
Taking It Further: The market rate of interest increased. When Surge issued the bonds, the market rate of interest was 4.5%, 0.5% lower than the stated rate of 5%. Treasury paid 104 for the bonds because of the attractive rate. At Dec. 31, 2017, the bonds were trading at a lower price of 103. The effective interest rate had; therefore, increased since January 1, 2017. If Treasury purchased the bonds to earn interest, and intends to hold them to maturity, they should not care if the market rate of interest increases or decreases. Should an emergency arise that requires Treasury to sell the bonds before maturity, in spite of their original intention, they would want the current market interest rate to be lower so that their Surge bonds will be more attractive on resale and command a higher price on the date they are sold.
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PROBLEM 16-4B (a) Feb. 1 Short-Term Investments at FVTPL—Equity .............................. Cash ................................................
63,600
Mar. 1 Short-Term Investments at FVTPL—Equity ............................. Cash ................................................
7,500
Apr. 1 Short-Term Investments at FVTPL—Bonds ............................ Cash ................................................
100,000
63,600
7,500
100,000
July 1 Cash (2,400 × $2) ................................ Dividend Revenue ..........................
4,800
Aug. 1 Cash (1,600 × $25) .............................. Loss on Sale of FVTPL Investments . Short-Term Investments at FVTPL—Equity ........................ ($63,600 ÷ 2,400 × 1,600)
40,000 2,400
Oct.
2,000
1 Cash ($100,000 × 4% × 6/12) .............. Interest Revenue ............................
4,800
42,400
2,000
2 Cash .................................................... 101,000 Gain on Sale of FVTPL Investments 1,000 Short-Term Investments at FVTPL—Bonds....................... 100,000
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PROBLEM 16-4B (Continued) (a) (Continued) Dec. 31 Short-Term Investments at FVTPL—Equity* ....................... Gain on Fair Value Adjustment—FVTPL ............ *($30,800 – $28,700) Number of Shares Lemelin 2,400 – 1,600 = 800 RSD 600 Total * $63,600 – $42,400 (b)
Cost $21,200* 7,500 $28,700
2,100 2,100
Fair Value $22,400 8,400 $30,800
(800 × $28) (600 × $14)
MEAD INVESTMENT CORPORATION Balance Sheet (Partial) December 31, 2017
Current assets Short-term investments at fair value through profit or loss—equity ..................................................... $30,800 MEAD INVESTMENT CORPORATION Income Statement (Partial) Year ended December 31, 2017 Other revenues Dividend revenue ................................... Interest revenue ..................................... Gain on fair value adjustment—FVTPL Gain on sale of fair value through profit or loss investments .................. Other expenses Loss on sale of fair value through profit or loss investments ..................
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$4,800 2,000 2,100 1,000
$9,900
$ 2,400
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PROBLEM 16-4B (Continued)
Taking It Further: When Mead invested in the MRT bonds, it was anticipating a decline in the market interest rate which would in turn increase the resale value of the bonds.
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PROBLEM 16-5B (a) COMMERCIAL INC. Balance Sheet (Partial) December 31, 2016 Current assets Short-term investments at fair value through profit or loss, equity ..................................................... $55,500 (b) 2017 Apr. 15 Cash (1,250 × $27) ................................. 33,750 Gain on Sale of FVTPL Investments Short-Term Investments at FVTPL—Equity ......................... [($39,000 ÷ 1,500) × 1,250]
1,250 32,500
June 15 Short-Term Investments at FVTPL—Equity ................................ 27,500 Cash (1,000 × $27.50) ........................
27,500
July 31 Long-Term Investments at FVTOCI—Equity ............................... 16,000 Cash (4,000 × $4.00)..........................
16,000
Aug. 5 Cash ......................................................... 5,000 Dividend Revenue (2,000 × $2.50)....
5,000
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PROBLEM 16-5B (Continued) (b) (Continued) Oct. 15 No entry is necessary for the stock split. The number of shares held is now doubled to 8,000 (4,000 × 2), at a carrying amount of $2.00 per share ($16,000 ÷ 8,000). Dec. 31 Loss on Fair Value Adjustment—FVTPL Short-Term Investments at FVTPL—Equity ........................... ($50,500 – $49,500)
1,000
Dec. 31 OCI—Loss on Fair Value Adjustment .. Long-Term Investments at FVTOCI—Equity ......................... ($16,000 – $12,800)
3,200
Number of Shares Market Price $30.00 1,250* 6.00 2,000
Fahim PLJ Total * 1,500 – 1,250 + 1,000 = 1,250 * $39,000 – $32,500 + $27,500 = $34,000 Hopeful
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$1.60
8,000
16-75
1,000
3,200
Carrying Amount $34,000** 16,500 $50,500
Fair Value $37,500 12,000 $49,500
$16,000
$12,800
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PROBLEM 16-5B (Continued) (c) COMMERCIAL INC. Statement of Comprehensive Income (Partial) Year Ended December 31, 2017 Profit from operations Other revenue Dividend revenue ................................................ $5,000 Gain on sale of FVTPL investments ............... 1,250 Other expenses Loss on fair value adjustment—FVTPL ......
6,250
1,000
Profit................................................................................... Other comprehensive income: Loss on fair value adjustment (net of tax) ....................... (3,200) Comprehensive income ....................................................
Taking It Further: Commercial Inc. has decided to report the Hopeful Industries common shares as fair value through other comprehensive income investments because the gains and losses arising from fair value adjustments of these shares may not be relevant information to users when assessing the economic performance of the company.
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PROBLEM 16-6B
Balance Sheet
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
Assets + – (+/–) NE (+/–) + + – – (+/–) + NE (+/–) + NE + NE + –
Liabilities NE NE NE NE NE NE NE NE NE NE NE NE NE NE NE
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Income Statement
Shareholders’ Equity + – NE + + – – + NE + NE + NE + –
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Revenues Expenses and gains and losses + NE NE + NE NE + NE + NE NE NE NE NE + NE NE NE + NE NE NE NE NE NE NE + NE NE NE
Profit + – NE + + NE NE + NE + NE NE NE + NE
Statement of Comprehensive Income Other Comprehensive Income NE NE NE NE NE NE – NE NE NE NE + NE NE –
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PROBLEM 16-6B (Continued)
Taking It Further: If Pepper Corporation is a private company reporting using ASPE, there is no Other Comprehensive Income. Therefore, transactions #7, #12, and #15 would be affected. Pepper’s investment in Hegal’s and Baudillard’s common shares would be reported at fair value through profit or loss in its balance sheet and the loss on the sale of the Hegal shares would be reported in the income statement under other expenses and losses as would the loss on fair value adjustment at the end of the year for both Hegal and Baudillard. Pepper Corporation would also have a choice in the way in which it accounts for investments with significant influence in Lincoln Corporation. It could account for the investment using the equity method as given, but could also account for the investment at fair value if the shares’ quoted market price is readily available or at cost if the shares’ quoted market price is not readily available.
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PROBLEM 16-7B (a)
Hadley’s accountant used the equity method to account for the investment, which resulted in Hadley recognizing 20% of Letourneau’s income as revenue ($200,000 ÷ $1,000,000). Therefore, Hadley Inc. must own 20% of the common shares of Letourneau Corp.
(b)
Hadley would have received 20% of any dividends declared by Letourneau, or $40,000 ($200,000 × 20%).
(c)
Hadley purchased 80,000 common shares of Letourneau Corp. This amount could be calculated as follows: Balance in Investment in Associate account, Dec. 31 Less: Hadley’s share of Letourneau’s earnings Add: Hadley’s share of Letourneau’s dividends 1 Investment account (at cost)
$960,000 (200,000) 40,000 $800,000*
*Since the cost of the investment was $800,000 and the issue price of Letourneau’s shares was $10 per share, it follows that 80,000 shares were purchased. 1 Part (b) above (d)
If significant influence does not exist and Hadley chooses to designate the investment at FVTOCI, the following will be reported: Hadley Inc. Statement of Comprehensive Income (partial) Year Ended December 31, 2017
Profit................................................................................ Other comprehensive income: Gain on fair value adjustment net of tax of $34,000 .... $136,000 Comprehensive income ................................................. ($970,000 - $800,000) x 20% = $34,000
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PROBLEM 16-7B (Continued) (e)
Under the cost model, Hadley would report the investment at cost of $800,000 on the balance sheet and only the dividends received of $40,000 as other revenue on the income statement.
Taking It Further: Among the questions that should be considered in determining an investor’s influence are whether: The investor has representation on the investee’s board of directors The investor participates in the investee’s policy-making process There are material transactions between the investor and the investee The common shares held by other shareholders are concentrated among a few investors or dispersed among many A company owning 19% of the common shares of another company could have significant influence over that associate. This situation could occur when the common shares held by other shareholders are widely dispersed.
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PROBLEM 16-8B (a)
The presence of significant influence is not just a matter of what percentage ownership one business has of another. Rather it is based on the investor’s ability to participate in the associate’s operating and policy decisions. In this case, this influence has been exercised. Carnegie Inc. holds two of the eight positions on the board of directors of its associate, Aquinas Auto Inc.
(b) Jan. 1 Investment in Associate......................... 225,000 Cash ................................................... 225,000 Cash ($35,000 x 15%) ............................ Investment in Associate ...................
5,250 5,250
Investment in Associate........................... 22,500 Income from Investment in Associate ($150,000 x 15%)...........
22,500
Cash ($45,000 x 15%) ............................ Investment in Associate ...................
6,750
(c) 6,750
Investment in Associate........................... 48,750 Income from Investment in Associate ($325,000 x 15%)........... (d) Beginning balance ......................... Purchase of shares ....................... Less dividends received................ Share of income of associate........ Ending balance ..............................
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2017 2018 0 $242,250 $225,000 (5,250) (6,750) 22,500 48,750 $242,250 $284,250
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PROBLEM 16-8A (Continued) (e) CARNEGIE INC. Balance Sheet (Partial) December 31, 2017
Non-current assets Investment in associate ............................................... $242,250 CARNEGIE INC. Income Statement (Partial) Year Ended December 31, 2017 Other revenues Income from investment in associate ...................
$22,500
Taking It Further: Carnegie has the benefit of participating in and hearing candid discussions held at the meetings of the board of directors of Aquinas. These discussions may include information concerning some of Aquinas’ customer and business relationships. Carnegie is then able to get information it would not otherwise be able to obtain. This information could in turn assist Carnegie in developing a new customer market.
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PROBLEM 16-9B (a) INVESTMENTS R US COMPANY Income Statement Year ended November 30, 2017 (in millions) Revenues Operating expenses Profit from operations Other revenue Gain on sale of land Interest revenue Income from investment in associate Dividend revenue Gain on fair value adjustment—FVTPL Other expenses Interest expense Loss on sale of FVTPL investments Other expenses Profit before income tax Income tax expense Profit
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$7,240 4,616 2,624 $ 26 6 4 3 2
299 194 21
41 2,665
514 2,151 781 $1,370
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PROBLEM 16-9B (Continued) (a) (Continued) INVESTMENTS R US COMPANY Statement of Comprehensive Income Year ended November 30, 2017 (in millions) Profit Other comprehensive income: Loss on fair value adjustment (net of tax) Comprehensive income
(b)
Accumulated other comprehensive loss: ($150 + $68)
$1,370 68 $1,302
$218 million
Taking It Further: Fair value adjustments of FVTPL investments are included in profit because the investments are short-term in nature. Including the gain or loss in profit helps users predict future profitability. Valuing these investments at fair value on the balance sheet also provides more relevant information for statement users. For FVTOCI investments, since the investments are long-term and are going to be held and not sold, it may be inappropriate to affect a company’s profit with the gains and losses on fair value adjustments caused by market fluctuations. The fair value adjustment may; therefore, be kept out of profit, but instead reflected in other comprehensive income on the statement of comprehensive income.
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PROBLEM 16-10B VLADIMIR CORPORATION Statement of Comprehensive Income Year Ended December 31, 2017 Service revenue ................................................................. $651,000 Operating expenses Salaries expense........................................... $335,000 Rent expense ............................................. 45,000 Depreciation expense................................ 28,000 408,000 Profit from operations ......................................................... 243,000 Other revenues Income from investment in associate ...... 31,000 Dividend revenue ....................................... 9,000 Gain on sale of fair value through profit or loss investments ................................ 2,500 Gain on fair value adjustment—FVTPL ... 2,600 Interest revenue ......................................... 3,300 48,400 291,400 Other expenses Interest expense ........................................ 12,500 Loss on fair value adjustment—FVTPL ... 1,500 14,000 Profit before tax ................................................................... 277,400 Income tax expense ........................................................... 79,290 Profit..................................................................................... 198,110 Other comprehensive income Gain on fair value adjustment, net of $3,600 tax ........ 12,000 Comprehensive income .................................................... $210,110
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PROBLEM 16-10B (Continued) VLADIMIR CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash............................................................................... $150,000 Short-term investments at FVTPL ................................. 119,500* Accounts receivable ...................................... $68,000 Less: Allowance for doubtful accounts .... 4,000 64,000 Total current assets ............................................. 333,500 Non-current assets Long-term investments Notes receivable, due 2020 ............................. 75,000 Long-term investments at amortized cost–bonds ................................................... 36,000 Long-term investments at fair value through other comprehensive income—equity 185,000 Investment in associate .............................. 215,000 Total investments................................................. 511,000 Property, plant, and equipment Equipment ............................................... 288,000 Less: Accumulated depreciation ........... 92,000 196,000 Total assets ............................................................$1,040,500 * ($37,000 + $82,500 = $119,500)
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PROBLEM 16-10B (Continued) VLADIMIR CORPORATION Balance Sheet (Continued) December 31, 2017 Liabilities and Shareholders' Equity Current liabilities Accounts payable ..................................................... $ 85,000 Interest payable ........................................................ 5,000 Income tax payable ..................................................... 16,000 Total current liabilities ......................................... 106,000 Long-term liabilities Bonds payable ............................................................ 250,000 Total liabilities ...................................................... 356,000 Shareholders' equity Common shares, no par value, unlimited shares authorized, 200,000 shares ........................ 250,000 Retained earnings .................................................... 394,500 Accumulated other comprehensive income*......... 40,000 Total shareholders' equity ................................... 684,500 Total liabilities and shareholders' equity ........... $1,040,500
* Beginning Balance of Accumulated other Comprehensive income $28,000 Add: Other comprehensive income for the year 12,000 Ending Balance $40,000
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PROBLEM 16-10B (Continued)
Taking It Further:
Return on equity
=
$198,110 ($684,500 + $605,100) ÷ 2
=
30.7%
Given that Vladimir’s return on equity is 30.7% and the industry average is 36%, we can conclude that Vladimir’s operating performance is good but not as strong as its peers.
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CUMULATIVE COVERAGE: CHAPTERS 13 TO 16 (a) Jan.
7 Cash ..................................................... 25,000 Preferred Shares ............................ 25,000
Mar. 16 Short-Term Investments at FVTPL—Equity .............................. 19,200 Cash (800 × $24) ............................. 19,200 July
1 Long-Term Investments at AC—Bonds .................................... 108,200 Cash ($100,000 × 108.2) ................. 108,200
Aug.
2 Cash (800 × $25).................................. 20,000 Short-Term Investments at FVTPL—Equity ........................ 19,200 Gain on Sale of FVTPL Investments 800 5 Short-Term Investment— Money Market Fund .......................... 20,000 Cash ................................................ 20,000
Sep. 25 Preferred Shares ($25,000 ÷ 1,000 × 500)........................ 12,500 Common Shares............................. 12,500 Oct. 24 Cash ..................................................... 20,200 Short-Term Investment— Money Market Fund...................... 20,000 Interest Revenue ............................ 200 Nov. 30 Cash ..................................................... 50,000 Notes Payable................................. 50,000 Dec.
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CUMULATIVE COVERAGE (Continued) (a) (Continued)
Dec. 31 Interest Expense ($50,000 × 6% × 1/12) .......................... 250 Notes Payable ($1,521 – $250) .......... 1,271 Cash ................................................
1,521
31 Investment in Associate 8,000 ($20,000 × 40%) .............................. Income from Investment in Associate ...................................
8,000
31 Cash.................................................. Investment in Associate ($1,200 × 40%)..................................
480
31 Interest Receivable ($100,000 × 5% × 6/12) ......................... 2,500 Long-Term Investments at AC— Bonds ($2,500 – $2,164) ..... Interest Revenue ($108,200 × 4% × 6/12).................. 31 Interest Expense ($126,025 × 7%) ........8,822 Bonds Payable ($8,822 – $7,800).... Interest Payable ($130,000 × 6%)................................
480
336 2,164
1,022 7,800
31 OCI—Loss on Fair Value Adjustment* 2,000 Long-Term Investments at FVTOCI—Equity ...................... 2,000 * $28,000 (fair value) – $30,000 (carrying amount) = $2,000
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CUMULATIVE COVERAGE (Continued) (b) PLANKTON CORPORATION Trial Balance December 31, 2017 Debit
Credit
Cash ($48,000 + $25,000 – $19,200 – $108,200 + $20,000 – $20,000 + $20,200 + $50,000 – $1,521 + $480) ........................................... $ 14,759 Accounts receivable ........................................ 51,000 Allowance for doubtful accounts .................... $ 2,500 Interest receivable............................................ 2,500 Merchandise inventory ................................... 22,700 Investment in associate ($85,000 + $8,000 – $480) ............................ 92,520 Long-term investments at AC—bonds 107,864 ($108,200 – $336) ......................................... Long-term investments at FVTOCI–equity ($30,000 – $2,000) ............................................ 28,000 Land .................................................................. 90,000 Building............................................................. 200,000 Accumulated depreciation—building ............. 40,000 Equipment......................................................... 40,000 Accumulated depreciation—equipment ......... 15,000 Accounts payable............................................. 18,775 Dividends payable ............................................ 1,000 Income tax payable .......................................... 4,500 Interest payable ................................................ 7,800 Notes payable ($50,000 – $1,271) .................... 48,729 Bonds payable (6%, due 2022) ($126,025 + $1,022) ...................................... 127,047 $2, noncumulative preferred shares, convertible no par value, 500 issued ($25,000 – $12,500) ........................................ 12,500 Common shares, no par value, 102,500 issued ($100,000 + $12,500) ...................................... 112,500
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CUMULATIVE COVERAGE (Continued) (b) (Continued) PLANKTON CORPORATION Trial Balance (Continued) December 31, 2017 Debit
Credit $110,775
Retained earnings ........................................ Cash dividends - preferred .......................... $ 1,000 5,000 Accumulated other comprehensive income Sales.............................................................. 750,000 Cost of goods sold ....................................... 370,000 Operating expenses ..................................... 180,000 2,739 Interest revenue ($375 + $200 + $2,164)...... Interest expense ($6,250 + $250 + $8,822) .. 15,322 Income from investment in associate......... 8,000 Income tax expense ..................................... 50,000 Gain on sale of FVTPL investments............ 800 OCI—loss on fair value adjustment ............... 2,000 Totals $1,267,665 $1,267,665
(c)
Revenues Sales....................................................... Interest revenue..................................... Income from investment in associate. ......................................... Gain on sale of FVTPL investments..... Expenses Cost of goods sold ................................ Operating expenses .............................. Interest expense .................................... Income before income tax ...................
$750,000 2,739 8,000 800 $761,539
370,000 180,000 15,322
Dec. 31 Income Tax Expense [($196,217 × 27%) – $50,000].......... 2,979 Income Tax Payable................... Solutions Manual .
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CUMULATIVE COVERAGE (Continued) (c)
(Continued) PLANKTON CORPORATION Trial Balance December 31, 2017
Debit
Credit
Cash ($48,000 + $25,000 – $19,200 – $108,200 + $20,000 – $20,000 + $20,200 + $50,000 – $1,521 + $480) ........................................... $ 14,759 Accounts receivable ........................................ 51,000 Allowance for doubtful accounts .................... $ 2,500 Interest receivable............................................ 2,500 Merchandise inventory ................................... 22,700 Investment in associate ($85,000 + $8,000 – $480) ............................ 92,520 Long-term investments at AC—bonds ($108,200 – $336) ......................................... 107,864 Long-term investments at FVTOCI—equity ($30,000 – $2,000) ........................................ 28,000 Land .................................................................. 90,000 Building............................................................. 200,000 Accumulated depreciation—building ............ 40,000 Equipment......................................................... 40,000 Accumulated depreciation—equipment ......... 15,000 Accounts payable............................................. 18,775 Dividends payable ............................................ 1,000 Income tax payable ($4,500 + $2,979) ............. 7,479 Interest payable ................................................ 7,800 Notes payable ($50,000 – $1,271) .................... 48,729 Bonds payable (6%, due 2022) ($126,025 + $ 1,022) ..................................... 127,047 $2-noncumulative preferred shares, convertible no par value, 500 issued ($25,000 – $12,500) ........................................ 12,500 Common shares, no par value, 102,500 issued ($100,000 + $12,500) ...................................... 112,500
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CUMULATIVE COVERAGE (Continued) (c) (Continued) PLANKTON CORPORATION Trial Balance (Continued) December 31, 2017 Debit
Credit $110,775
Retained earnings ........................................ Cash dividends - preferred .......................... $ 1,000 Accumulated other comprehensive income 5,000 Sales.............................................................. 750,000 Cost of goods sold ....................................... 370,000 Operating expenses ..................................... 180,000 Interest revenue ($375 + $200 + $2,164)...... 2,739 Interest expense ($6,250 + $250 + $8,822) .. 15,322 Income from investment in associate......... 8,000 Income tax expense ($50,000 + $2,979) ...... 52,979 Gain on sale of FVTPL investments............ 800 OCI—loss on fair value adjustment ............... 2,000 Totals $1,270,644 $1,270,644
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CUMULATIVE COVERAGE (Continued) (d) PLANKTON CORPORATION Income Statement Year Ended December 31, 2017 Sales................................................................................ $750,000 Cost of goods sold ......................................................... 370,000 Gross profit..................................................................... 380,000 Operating expenses ....................................................... 180,000 Profit from operations.................................................... 200,000 Other revenues Interest revenue ................................................ $2,739 Income from investment in associate ............... 8,000 Gain on sale of fair value through profit or loss investments ............................................. 800 11,539 211,539 Other expenses Interest expense ........................................................ 15,322 Profit before income tax ................................................ 196,217 Income tax expense ....................................................... 52,979 Profit................................................................................ $143,238
PLANKTON CORPORATION Statement of Comprehensive Income Year Ended December 31, 2017 Profit............................................................................ Other comprehensive income Loss on fair value adjustment ................................. Comprehensive income .............................................
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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2017
Preferred Shares Balance, January 1, 2017 Issued shares for cash Preferred shares converted Cash dividends–preferred Comprehensive income Balance, December 31, 2017
$25,000 (12,500)
$12,500
Accumulated Other Comprehensive Income
Common Shares
Retained Earnings
$100,000
$110,775
$5,000
(1,000) 143,238 $253,013
(2,000) $3,000
12,500
$112,500
Total $215,775 25,000 0 (1,000) 141,238 $381,013
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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash................................................................................ $ 14,759 Accounts receivable ......................................... $51,000 Less: Allowance for doubtful accounts ........ 2,500 48,500 Interest receivable ........................................................ 2,500 Merchandise inventory .................................................. 22,700 Total current assets ..................................................... 88,459 Non-current Long-term investments Long-term investments at fair value through other comprehensive income—equity ...........28,000 Long-term investments at amortized cost—bonds ................................................... 107,864 Investment in associate ................................... 92,520 Total investments ....................................................... 228,384 Property, plant, and equipment Land ............................................................... 90,000 Building ........................................... $200,000 Less: Accumulated depreciation ... 40,000 160,000 Equipment ........................................... 40,000 Less: Accumulated depreciation .. 15,000 25,000 Total property, plant and equipment......................... 275,000 Total assets .............................................................. $591,843
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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Balance Sheet (Continued) December 31, 2017
Liabilities and Shareholders' Equity Current liabilities Accounts payable .......................................................... $ 18,775 Dividends payable ...................................................... 1,000 Income tax payable..................................................... 7,479 Interest payable .......................................................... 7,800 Current portion of notes payable................................... 15,757 Total current liabilities ........................................... 50,811 Long-term liabilities Notes payable, 6%, due 2020 ........................ $ 32,972* Bonds payable, 6%, due 2022 ........................ 127,047 Total long-term liabilities ......................................... 160,019 Total liabilities .......................................................... 210,830 Shareholders' equity Share capital $2-noncumulative preferred shares, convertible, no par value, 500 shares issued .................................. $ 12,500 Common shares, no par value, unlimited number of shares authorized, 102,500 shares issued ........................... 112,500 125,000 Total share capital ............................................. Retained earnings ...................................................... 253,013 Accumulated other comprehensive income ............. 3,000 Total shareholders' equity ................................ 381,013 Total liabilities and shareholders' equity ......... $591,843 *($48,729 – $15,757 = $32,972)
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CUMULATIVE COVERAGE (Continued) (e) If Plankton had purchased the Solar Inc. bonds to trade, the bond investment would have been accounted for as a fair value through profit or loss investment instead of amortized cost. The bonds would have been classified as current assets on the balance sheet. In this case the bonds which had a carrying amount of $107,864 based on amortized cost, would have been reported at the fair value of $106,000 ($100,000 × 106%). The reduction in the carrying amount would have a modest reduction of profit in the amount of $1,864 ($107,864 – $106,000). This amount would have been reported as a FVTPL loss on fair value adjustment, under other expenses. This difference of $1,864 reconciles with the interest revenue recognized at amortized cost of $2,164 and the interest received of $2,500 ($336) and the amount of the change in the market price of the bonds from the date of acquisition to the year-end date. ($108,200 – $106,000 = $2,200) (f)
If Plankton Corporation were a private company and reported under ASPE, it would present an income statement only. The amount for profit would remain the same. The balance sheet would not include Accumulated Other Comprehensive Income in shareholders’ equity. The FVTOCI investments in common shares in BCB would be shown at its fair value if there is a quoted fair value from an active market; otherwise, it would be shown at its carrying value.
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BYP16-1 FINANCIAL REPORTING PROBLEM (a)
For the year ended August 31, 2014, Corus recorded Equity loss of investees of $1,685,000.
(b)
The names of the associates are Figerprint Digital Inc., Food Network Canada, KidsCo Limited, and SoCast Inc. Corus’ share of the net assets of associates totals $8,587,000.
(c)
During the year Corus purchased 100% of Historia Network and Séries + Network. It also increased its investment in ABC Spark Network from 51% to 100% and TELETOON Canada from 50% to 100% ownership.
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BYP16-2 INTREPRETING FINANCIAL STATEMENTS (a) Royal Bank likely chooses to invest a higher percentage of its FVTPL investments held for trading in debt instruments instead of equity instruments to reduce the risk of losses due to market fluctuations since the bank may need access to the money on short notice to issue new loans to clients. Debt investments are low risk and typically low incomeyielding investments, while equity investments are higher risk and potentially higher income-yielding investments. Royal Bank favours the lower risk investments. (b) Since both debt and equity trading investments are actively traded on the stock and bond markets, they will be valued on Royal Bank’s balance sheet at fair value. (c) The Royal Bank chooses to report long-term strategic equity investment gains and losses from the fair value adjustments in other comprehensive income to remove those market fluctuations from profit. The realized gains and losses from market fluctuations will be reflected in profit when the investments are sold. This has the advantage of reducing the volatility of profit. The disadvantage is that the profit figure does not reflect all gains and losses from market fluctuations. Only gains and losses from trading and non-strategic investments are included.
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BYP16-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.
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BYP16-4 COMMUNICATION ACTIVITY Memo to: President of Lunn Financial Enterprises From: Accountant Subject: Reporting of debt investments at amortized cost and at fair value. Debt investments are reported at both amortized cost and at fair value through profit or loss depending on the intentions of management in acquiring the investment. For example, debt investments that are acquired for the purposes of earning interest are reported at amortized cost. This treatment is required because the primary purpose of the investment is to hold the investment and earn interest, and not to trade and realize gains on market fluctuations. Using amortized cost provides a more relevant balance sheet valuation and a more accurate representation of the profit generated from the investment. It also allows users to assess cash flows from the receipt of interest. Debt investments may also be acquired for speculative purposes and sold to generate gains. For these investments, fair value through profit or loss results in a more relevant value for balance sheet presentation purposes. In this case, the earning of interest revenue is incidental. The fair value measure of the investment allows users to better predict cash flows and assess the company’s liquidity and solvency. The method applied to debt investments is based on the purpose of the investment and management’s intention at the time the investment is purchased. Each method shows financial results on the income statement based on the intention of the investment – debt investments acquired to receive interest will report mostly interest revenue whereas debt investments acquired for trading purposes will mostly generate gains and losses from FVTPL fair value adjustments and selling.
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BYP16-5 “ALL ABOUT YOU” ACTIVITY (a) An RRSP is primarily intended for retirement savings. RRSPs provide an incentive to Canadians to invest because of a tax deduction for RRSP contributions. Contributions to a TFSA are not tax-deductible. An investment in an RRSP is usually considered strategic in that it is part of an individual’s long-term strategy for retirement planning. A TFSA investment may be either strategic or non-strategic. It can be used as part of a long-term strategic plan for income growth or for short-term purposes. (b) The types of investment income that can be generated from equity securities include dividends and gains from the sale of the investments. Bonds can generate interest income as well as gains from the sale of the bonds. While the equity securities offer more variety in the types of companies in which to invest, they bring with them higher risk due to market fluctuations but also potentially higher returns. (c) Assuming monthly contributions of $200 per month for 20 years at a return of 6%, using an income range of $10,000 to $39,999, the TFSA account would yield a balance of $92,870 vs. $84,582 for a taxable account, an increase of $8,288 (numbers are different for each province). (d) Assuming monthly contributions of $200 per month for 20 years at a return of 6%, but using an income range of $40,000 to $79,999, the TFSA account would yield a balance of $92,870 vs. $77,053 for a taxable account, an increase of $15,817 (numbers are different for each province).
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BYP16-6 Santé Smoothie Saga (a) 1. The amount of influence you would have in Nouveau Delight Ltd. would determine how you would account for the investment. Given that you would own 20% of the common shares of Nouveau Delight Ltd., it would be assumed (unless there was evidence to the contrary) that you could exert significant influence over the dayto-day operations of the business. This is especially so given the small number of shareholders. Significant influence over an associate may also result from representation on the board of directors, participation in policy-making processes, and material intercompany transactions. Assuming significant influence exists, the investment would be accounted for using the equity method of accounting. However, in this case, the Thornton sisters will still exercise majority control and may not be willing to let an investor participate in the decisionmaking process. In particular, since each sister owns 40%, this means that any decision proposed can be overturned by the sisters. This makes significant influence unlikely. In this case, the investment would be accounted for using the cost method. This method would be used rather than fair value, since there is no active market for the Nouveau Delight Ltd. shares, given that there are only three shareholders. 2. We have established that the investment in Nouveau Delight Ltd. will be at cost. The remaining three investments will be accounted based on the intention of Santé’s management. If management does not believe that it will need to sell the $20,000 Bell Canada bonds until maturity, these bonds should be accounted for at amortized cost and classified as a long-term investment on the balance sheet.
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BYP 16-6 (Continued) (a) 2. (Continued) On the other hand, the investment in the Loblaw and WestJet Airlines shares were likely purchased for trading and not to be held for the long term. These shares should be accounted for using the fair value through profit or loss method and classified as current assets. The fair value through other comprehensive income is not an option for these investments as Santé Smoothies & Sweets Ltd. reports under ASPE. (b) Since the equity method is applied when an investor can exercise significant influence, details of the relationship between Santé Smoothies & Sweets Ltd. and Nouveau Delight Ltd. are required to support or refute significant influence. For example, who are the current members of the board of directors and how many positions would be vacated from the sale of the shares? How many positions on the board of directors would be occupied by the new shareholder? How will decisions regarding company policy be made, and what will Janet, Brian, and Natalie’s responsibilities be in the running of Nouveau Delight Ltd.? Because of the voting control exercised by the two sisters, Janet, Brian, and Natalie should have a contract setting out their responsibilities and amount of influence they would be able to exercise. (c)
Because the investment in Nouveau Delight Ltd. is a strategic investment, it would be classified as a long-term investment in the non-current assets section of Santé Smoothies & Sweets Ltd.’s balance sheet. If the investment were accounted for using the cost method, it would be recorded at its original cost. Its value would be adjusted at year-end to its fair value, if the shares had a market value; however, this is unlikely since there are only three shareholders. Any dividends received would be recorded as income.
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BYP 16-6 (Continued) (c) (Continued) If the investment were accounted for using the equity method, it would be accounted for at its original cost plus a proportionate share of Nouveau Delight ’s income, less a proportionate share of any dividends paid by Nouveau Delight Ltd. (d) 2019 Feb. 1 Investments in Associate..................... Cash ..................................................
30,000 30,000
1 Long-Term Investments at AC—Bonds 21,487 Cash ..................................................
21,487
1 Short-Term Investments at FVTPL—Equity .................................. Cash ($13,718 + $11,650) .................
25,368
25,368
(e) Loblaw WestJet Total
Number of Market Price Shares $72.15 200 25.50 400
Carrying Amount $13,718 11,650 $25,368
2019 May 31 Loss on Fair Value Adjustment—FVTPL Short-Term Investments at FVTPL—Equity ............................. ($25,368 - $24,630 =$738)
Fair Value $14,430 10,200 $24,630
738
31 Interest Receivable ............................... 333 Long-Term Investments at AC—Bonds Interest Revenue .............................. ($20,000 x 5% x 4/12 = $333) ($21,487 x 3% x 4/12 = $215) Solutions Manual .
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118 215
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Accounting Principles, Seventh Canadian Edition
CHAPTER 17 The Cash Flow Statement ASSIGNMENT CLASSIFICATION TABLE Learning Objectives
Brief Problems Problems Questions Exercises Exercises Set A Set B
1. Discuss the usefulness, 1, 2, 3, 4 content, and format of the cash flow statement.
1, 2
2. Prepare a cash flow statement using the indirect method.
1A
1B
3, 4, 5, 6, 4, 5, 6, 7, 7, 8, 9, 8, 9, 10, 10, 11, 12 11, 18
2A, 3A, 4A, 5A, 6A, 7A, 9A, 10A, 11A
2B, 3B, 4B, 5B, 6B, 7B, , 9B, 10B, 11B
3. Prepare the operating 10, 11, 12 section of the cash flow statement using the direct method.
13, 14, 15, 16, 17, 18
12, 13, 14, 15, 16, 17, 18
2A, 3A, 2B, 3B, 8B, 8A, 9A, 9B, 10B, 10A, 12A 12B
4. Analyze the cash flow statement.
19, 20
19, 20
5A, 6A, 13A
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16, 17
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1, 2, 3
5B, 6B, 13B
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Classify transactions by activity. Indicate impact on cash and profit.
Simple
25-35
2A
Prepare operating activities section–indirect and direct methods.
Moderate
30-40
3A
Prepare operating activities section–indirect and direct methods.
Moderate
25-35
4A
Calculate cash flows for investing activities and financing activities.
Complex
50-60
5A
Simple
20-25
Simple
20-25
7A
Prepare a cash flow statement-indirect method, and calculate free cash flow. Prepare a cash flow statement-indirect method, and calculate free cash flow. Prepare cash flow statement–indirect method.
Moderate
20-25
8A
Prepare cash flow statement–direct method.
Moderate
20-25
9A
Prepare cash flow statement–indirect method and direct method.
Moderate
50-60
10A
Prepare cash flow statement–indirect method and direct method.
Moderate
50-60
11A
Prepare cash flow statement–indirect method.
Moderate
30-40
12A
Prepare cash flow statement–direct method.
Moderate
30-40
13A
Calculate free cash flow and evaluate cash.
Simple
10-15
1B
Classify transactions by activity. Indicate impact on cash and profit.
Simple
25-35
2B
Prepare operating activities section–indirect and direct methods.
Moderate
30-40
3B
Prepare operating activities section–indirect and direct methods.
Moderate
25-35
4B
Calculate cash flows for investing activities and financing activities.
Complex
50-60
5B
Prepare a cash flow statement-indirect method, and calculate free cash flow. Prepare a cash flow statement-indirect method, and calculate free cash flow.
Simple
20-25
Simple
20-25
6A
6B
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Accounting Principles, Seventh Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
7B
Prepare cash flow statement–indirect method.
Moderate
20-25
8B
Prepare cash flow statement–direct method.
Moderate
20-25
9B
Prepare cash flow statement–indirect method and direct method.
Moderate
50-60
10B
Prepare cash flow statement–indirect method and direct method.
Moderate
50-60
11B
Prepare cash flow statement–indirect method.
Moderate
30-40
12B
Prepare cash flow statement–direct method.
Moderate
30-40
13B
Calculate free cash flow and evaluate cash.
Simple
10-15
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Accounting Principles, Seventh Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objective 1. Describe the usefulness, content, and format of the cash flow statement. 2.
Prepare a cash flow statement using the indirect method.
Knowledge Q17-2 Q17-4
Comprehension Q17-1 Q17-3 Q17-4 BE17-2
Q17-5 Q17-6 Q17-7 Q17-8 Q17-9 Q17-13 Q17-14 Q17-15
Application BE17-1 E17-1 E17-2 E17-3 P17-1A P17-1B Q17-16 BE17-3 BE17-4 BE17-5 BE17-6 BE17-7
P17-2A P17-3A P17-4A P17-5A P17-6A P17-7A
BE17-8 BE17-9 BE17-10 BE17-11 BE17-12
P17-9A P17-10A P17-11A P17-2B P17-3B
E17-4 E17-5 E17-6 E17-7 E17-8 E17-9 E17-10 E17-11 E17-18
P17-4B P17-5B P17-6B P17-7B P17-9B P17-10B P17-11B
E17-20 P17-2A P17-3A P17-8A P17-9A P17-10A P17-12A P17-2B P17-3B P17-8B P17-9B P17-10B P17-12B
3.
Prepare a cash flow statement using the direct method.
Q17-10 Q17-11 Q17-12
BE17-13 BE17-14 BE17-15 BE17-16 BE17-17 BE17-18 E17-12 E17-13 E17-14 E17-15 E17-16 E17-17 E17-18
4.
Analyze the cash flow statement.
Q17-16 Q17-17
BE17-19 P17-5A P17-6A
Broadening Your Perspective
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BYP 17-6 Santé Smoothie Saga
17-4
Analysis
Synthesis
BE17-20 E17-19 E17-20 P17-13A P17-13B BYP17-1 BYP17-2 BYP17-3 BYP17-4
Evaluation
BYP17-5
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Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
A cash flow statement is a statement that shows sources and uses of cash classified along the three main lines of business activities: operating, investing, and financing. The cash flow statement is useful because it helps investors, creditors, and others assess the following aspects of the firm’s financial position:
the company’s ability to generate future cash flows the ability of the company to pay dividends and meet obligations the reasons for the difference between profit and cash provided (used) by operating activities the cash investing and financing transactions during a period.
2.
For the cash flow statement preparation, cash is generally defined as cash on hand (coins, paper currency, cheques) and money on deposit at a bank less any bank overdrafts.
3.
The three activities are: Operating activities include the cash effects of transactions that create revenues and expenses, and enter into the determination of profit. An example would be a sale of goods for cash. Investing activities include: (a) acquiring and disposing of investments and productive long-lived assets and (b) lending money and collecting loans. An example is buying land (not for resale) for cash. Financing activities include: (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from shareholders and providing them with a return on their investment, such as a dividend payment. An example is the payment of the principal on a mortgage payable.
4.
In general terms, current assets and current liabilities relate to accruals contained in the operating activities and are used to adjust income statement elements (revenues and expenses) and convert them to cash collections and cash payments. Non-current assets generally involve investing activities and are used to extract information about sources and uses of cash in investing activities. Long-term liabilities and equity items involve financing activities and are used to extract information about sources and uses of financing activities. An exception to these general guidelines is a short-term note payable that does not relate to purchases. Although this note payable is classified as a current liability, it is a result of the business borrowing and later repaying a note payable. Consequently, cash transactions relating to this note payable would be classified as financing activities.
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 5.
The cash flow statement is prepared from a comparative balance sheet, an income statement, and selected transaction information. It presents information that is not readily available in the other financial statements since the balance sheet and income statement are prepared on an accrual basis.
6.
Revenues and expenses, and consequently profit, are recognized based on the accrual method of accounting and not on the cash basis of accounting. Consequently, profit and loss reported on the income statement will not necessarily be consistent with cash increases and decreases. A number of factors could have caused a decrease in cash despite the company earning profit. These include (1) low cash-based revenues relative to high cash-based expenses; (2) purchase of property, plant, and equipment; (3) purchase of investments; and (4) repayment of debt or reacquisition of share capital. An increase in cash could have occurred despite a loss. Factors that could lead to this include: (1) high cash-based revenues relative to low cashbased expenses; (2) sales of property, plant, and equipment; (3) sales of investments; and (4) issuing of debt or share capital.
7.
When revenues and expenses are recorded using accrual-basis accounting, it is necessary to adjust profit for the changes in the related noncash current assets and current liabilities to determine the amount of cash provided from operations. These adjustments are necessary when using the indirect method of showing cash provided (used) by operating activities. Increases in current assets occur when cash has been spent acquiring assets not yet used in operations, or not yet converted to cash from operations. Consequently, the amount of the increase of these asset balances must be deducted from profit to arrive at cash provided (used) by operations. Similarly, when noncash current liabilities increase, it is generally because expenses have been incurred for which payments have not yet been made. Since no cash has yet been spent, the increases in these liability accounts balances are added to profit to arrive at cash provided (used) by operations.
8.
Vijaya is incorrect. While it is true that depreciation is an expense that does not involve cash flow, it is an expense that has been deducted from revenues to arrive at the profit. When using the indirect method, we add back the depreciation expense to profit effectively cancelling this expense to arrive at the amount of cash provided (used) by operations.
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QUESTIONS (Continued) 9.
Gains and losses do not normally arise from operating activities. Under the indirect method, losses are added back to profit, and gains are deducted from profit, to reconcile profit to net cash provided by operating activities. Since losses are deductions in calculating profit, and are already included in the profit figure; adding them back to profit effectively cancels them. Conversely, gains have already increased profit, so deducting them cancels their effect on profit.
10.
Sales on the income statement include cash and credit sales made in the current period only. Cash collected from customers on the statement of cash flows can come from sales in the current or previous periods, and not all current period sales are collected in the current period.
11.
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. Recall the journal entry to record depreciation: debit Depreciation Expense and credit Accumulated Depreciation. No cash is involved in this entry.
12.
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 it does not reconcile the cash flows from operating activities with profit. The advantage of the indirect method is its reconciliation of profit to net cash provided by operating activities. Its primary disadvantage is the difficulty in understanding the adjustments that comprise the reconciliation. Both methods are acceptable. Standard setters prefer the direct method. Most companies favour the indirect method because: (1) it is easier to prepare, (2) it provides a reconciliation between profit and net cash flow from operating activities, (3) it also discloses less competitive information about the company, and (4) it is the format most familiar to users of financial statements.
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QUESTIONS (Continued) 13.
The cash received from the sale of equipment is reported as an inflow in the investing activities section. Neither the gain nor the loss itself provided or used cash from operating activities. Because a gain does not provide cash from operating activities, it must be deducted from profit in the operating activities section of a cash flow statement prepared using the indirect method. The noncash gain, which was included in profit, must be deducted from profit on the cash flow statement to convert profit to net cash provided by operating activities. When the statement is prepared using the direct method, any gain is simply excluded from the operating activities section. Because a loss does not use cash from operating activities, it must be added to profit in the operating activities section of a cash flow statement prepared using the indirect method. The noncash loss, which was deducted from profit in the income statement, must be added to profit on the cash flow statement to convert profit to net cash provided by operating activities. When the statement is prepared using the direct method, any loss is simply excluded from the operating activities section.
14.
Unless a cash dividend is paid, the simple declaration of a dividend which causes it to be reported as a reduction of retained earnings in the statement of changes in shareholder’s equity will not result in any reduction in cash reported as an outflow in the cash flow statement.
15.
A financially healthy, growing company will generally be generating positive flows from operating activities. Growth is evidenced by negative flows in investing activities as the company purchases property, plant, and equipment and replaces older assets to assist its growth. The financing activities section will usually show negative flows as the company repays debt and pays dividends to owners or occasionally positive flows if the company is issuing debt to finance growth.
16.
If the net capital expenditures exceed the cash provided by operating activities, the free cash flow will be negative.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 17-1 (a) (b) (c) (d) (e) (f) (g) (h) (i)
− + − − NE + + NE NE
BRIEF EXERCISE 17-2 (a) (b)
(c) (d) (e) (f) (g) (h)
(i)
(F) (I)
Financing activity Investing activity (Note: The sale of land is an investing activity. If using the indirect method, the loss is added back under operating activities to cancel its impact on profit.) (F) Financing activity (I) Investing activity (NC) Significant noncash activity (F) Financing activity (O) Operating activity None. Depreciation expense is reported in the operating activities section using the indirect method only to cancel it from profit. It is neither a source nor a use of cash in any way. None. The payment of cash dividends results in a financing activity. The declaration is not a use of cash.
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 17-3 (a) (b) (c) (d) (e) (f) (g) (h)
+ – + − + + + +
BRIEF EXERCISE 17-4 DIAMOND LTD. Cash Flow Statement (Partial) Year Ended November 30, 2017 Operating activities Profit ............................................................................... $ 850,000 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ............................. $175,000 Increase in accounts receivable ................ (80,000) Decrease in prepaid expenses ................... 35,000 Increase in accounts payable ................ 170,000 . 300,000 Net cash provided by operating activities ............$1,150,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 17-5 Montalvo Company Cash Flow Statement (Partial)—Indirect Method Year Ended May 31, 2017 Operating activities Profit .................................................................. $300,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Decrease in accounts receivable .............. $80,000 Increase in inventory ................................... (30,000) Increase in prepaid expenses................. (28,000) 22,000 Net cash provided by operating activities.......... $322,000
BRIEF EXERCISE 17-6 Chas Company Cash Flow Statement (Partial)—Indirect Method Year Ended June 30, 2017 Operating activities Profit .................................................................. $300,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ................................ $32,000 Gain on sale of equipment .......................... (25,000) Increase in accounts receivable ................. (35,500) Decrease in inventory ............................. 22,500 Decrease in prepaid expenses ............... 12,800 Increase in accounts payable ................. 16,000 22,800 Net cash provided by operating activities.......... $322,800
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 17-7 MIRZAEI LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended March 31, 2017 Operating activities Profit .................................................................. $330,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ................................ $50,000 Gain on sale of equipment .......................... (45,200) Increase in accounts receivable ................. (20,000) Decrease in inventory ............................. 7,000 Increase in prepaid expenses................. (2,000) Decrease in accounts payable ............... (5,000) Increase in income tax payable .............. 6,000 (9,200) Net cash provided by operating activities.......... $320,800
BRIEF EXERCISE 17-8 Indirect method: Operating activities: Loss on sale of equipment
$ 1,500
Investing activities: Sale of equipment
17,000*
The operating activities section would also show depreciation expense of $12,000 and the investing activities section would show purchase of equipment of $(41,600). * Cash ............................................ 17,000 Loss on Sale of Equipment .......... 1,500 Accumulated Depreciation .......... 5,500 Equipment ................................................ 24,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 17-9 In order to arrive at the ending balance of $63,200 for Retained Earnings, a debit of $7,700 is needed ($27,500 + $43,400 - $63,200). Dividends of $7,700 were declared and paid during the year.
BRIEF EXERCISE 17-10 Investing activities: Proceeds from sale of land ...................................$120,000 1 Equipment purchase ................................................ (89,000) 2 Net cash provided by investing activities .............. $ 31,000 1.
Decrease in land ($180,000 − $95,000) ........... $ 85,000 Plus gain ........................................................... 35,000 Cash proceeds from sale of land ..................... $120,000
2.
Balance in equipment account, Dec. 31, 2017 $237,000 Balance, Jan. 1, 2017 ...................
(148,000)
Cost of equipment purchased ........................
$89,000
BRIEF EXERCISE 17-11 Dividends paid $46,000 Proof: Retained earnings December 31, 2017 .............. Profit..................................................................... Retained earnings, December 31, 2016 ............. Dividends declared during 2017......................... Increase in dividends payable............................ Cash payment for dividends ..............................
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$(261,000) 197,000 114,000 50,000 (4,000) $ 46,000
Chapter 17
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 17-12 Financing activities Sale of common shares 1 .............................. $ 10,000 Repayment of mortgage payable ....................(25,000) Payment of cash dividends 2 .........................(65,000) Net cash used by financing activities ..................... $(80,000) 1.
$10,000 = $55,000 − $45,000
2.
Payment of cash dividends: Retained earnings, beginning of year ...................... $85,000 Add: Profit.................................................................. 145,000 230,000 Less: Cash dividends paid (calculated)................... (65,000) Retained earnings, end of year ................................ $165,000
Note X: During the year, the company acquired a building with a cost of $500,000 by paying $200,000 cash and incurring a mortgage payable of $300,000.
BRIEF EXERCISE 17-13 Sales revenue ............................................. $640,000 Add: Decrease in accounts receivable ..... 13,650 Cash receipts from customers .................. $653,650
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BRIEF EXERCISE 17-14 (a) Increase in inventory ................................. Add: Cost of goods sold ............................ Cost of goods purchased ..........................
$ 5,600 89,500 $95,100
(b) Cost of goods sold ..................................... Add: Increase in inventory ........................ Less: Increase in accounts payable ......... Cash payments to suppliers......................
$89,500 5,600 (7,200) $87,900
BRIEF EXERCISE 17-15 Operating expenses ......................................... $100,000 Plus: Increase in prepaid expenses ................ 10,900 Less: Increase in accrued expenses payable (6,400) Cash payments for operating expenses ......... $104,500
BRIEF EXERCISE 17-16 Salaries expense .............................................. $188,000 Add: Decrease in salaries payable.................. 1,500 Cash payments to employees ......................... $189,500
BRIEF EXERCISE 17-17 Income tax expense ......................................... Less increase in income tax payable.............. Cash payments for income tax........................
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$90,000 (9,000) $81,000
Chapter 17
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 17-18 ANGUS MEAT CORPORATION Cash Flow Statement (Partial) Year Ended December 31, 2017 Operating activities Cash receipts from customers1 ................................. $350,000 Cash payments: To suppliers2...................................... $(164,000) For operating expenses3 ................... (71,000) 4 For income taxes .............................. (45,000) (280,000) Net cash provided by operating activities ............. $ 70,000 1.
Sales revenue ............................................ $375,000 Less: Increase in accounts receivable..... (25,000) Cash receipts from customers ................. $350,000
2.
Cost of goods sold .................................... $150,000 Add: Increase in inventory ...................... 7,000 Add: Decrease in accounts payable ....... 7,000 Cash payments to suppliers ..................... $164,000
3.
Operating expenses .................................. Less: Decrease in prepaid expenses ....... Cash payments for operating expenses ..
$75,000 (4,000) $71,000
4.
Income tax expense .................................. Less: Increase in income tax payable...... Cash payments for income tax.................
$50,000 (5,000) $45,000
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 17-19 Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $360,000 – $200,000 = $160,000
BRIEF EXERCISE 17-20 (a) Free cash flow = Cash provided (used) by operating activities − Cash used (provided) by investing activities Company A Company B = $(10,000) − $70,000 = $50,000 − $(30,000) = $(80,000) = $80,000 (b) Company A is more likely to be in the early stages of its development. It has negative cash flow from operating and investing activities and positive cash flow from financing. This indicates the company issued debt and/or equity and used some of the money to buy assets and fund its operations.
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Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 17-1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Payment of interest on notes payable operating Exchange of land for patent noncash investing Sale of building at book value investing Payment of dividends financing Depreciation operating Receipt of dividends on investment operating Receipt of interest on notes receivable operating Issuance of common shares financing Amortization of patent operating Issuance of bonds at par for land noncash investing financing 11. Purchase of land investing 12. Conversion of bonds into noncash common shares financing 13. Sale of land at a loss: investing Proceeds from sale of land operating Loss on sale of land 14. Sale of Wellman bonds financing
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Accounting Principles, Seventh Canadian Edition
EXERCISE 17-2 Transaction 1. Sold inventory for $1,000 cash. 2. Purchased a machine for $30,000. Made a $5,000 down payment and issued a long-term note for the remainder. 3. Issued common shares for $50,000. 4. Collected $16,000 of accounts receivable. 5. Paid a $25,000 cash dividend. 6. Sold a long-term equity investment with a carrying value of $15,000 for $10,000. 7. Sold bonds at par for $200,000. 8. Paid $18,000 on accounts payable. 9. Purchased inventory for $28,000 on account. 10. Purchased a long-term investment in bonds for $100,000. 11. Sold equipment with a carrying amount of $16,000 for $13,000. 12. Paid $12,000 interest expense on long-term notes payable.
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(a) Classification O
(b) Cash Inflow or Outflow +$1,000
I
−$5,000
NC F
NE +$50,000
O
+$16,000
F I
−$25,000 +$10,000
F O NC
+$200,000 −$18,000 NE
I
−$100,000
I
+$13,000
O
−$12,000
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Accounting Principles, Seventh Canadian Edition
EXERCISE 17-3 1. (a)
Cash.......................................................... 15,000 Land................................................. Gain on Disposal ............................
12,000 3,000
(b) Operating activities: deduct Gain from profit; Investing activities: show Proceeds of $15,000 from sale of land
2. (a)
(b)
3. (a)
Cash.......................................................... 20,000 Common Shares .............................
20,000
Financing activities: add Issuance of common shares $20,000
Depreciation Expense ............................. 17,000 Accumulated Depreciation - Buildings
17,000
(b) Operating activities: add Depreciation Expense to profit.
4. (a)
Salaries Expense ....................................... 9,000 Cash ................................................
9,000
(b) Operating activities: No entry as amount of salaries expense already included in profit.
5. (a)
Equipment .................................................. 8,000 Common Shares .............................
8,000
(b) This is a noncash financing investing activity that is not reported on the statement of cash flows but in a note to the financial statements.
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EXERCISE 17-3 (Continued) 6. (a)
Cash........................................................ Accumulated Depreciation - Equipment Loss on Disposal ................................... Equipment .......................................
1,200 7,000 1,800 10,000
(b) Operating activities: add Loss of $1,800 to profit. Investing activities: show Proceeds of $1,200 from sale of equipment
EXERCISE 17-4 PESCI LTD. Cash Flow Statement (Partial) Year Ended November 30, 2017 Operating activities Profit ............................................................................... $ 78,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $50,000 Gain on sale of equipment......................... (10,000) Decrease in accounts receivable ............... 36,000 Increase in inventory ................................. (19,000) Increase in prepaid expenses ..................... (2,000) Decrease in accounts payable .................. (12,000) Decrease in income taxes payable .......... (4,000) 39,000 Net cash provided by operating activities................... $117,000
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EXERCISE 17-5 SCOOTERS RENTALS Cash Flow Statement (Partial) Year Ended December 31, 2017 Operating activities Profit .............................................................................. $153,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $24,000 Increase in accounts receivable................ (21,000) Decrease in inventory ................................. 14,000 Increase in prepaid expenses ..................... (5,000) Decrease in accounts payable .................... (7,000) Increase in accrued expenses payable ... 10,000 . 15,000 Net cash provided by operating activities................... $168,000
EXERCISE 17-6 CHARRON INC. Cash Flow Statement (Partial) Year Ended October 31, 2017 Operating activities Profit ................................................................................ $87,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $23,000 Loss on sale of equipment ........................... 8,000 Increase in accounts receivable................ (23,000) Decrease in inventory ................................. 13,500 Increase in prepaid expenses ..................... (1,700) Increase in accounts payable ....................... 7,000 Decrease in accrued expenses payable .. (3,000) Decrease in income taxes payable .......... (5,000) 18,800 Net cash provided by operating activities................... $105,800
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EXERCISE 17-7 Operating activities Profit ................................................................................ $77,000 Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ............................... $28,000 Loss on disposal of equipment............. 7,000 35,000 Investing activities Sale of equipment* ..................................... Purchase of equipment ..............................
12,000 (70,000)
Financing activities Payment of cash dividends........................
(14,000)
*Cost of equipment sold .................................. $49,000 Accumulated depreciation............................... 30,000 Net carrying amount ........................................ 19,000 Loss on disposal of equipment....................... 7,000 Cash proceeds from sale............................... $12,000 Cash .................................................................. 12,000 Accumulated Depreciation .............................. 30,000 Loss on Disposal.............................................. 7,000 Equipment ......................................................................... 49,000
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EXERCISE 17-8 DUPRÉ CORP. Cash Flow Statement (Partial) Year Ended December 31, 2017 Investing activities Sale of equipment* ..................................... $ 5,000 Purchase of equipment ............................... (65,000) Net cash used by investing activities ..................... $(60,000) Financing activities Payment of cash dividends........................ Net cash used by financing activities ...
(8,000) (8,000)
*Cost of equipment sold .................................. $46,000 Accumulated depreciation............................... 38,000 Net carrying amount ........................................ 8,000 Loss on sale of equipment .............................. 3,000 Cash proceeds from sale................................. $ 5,000 Cash .................................................................. 5,000 Accumulated Depreciation - Equipment ......... 38,000 Loss on Disposal.............................................. 3,000 Equipment ......................................................................... 46,000
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EXERCISE 1725 LU CORPORATION Cash Flow Statement—Indirect method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $22,630 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ................................. $5,000 Loss on sale of land ($6,000 - $4,900).... 1,100 Decrease in accounts receivable ........... 2,200 Decrease in accounts payable ............... (18,730) (10,430) Net cash provided by operating activities ............. 12,200 Investing activities Sale of land .................................................. 4,900 Net cash provided by investing activities
4,900
Financing activities Payment of cash dividends ............................ (19,500) Issue of common shares ................................ 6,000 Net cash used by financing activities ..................... (13,500) Net increase in cash.......................................................... 3,600 Cash, January 1................................................................. 10,700 Cash, December 31 ........................................................... $ 14,300
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EXERCISE 17-10 PREFERRED HOMES LTD. Cash Flow Statement (Partial) Year Ended September 30, 2017 Investing activities Sale of equipment (3) ................................. $ 3,000 Purchase of land (Note X) .............................. (35,000) Purchase of equipment ................................ (20,000) Net cash used by investing activities ..................... $(52,000) Financing activities Payment of cash dividends (4) ...................... (80,000) Issuance of common shares (2) ................ 85,000 Repayment of mortgage note payable (1) . (5,000) Net cash from financing activities .........................
$ 0
Note X: Land costing $100,000 was acquired by paying $35,000 cash and issuing a mortgage note payable for $65,000. (1) Transactions involving Mortgage Note Payable Mortgage Note Payable Repayments
5,000
Oct. 1, 2016 50,000 Land purchase 65,000 Sept. 30, 2017 110,000
(2) Transactions involving Common Shares: Common Shares Oct. 1, 2016 Issuance Sept. 30, 2017
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150,000 85,000 235,000
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EXERCISE 17-10 (Continued) (3) Transactions involving Equipment: Equipment Oct. 1, 2016 Purchases Sept. 30, 2017
125,000 20,000 139,000
Disposal
6,000
Accumulated Depreciation Disposal
5,000
Oct. 1, 2016 Sept. 30 Sept. 30, 2017
55,000 15,000 65,000
*Cost of equipment sold .................................. Accumulated depreciation............................... Net carrying amount ........................................ Add: Gain on sale of equipment..................... Cash proceeds from sale.................................
$6,000 5,000 1,000 2,000 $3,000
Cash .................................................................. Accumulated Depreciation-Equipment........... Gain on Disposal .......................................... Equipment .....................................................
3,000 5,000 2,000 6,000
(4) Transactions involving Retained Earnings: Retained Earnings Dividends
70,000
Oct. 1, 2016 Profit Sept. 30, 2017
80,000 210,000 220,000
Dividends Payable Dividends paid
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80,000
17-27
Oct. 1, 2016 Dividends Sept. 30, 2017
20,000 70,000 10,000
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EXERCISE 17-28 SAVARY LIMITED Cash Flow Statement Year Ended December 31, 2017 Operating activities Profit .............................................................................. $200,000 Adjustments to reconcile profit to net cash used by operating activities: Depreciation expense ............................ $ 70,000 Increase in accounts receivable ........... (150,000) Increase in inventory ............................. (170,000) Decrease in prepaid insurance ............. 7,000 Increase in accounts payable................ 26,000 Decrease in salaries payable................. (10,000) Increase in interest payable .................. 6,000 (221,000) Net cash used by operating activities .............. (21,000) Investing activities Purchase of equipment ................................ (250,000) Net cash used by investing activities ...................... (250,000) Financing activities Issued note payable....................................... 150,000 Issued common shares ................................. 200,000 Payment of cash dividends* ........................ (50,000) Net cash provided by financing activities ............... 300,000 Increase in cash ............................................................... 29,000 Cash, January 1 ................................................................ 85,000 Cash, December 31 ........................................................... $114,000 * Profit was $200,000, and retained earnings only increased by $150,000, so $50,000 in dividends must have been declared and paid.
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EXERCISE 17-29 MACGREGOR COMPANY Cash Flow Statement Year Ended December 31, 2017 Operating activities Cash receipts Cash receipts from customers *.............................. $132,000* Cash payments for operating expenses ** ................ (55,000) Net cash provided by operating activities ......................... $77,000 Revenues ........................................................... $192,000 Less ending balance accounts receivable ......(60,000) Cash receipts from customers*........................ $132,000 Operating expenses ............................................ $78,000 Less ending balance accounts payable ..........(23,000) Cash payments for operating expenses** ......... $55,000
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EXERCISE 17-13 FLYPAPER AIRLINES INC. Cash Flow Statement Year Ended March 31, 2017 Operating activities Cash receipts Cash receipts from customers ................................ $254,000* Dividends on investments ...................................... 14,000 268,000 Cash payments To suppliers........................................... $(110,000) For operating expenses ....................... (28,000) For salaries ........................................... (51,000) For interest ........................................... (8,000) For income tax.......................................... (7,500) (204,500) Net cash provided by operating activities ......... 63,500 Investing activities Sale of aircraft ............................................. $212,000 Purchase of land .......................................... (174,000) Purchase of equipment .............................. (22,000) Net cash provided by investing activities................... 16,000 Financing activities Payment of cash dividends ........................ (14,000) Net cash used by financing activities ..................... (14,000) Net increase in cash .............................................................. 65,500 Cash, April 1, 2016 ........................................................... 35,000 Cash, March 31, 2017 ....................................................... $ 100,500 Note X: Land costing $35,000 was acquired by issuing common shares. * $53,000 + $201,000 = $254,000
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EXERCISE 17-14 PESCI LTD. Cash Flow Statement (Partial) Year Ended November 30, 2017 Operating activities Cash receipts from customers1 ................................. $984,000 Cash payments: To suppliers2.................................... $(521,000) For operating expenses3 ................. (312,000) 4 For income taxes ............................ (34,000) (867,000) Net cash provided by operating activities .............. $117,000 1.
Sales revenue ............................................ $948,000 Add: Decrease in accounts receivable .... 36,000 Cash receipts from customers ................. $984,000
2.
Cost of goods sold .................................... $490,000 Add: Increase in inventory ...................... 19,000 Add: Decrease in accounts payable ....... 12,000 Cash payments to suppliers ..................... $521,000
3.
Operating expenses .................................. $310,000 Add: Increase in prepaid expenses ......... 2,000 Cash payments for operating expenses .. $312,000
4.
Income tax expense .................................. Add: Decrease in income tax payable ..... Cash payments for income tax.................
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$30,000 4,000 $34,000
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EXERCISE 17-15 (a) Sales revenue ........................................... Less: Increase in accounts receivable .. Cash receipts from customers ................
$275,000 (14,100) $260,900
(b) Cost of goods sold................................... Less: Decrease in inventory ................... Add: Decrease in accounts payable ..... Cash payments to suppliers ...................
$110,000 (3,300) 1,700 $108,400
(c) Operating expenses ................................. Less: Depreciation expense ................... Add: Increase in prepaid expenses ........ Decrease in accrued expenses payable........................................ Cash payments for operating expenses..
$70,000 (20,000) 2,500
(d) Interest expense.......................................
$18,000
Cash payments for interest expense ......
$18,000
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2,000 $54,500
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EXERCISE 17-16 McTAVISH LTD. Cash Flow Statement (partial)—Direct Method Year Ended September 30, 2017 Operating activities Cash receipts Cash receipts from customers 1 .............................. $262,000 Cash payments For operating expenses 2........................ (114,600) For interest 3 ......................................... (3,500) 4 For income taxes ............................... (28,700) (146,800) Net cash provided by operating activities ........... 115,200 1. Cash receipts from customers Service revenue .................................................. Less: Increase in accounts receivable .............
2. Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ................... Less: Increase in accrued expenses payable ...
3. Cash payments for interest Interest expense ................................................. Less: Increase in interest payable.....................
$285,000 (23,000) $262,000 $122,000 3,100 (10,500) $114,600 $ $
4. Cash payments for income taxes Income tax expense............................................ Less: Increase in Income taxes payable ...........
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4,000 (500) 3,500
$ 38,500 (9,800) $ 28,700
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EXERCISE 17-17 CHARRON INC. Cash Flow Statement (partial)—Direct Method Year Ended October 31, 2017 Operating activities Cash receipts Cash receipts from customers 1 .............................. $602,000 Cash payments To suppliers 2 ........................................ $(369,500) For operating expenses 3..................... (92,700) 4 For income taxes ............................... (34,000) (496,200) Net cash provided by operating activities ......... $105,800 1. Cash receipts from customers Sales .................................................................... Less: Increase in accounts receivable ............. 2. Cash payments to suppliers Cost of goods sold ............................................. Less: Decrease in inventory .............................. Increase in accounts payable .................. 3. Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ................... Decrease in accrued expenses payable .. 4. Cash payments for income taxes Income tax expense............................................ Add: Decrease in income taxes payable ...........
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$625,000 (23,000) $602,000 $390,000 (13,500) (7,000) $369,500 $88,000 1,700 3,000 $92,700 $29,000 5,000 $34,000
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EXERCISE 17-18 (a) STORM ADVENTURES LTD. Cash Flow Statement—Indirect method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $69,900 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ............................... $50,000 Loss on sale of land .................................... 10,000 Decrease in accounts receivable ........... 9,000 Decrease in inventory ................................. 12,000 Increase in prepaid expenses ................ (7,000) Increase in accounts payable................. 5,000 Decrease in income taxes payable ........ (3,500) 75,500 Net cash provided by operating activities ........... 145,400 Investing activities Sale of land ($25,000 − $10,000 loss).............. 15,000 Purchase of equipment ................................. (80,000) Net cash used by investing activities ........................ (65,000) Financing activities Payment of cash dividends (1) ..................... (30,000) Redemption of bonds ..................................... (60,000) Issue of common shares .............................. 40,000 Net cash used by financing activities ..................... (50,000) Net increase in cash .............................................................. 30,400 Cash, January 1 .................................................................. 12,600 Cash, December 31 ............................................................ $ 43,000
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EXERCISE 17-18 (Continued) (a) (Continued) (1) Transactions involving Retained Earnings: Retained Earnings Dividends
32,500
Jan. 1, 2017 Profit Dec.31, 2017
103,600 69,900 141,000
Dividends Payable Dividends paid
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Jan. 1, 2017 Dividends Dec.31, 2017
5,000 32,500 7,500
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EXERCISE 17-18 (Continued) (b) STORM ADVENTURES LTD. Cash Flow Statement—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts Cash receipts from customers (1)........................... $687,000 Cash payments To suppliers (2) ..................................... $(422,800) For operating expenses (3).................. (87,000) For interest ........................................... (5,000) For income taxes (4) ............................ (26,800) (541,600) Net cash provided by operating activities ........... 145,400 Investing activities Sale of land ($25,000 − $10,000 loss).............. 15,000 Purchase of equipment ................................ (80,000) Net cash used by investing activities ........................ (65,000) Financing activities Payment of cash dividends ........................... (30,000) Redemption of bonds ..................................... (60,000) Issue of common shares .............................. 40,000 Net cash used by financing activities ..................... (50,000) Net increase in cash.......................................................... 30,400 Cash, January 1................................................................. 12,600 Cash, December 31 ........................................................... $ 43,000 (1) Cash receipts from customers Sales .................................................................... Add: Decrease in accounts receivable.............
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$678,000 9,000 $687,000
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EXERCISE 17-18 (Continued) (b) (Continued) (2) Cash payments to suppliers Cost of goods sold ............................................. Less: Decrease in inventory .............................. Cost of goods purchased................................... Less: Increase in accounts payable ..................
(3) Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ...................
(4) Cash payments for income taxes Income tax expense............................................ Add: Decrease in Income taxes payable ...........
$439,800 (12,000) 427,800 (5,000) $422,800 $80,000 7,000 $87,000 $23,300 3,500 $26,800
EXERCISE 17-19 Company A is clearly in a better financial position than Company B. While both companies experienced similar increases in cash, it should be noted that Company A’s cash flow comes mainly from its operations, while company B’s cash was acquired through debt/equity, as evidenced by the large amount of cash generated through financing activities. By contrast, Company A appears to be paying down debt/equity, as its cash flow from financing activities is negative. Essentially, Company A appears to be self-sustaining (independent of external sources for its financing) to a much greater degree than Company B.
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EXERCISE 17-20 (a) ($ in millions) Cash provided (used) by operating activities Cash provided (used) by investing activities Cash provided (used) by financing activities Increase in cash
Bank of Montreal
Scotiabank
$(2,927)
$ 4,944
3,293
(586)
(465) $ (99)
(4,186) $ 172
Bank of Montreal
Scotiabank
$(2,927)
$ 4,944
3,293 $ 366
(586) $ 4,358
(b) ($ in millions)
− = (c)
Cash provided (used) by operating activities Cash provided (used) by investing activities Free cash flow
At first glance, Scotiabank appears to have better cash management performance because it had a larger increase in cash for the year. When we look closer at the sources of the change in the cash balance, we see that Scotiabank generated most of its cash from operations with very little used by investing activities. By contrast, Bank of Montreal’s extremely large use of cash from operating activities has been completely financed by investing activities, leaving little use of cash by financing activities. Looking more closely at the transactions that lead to this result would be necessary to draw more detailed conclusions.
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EXERCISE 17-20 (Continued) (d) A manufacturing company’s free cash flow would come primarily from its operating activities, not its investing activities. Due to the nature of its operations, banks invariably are more involved in investing activities than a manufacturing company and so larger amounts would appear on their statement of cash flow for investing activities compared to operating activities. There is an exception to this generality in the case of Scotiabank as evidenced in the above analysis.
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SOLUTIONS TO PROBLEMS PROBLEM 17-1A
Transaction 1. 2. 3. 4.
5. 6. 7. 8. 9. 10. 11. 12.
13. 14. 15. 16. 17. 18.
Paid telephone bill for the month. Sold equipment for cash, at a loss.* Sold an investment, at a gain.* Acquired a building by paying 10% in cash and signing a mortgage payable for the balance. Made principal repayments on the mortgage. Paid interest on the mortgage.** Sold inventory on account, at a price greater than cost. Paid wages owing (previously accrued) to employees. Declared and paid a cash dividend to common shareholders.** Paid rent in advance. Sold inventory for cash, at a price greater than cost. Wrote down the value of inventory to net realizable value, which was lower than cost. Received semi-annual bond interest.** Received dividends on an investment in associate.** Issued common shares. Paid a cash dividend to common shareholders.** Collected cash from customers on account. Collected service revenue in advance.
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(a) Classification O I I I
(b) Cash
NC F
NE −
O O
− NE
O
−
F
−
O O
− +
O
NE
O O
+ +
F F
+ −
O
+
O
+
− + + −
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PROBLEM 17-1A (Continued) *
Using the indirect method, the loss/gain would be added/deducted under operating activities. ** Interest and dividends received can be reported as operating or investing activities. Interest and dividends paid can be reported as operating or financing activities. Taking It Further: Operating activities can increase cash without increasing profits in cases where cash is received at a different time from when revenue is earned, for example: Collection of outstanding receivables (Dr) Cash, (Cr) Accounts Receivable — profit was increased when the sale was recognized and not when cash is collected; Cash received in advance of being earned (Dr) Cash, (Cr) Unearned Revenue — profit will be increased when the revenue is earned and not when cash is collected.
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PROBLEM 17-2A (a)
MOLLOY LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended September 30, 2017
Operating activities Profit ......................................................... $116,000 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ......................... $25,000 Gain on sale of land ............................ (35,000) Decrease in accounts receivable ....... 15,000 Increase in inventory .......................... (7,000) Decrease in prepaid expenses ........... 5,000 Increase in accounts payable............. 10,000 Increase in accrued expenses payable 4,000 Decrease in income taxes payable .... (6,000) 11,000 Net cash provided by operating activities $127,000 (b) MOLLOY LTD. Cash Flow Statement (Partial)—Direct Method Year Ended September 30, 2017 Operating activities Cash receipts From customers (1)..................................... $595,000 Cash payments To suppliers ................................ $(337,000) (2) For operating expenses ......... (87,000) (3) For income taxes.................... (44,000) (4) (468,000) Net cash provided by operating activities $127,000
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PROBLEM 17-2A (Continued) (b) (Continued) Calculations (1)
(2)
(3)
(4)
Cash receipts from customers Sales ............................................................ Add: decrease in accounts receivable ..... Cash receipts from customers ..................
$580,000 15,000 $595,000
Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ......................... Cost of purchases ...................................... Less: increase in accounts payable ......... Cash payments to suppliers ......................
$340,000 7,000 347,000 (10,000) $337,000
Cash payments for operating expenses Operating expenses .................................. Less: Increase in accrued expenses payable Decrease in prepaid expenses.......... Cash payments for operating expenses ...
$96,000 (4,000) (5,000) $87,000
Cash payments for income taxes Income tax expense.................................... Add: Decrease in income tax payable ...... Cash payments for income taxes ..............
$38,000 6,000 $44,000
Taking It Further: The direct method of preparing the operating activities section will always produce the same amount of cash provided (used) by operations as the indirect method. The two methods differ in presentation format only and present the same net cash inflows and outflows.
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PROBLEM 17-3A (a) HANALEI INTERNATIONAL INC. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2017
Operating activities Profit .............................................................................. $123,750 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense .............................. $35,000 Loss on sale of equipment ........................ 25,000 Increase in accounts receivable............... (12,000) Decrease in prepaid expenses .............. 3,000 Decrease in accounts payable ................. (11,000) Increase in interest payable .................. 750 Decrease in income tax payable ........... (1,500) Increase in unearned revenue ............... 4,000 43,250 Net cash provided by operating activities $167,000 (b) HANALEI INTERNATIONAL INC. Cash Flow Statement (Partial)—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts from customers (1) ......................... $472,000 Cash payments For operating expenses .................... $(253,000) (2) For interest ...................................... (9,250) (3) For income tax..................................... (42,750) (4) (305,000) Net cash provided by operating activities $167,000
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PROBLEM 17-3A (Continued) (b) (Continued) Calculations: (1) Cash receipts from customers Service revenue ................................................... Less: Increase in accounts receivable ............ Add: Increase in unearned revenue ................ Cash receipts from customers ...........................
$480,000 (12,000) 4,000 $472,000
(2) Cash payments for operating expenses Operating expenses ............................................ Less: Decrease in prepaid insurance ............... Add: Decrease in accounts payable ............... Cash payments for operating expenses ............
$245,000 (3,000) 11,000 $253,000
(3) Cash payments for interest Interest expense .................................................. Less: Increase in interest payable .................... Cash payments for interest ................................
$10,000 (750) $ 9,250
(4) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income tax payable ............... Cash payments for income tax...........................
$41,250 1,500 $42,750
Taking It Further: The direct method of preparing the operating activities section shows the specific cash receipts and payments related to operations. This information is usually more meaningful to users. The preparation of the operating activities section using the direct method provides more details to the company’s competitors, which is a disadvantage. The other disadvantage of the direct method is that most users are not as familiar with this format. Solutions Manual .
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PROBLEM 17-4A TRUDEAU INC. Cash Flow Statement (Partial) Year Ended December 31, 2017 (a) Investing activities Sale of equipment (1) ................................. $ 3,875 Sale of building (2)...................................... 22,500 Purchase of land ............................................. (40,000) Purchase of building (2) ............................... (150,000) Purchase of equipment (Note X) ................. (10,000) Net cash used by investing activities .................... $(173,625)
(b) Profit reported by Trudeau Inc. In 2017 is $125,000. See calculation (5) (c) Financing activities Repayment of notes (3) ................................ $(35,000) Repayment of mortgage (4)............................ (40,000) Payment of cash dividends (5) ...................... (21,250) Issuance of common shares (6)................. 122,000 Net cash provided from financing activities $ 25,750 (d) Note X: Equipment costing $75,000 was acquired by paying $10,000 cash and issuing a note payable for $65,000.
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PROBLEM 17-4A (Continued) Calculations: (1) Transactions involving Equipment: Equipment Jan. 1, 2017 Purchases Dec. 31, 2017
340,000 75,000 393,000
Disposal
22,000
Accumulated Depreciation—Equipment Disposal
19,125
Jan. 1, 2017 Depreciation Dec. 31, 2017
94,000 49,125 124,000
Cost of equipment sold.................................... Accumulated depreciation (derived above) ... Net carrying amount ........................................ Add: Gain on disposal of equipment .............. Cash proceeds from sale.................................
$22,000 19,125 2,875 1,000 $ 3,875
Cash .................................................................. Accumulated Depreciation-Equipment........... Gain on Disposal ......................................... Equipment .....................................................
3,875 19,125
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1,000 22,000
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PROBLEM 17-4A (Continued) Calculations: (Continued) (2) Transactions involving Building: Building Jan. 1, 2017 Purchases Dec. 31, 2017
750,000 150,000 850,000
Disposal
50,000
Accumulated Depreciation—Building Disposal
17,500
Jan. 1, 2017 Depreciation Dec. 31, 2017
300,000 25,000 307,500
Cost of building sold........................................ Accumulated depreciation (derived above) ... Net carrying amount ........................................ Less: Loss on disposal of building................. Cash proceeds from sale.................................
$50,000 17,500 32,500 10,000 $22,500
Cash .................................................................. Accumulated Depreciation-Building ............... Loss on Disposal.............................................. Building ........................................................
22,500 17,500 10,000 50,000
(3) Transactions involving Notes Payable: Notes Payable Repayments
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Jan. 1, 2017 New notes Dec. 31, 2017
310,000 65,000 340,000
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PROBLEM 17-4A (Continued) Calculations: (Continued) (4) Transactions involving Mortgage Payable: Mortgage Payable Repayments
Jan. 1, 2017
585,000
Dec. 31, 2017
545,000
40,000
(5) Transactions involving Retained Earnings: Retained Earnings Closing div.
25,000
Jan. 1, 2017 Profit (b) Dec. 31, 2017
100,000 125,000 200,000
Dividends decl. Dec. 31, 2017
Cash Dividends 25,000 Closing entry 0
25,000
Dividends Payable Dividends paid
21,250
Jan. 1, 2017 2,500 Dividends decl. 25,000 Dec. 31, 2017 6,250
(6) Transactions involving Common Shares: Common Shares Jan. 1, 2017 Issuance Dec. 31, 2017
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685,000 122,000 807,000
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PROBLEM 17-4A (Continued) (e)
Cash December 31, 2017 Cash December 31, 2016 Net increase in cash for fiscal year 2017 Add: Cash used in investing activities (a) Less: Cash provided by financing activities (c) Cash provided from operating activities
$ 22,125 10,000 12,125 173,625 (25,750) $160,000
Taking It Further: A net cash outflow from investing activities is usually seen as favourable since it signifies investment in the company’s productive capacity (net purchases of long-term assets). The net cash outflow from investing activities indicates purchasing in anticipation of future growth, efficiencies, productivity, and profitability. However, this does not guarantee that the company’s plans and predictions will be realized or that the purchases are economical or efficient.
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PROBLEM 17-5A (a) GIL COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $32,000 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) .......................... $14,500 Increase in accounts receivable................ (16,000) Increase in inventory ................................... (7,000) Increase in accounts payable ....................... 9,000 Decrease in income taxes payable .......... (1,000) (500) Net cash provided by operating activities 31,500 Investing activities Sale of equipment (1) .................................. 8,500 Net cash provided by investing activities Financing activities Dividends paid ............................................. Repayments of notes payable .................... Issuance of common shares....................... Net cash used by financing activities
8,500
(20,000) (6,000) 4,000 (22,000)
Net increase in cash.......................................................... Cash, Jan. 1 ....................................................................... Cash, Dec. 31 .....................................................................
18,000 20,000 $ 38,000
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PROBLEM 17-5A (Continued) (a) (Continued) (1) Transactions involving Equipment:
Jan. 1, 2017 Dec. 31, 2017
Equipment 78,000 Disposal 60,000
18,000
Accumulated Depreciation—Equipment Disposal
9,500
Jan. 1, 2017 Depreciation Dec. 31, 2017
24,000 14,500 29,000
Cost of equipment sold.........................................$18,000 Accumulated depreciation (derived above) ... 9,500 Net carrying amount ........................................ 8,500 No gain or loss on income statement ............. 0 Cash proceeds from sale................................. $ 8,500 Cash .................................................................. Accumulated Depreciation-Equipment........... Equipment .....................................................
8,500 9,500 18,000
(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $31,500 – ($8,500) = $40,000
Taking It Further: It is possible to have had a negative cash balance at any point in the year if there is an arrangement with the bank that Gil’s bank account can go into an overdraft position. Depending on the timing of major disbursements, such as the payment of dividends, there might not be sufficient cash in the bank account at that date.
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PROBLEM 17-6A (a) STRONG SHOES Cash Flow Statement—Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $28,300 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) ............................ $5,200 Loss on disposal (1)...................................... 4,500 Increase in accounts receivable.................. (1,900) Increase in accounts payable................... 8,500 16,300 Net cash provided by operating activities 44,600 Investing activities Sale of equipment (1) .................................. 4,300 Purchase of investments ................................ (7,000) Net cash used by investing activities
(2,700)
Financing activities Dividends paid ............................................. Repayment of notes payable ...................... Issuance of common shares....................... Net cash used by financing activities
(31,400)
(26,400) (20,000) 15,000
Net increase in cash.......................................................... Cash, Jan. 1 ....................................................................... Cash, Dec. 31 .....................................................................
10,500 17,700 $ 28,200
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PROBLEM 17-6A (Continued) (a) (Continued) (1) Transactions involving Equipment:
Jan. 1, 2017 Dec. 31, 2017
Equipment 70,000 Disposal 60,000
10,000
Accumulated Depreciation-Equipment Disposal
1,200
Jan. 1, 2017 Depreciation Dec. 31, 2017
Cost of plant assets sold ................................. Accumulated depreciation............................... Net carrying amount ........................................ Loss on disposal .............................................. Cash proceeds from sale.................................
10,000 5,200 14,000
$10,000 1,200 8,800 4,500 $ 4,300
(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $44,600 +$4,300– $0 = $48,300 Taking It Further: Strong Shoes may desire to present its cash flows from operations using the direct method instead of the indirect method to highlight certain amounts. They may believe that communicating cash collections from customers, for example will better communicate to the financial statement users, the size of its operations. The total amount of cash flow from operations would remain the same under both methods.
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PROBLEM 17-7A COYOTE LTD. Cash Flow Statement—Indirect Method Year Ended May 31, 2017 Operating activities Profit ................................................................................$108,000 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) .......................... $28,250 Loss on sale of land .................................... 20,000 Increase in accounts receivable.................. (9,000) Increase in inventory ................................. (12,000) Decrease in prepaid expenses ..................... 2,500 Increase in accounts payable ....................... 5,000 Decrease in income taxes payable .......... (3,500) 31,250 Net cash provided by operating activities 139,250 Investing activities Sale of land ($50,000 – $20,000)...................... 30,000 Purchase of equipment (2) ........................... (135,000) Purchase of land (Note X) ............................ (55,000) Net cash used by investing activities .......................(160,000) Financing activities Sale of common shares............................... 50,000 Payment of cash dividends (4) .....................(59,650) Net cash used by financing activities ....................... (9,650) Net decrease in cash ............................................................ (30,400) Cash, June 1, 2016 ............................................................. 43,000 Cash, May 31, 2017............................................................. $ 12,600 Note X: Land with a cost of $100,000 was purchased by paying $55,000 cash and issuing a mortgage note payable for $45,000.
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PROBLEM 17-7A (Continued) (1) Increase in accumulated depreciation ($68,250 – $40,000) (2) Increase in equipment ($325,000 – $190,000) (3) Beginning balance of mortgage payable Add: New note issued for land purchase Ending balance of mortgage payable
$ 80,000 45,000 125,000
(4) Transactions involving Retained Earnings: Retained Earnings Div. (derived)
62,150
June 1, 2016 Profit May 31, 2017
215,500 108,000 261,350
Dividends Payable Dividends paid
59,650
June 1, 2016 5,000 Dividends decl. 62,150 May. 31, 2017 7,500
Taking It Further: A net cash outflow from financing activities is usually seen as favourable since it signifies repayment of debt and payment of dividends to owners. On the other hand, a net cash inflow from financing activities can be either favourable or unfavourable. It is favourable if the company is acquiring financing through debt or issue of shares to finance production or acquire long-term assets. It is unfavourable when the company is seeking to generate cash it cannot obtain otherwise. When combined with low or negative cash from operating activities and cash inflows from investing activities, the company may be sacrificing long-term profitability for short-term survival.
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PROBLEM 17-8A
COYOTE LTD. Cash Flow Statement—Direct Method Year Ended May 31, 2017 Operating activities Cash receipts From customers (1).......................
$664,250
Cash payments To suppliers (2) ............................. $(410,950) For operating expenses (3)........... (69,550) For interest (4) ............................... (5,000) For income tax (5) ......................... (39,500) (525,000) Net cash provided by operating activities ........... 139,250 Investing activities Sale of land ($50,000 – $20,000)..... $ 30,000 Purchase of equipment (6) ........................... (135,000) Purchase of land (Note X) ............................ (55,000) Net cash used by investing activities .......................(160,000) Financing activities Sale of common shares............................... 50,000 Payment of cash dividends (7) .....................(59,650) Net cash used by financing activities ....................... (9,650) Net decrease in cash ............................................................ (30,400) Cash, June 1, 2016 ............................................................. 43,000 Cash, May 31, 2017............................................................. $ 12,600 Note X: Land with a cost of $100,000 was purchased by paying $55,000 cash and issuing a mortgage note payable for $45,000.
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PROBLEM 17-8A (Continued) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Less: Increase in accounts payable................... (3) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense (7) .......................... Less: Decrease in prepaid expenses ................. (4) Cash payments for interest Interest expense .................................................. (5) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income taxes payable............
$673,250 (9,000) $664,250 $403,950 12,000 415,950 (5,000) $410,950 $100,300 (28,250) (2,500) $ 69,550 $ 5,000 $ 36,000 3,500 $ 39,500
(6) Increase in equipment ($325,000 – $190,000)
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PROBLEM 17-8A (Continued) Calculations: (Continued) (7) Transactions involving Retained Earnings: Retained Earnings Div. (derived)
62,150
June 1, 2016 Profit May 31, 2017
215,500 108,000 261,350
Dividends Payable Dividends paid
59,650
June 1, 2016 5,000 Dividends decl. 62,150 May. 31, 2017 7,500
Taking It Further: If Coyote Inc. was reporting under IFRS instead of ASPE, the interest paid could be classified as financing activities or the dividends paid could be classified as operating activities.
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PROBLEM 17-9A (a) E-PERFORM LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................$141,180 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense ............................... $46,500 Loss on sale of equipment ........................... 7,500 Increase in accounts receivable................ (32,800) Increase in inventory ................................. (29,650) Increase in prepaid expenses ................... (12,400) Increase in accounts payable ..................... 15,700 Increase in accrued expenses payable ... 4,500 (650) Net cash provided by operating activities ................ 140,530 Investing activities Sale of equipment* ...................................... 1,500 Purchase of long-term investments .............. (14,000) Purchase of equipment (Note X) ................... (25,000) Net cash used by investing activities ........................ (37,500) Financing activities Sale of common shares............................... 59,000 Retirement of note payable** ........................(100,000) Payment of cash dividends***........................(12,630) Net cash used by financing activities ....................... (53,630) Net increase in cash .............................................................. 49,400 Cash, January 1 .................................................................. 48,400 Cash, December 31 ............................................................ $ 97,800 Note X: Equipment was purchased by paying $25,000 cash and issuing a note payable for $60,000. Solutions Manual .
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PROBLEM 17-9A (Continued) (a) (Continued) *
Cash ................................................................... 1,500 Accumulated Depreciation-Equipment ......... 48,500 Loss on Disposal .............................................. 7,500 Equipment ................................................
57,500
* Cost of equipment sold $242,500 + $85,000 − $270,000 = $57,500 Accumulated depreciation removed from accounts ($52,000 + $46,500 depreciation expense) − $50,000 = $48,500 NBV = Cost $57,500 − Accumulated depreciation $48,500 = $9,000 Cash proceeds = NBV $9,000 − Loss on sale $7,500 = $1,500 ** Notes payable, 2016 ............................................ Note issued for equipment.................................. Notes payable retired .......................................... Notes payable, 2017 ............................................ *** Retained earnings, 2016 ...................................... Profit ..................................................................... Dividends declared and paid .............................. Retained earnings, 2017 ......................................
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$150,000 60,000 210,000 (100,000) $110,000 $105,450 141,180 246,630 (12,630) $234,000
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PROBLEM 17-9A (Continued) (b) E-PERFORM LTD. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts from customers ............................... $459,980 (1) Cash payments To suppliers................................. $(199,410) (2) For operating expenses .............. (70,310) (3) For income tax............................. (45,000) For interest .................................. (4,730) (319,450) Net cash provided by operating activities ...... 140,530 Calculations: (1)
Cash receipts from customers Sales ............................................................ Less: Increase in accounts receivable ......
(2)
Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ........................ Cost of goods purchased........................... Less: Increase in accounts payable ..........
(3)
$492,780 (32,800) $459,980
$185,460 29,650 215,110 (15,700) $199,410
Cash payments for operating expenses Operating expenses ................................... Add: Increase in prepaid expenses .......... Less: Increase in accrued expenses payable
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$62,410 12,400 (4,500) $70,310
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PROBLEM 17-9A (Continued)
Taking It Further: The company generated significant amounts of cash from its operations through cash received from customers. Some of this cash has been reinvested in the company through the purchase of equipment and by paying down the company’s debts and paying dividends to its owners.
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PROBLEM 17-10A (a) WETASKIWIN LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $36,000 Adjustments to reconcile profit to net cash used by operating activities: Depreciation expense ............................. $11,000 (1) Loss on sale of equipment ..................... 2,000 Increase in accounts receivable................ (14,000) Increase in inventory .............................. (4,000) Decrease in accounts payable .................. (18,000) Decrease in income tax payable ............ (17,000) (40,000) Net cash used by operating activities ................ (4,000) Investing activities Collection of notes receivable ........................ 23,000 Issue of notes receivable ............................... (14,000) Sale of equipment ............................................ 8,000 (2) Net cash provided by investing activities................... 17,000 Financing activities Repayment of note payable ............................ (5,000) (3) Payment of cash dividends ...........................(9,000) (4) Net cash used by financing activities ..................... (14,000) Net decrease in cash......................................................... Cash, January 1................................................................. Cash, December 31 ...........................................................
(1,000) 10,000 $ 9,000
Note: Equipment costing $10,000 was purchased by issuing a note payable.
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PROBLEM 17-10A (Continued) Calculations: (1) Depreciation expense Accumulated depreciation, beginning of year............ $24,000 Less: Accumulated depreciation of equipment sold ($15,000 − $10,000) ............................... (5,000) Accumulated depreciation, end of year ............ (30,000) Depreciation expense .................................................. $11,000 (2) Cash from the sale of equipment Equipment carrying amount.................................................................... $10,000 Less: Loss on sale ......................................................... (2,000) Cash received ............................................................... $ 8,000 (3) Note Payable Note payable, beginning of year .................................. $10,000 Add: Issue of note for equipment .............................. 10,000 20,000 Less: Repayment of note (calculated) ....................... (5,000) Note payable, end of year ............................................ $15,000 (4) Cash dividends Retained earnings, beginning of year ......................... $28,000 Add: Profit ................................................................... 36,000 64,000 Less: Dividends (calculated) ...................................... (9,000) Retained earnings, end of year .................................... $55,000
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PROBLEM 17-10A (Continued) (b) WETASKIWIN LTD. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts From customers ...................................................... $272,000 (1) From interest ........................................................... 1,000 Cash payments To suppliers..................................... $(216,000) (2) For operating expenses .................. (27,000) (3) For interest ...................................... (2,000) For income tax................................. (32,000) (4) (277,000) Net cash used by operating activities ................ (4,000) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Add: Decrease in accounts payable ................ (3) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense ............................... (4) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income tax payable .............
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$286,000 (14,000) $272,000 $194,000 4,000 198,000 18,000 $216,000 $38,000 (11,000) $27,000 $15,000 17,000 $32,000 Chapter 17
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PROBLEM 17-10A (Continued)
Taking It Further: Yes. A small change is the result of offsetting balances. For Wetaskiwin, the cash flow statement shows that operating activities used cash of $4,000 during the year. This is important information since the company’s main source of sustainable cash is operating activities. A negative cash flow from operations is a strong indicator of financial difficulties, unless the company is in its start-up phase. The cash flow statement also shows that the company’s negative cash flow from operations was counterbalanced by cash inflows from the collection of outstanding notes receivable. This is a nonrenewable source of cash for the following year (the notes outstanding at the end of 2017 are lower at $14,000).
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PROBLEM 17-11A DIATESSARON INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $68,000 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ............................. $43,500 (1) Loss on sale of equipment ..................... 3,000 Increase in accounts receivable ............ (26,000) Increase in inventory .............................. (49,500) Increase in accounts payable................. 10,500 Decrease in income tax payable ............ (1,000) (19,500) Net cash provided by operating activities ............. 48,500 Investing activities Acquisition of long-term investment ............ (101,500) Purchase of equipment ................................. (105,000) Sale of equipment ......................................... 6,000 (2) Net cash used by investing activities ...................... (200,500) Financing activities Issue of note payable .................................. 28,000 Issuance of common shares....................... 105,000 Payment of dividends ($15,000 − $6,000) ... (9,000) Repayment of note payable ........................ (3,000) Net cash provided by financing activities ................121,000 Net decrease in cash......................................................... (31,000) Cash, January 1................................................................. 98,000 Cash, December 31 ........................................................... $67,000
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PROBLEM 17-11A (Continued) Calculations: (1) Depreciation expense Accumulated depreciation, end of year .................... $162,500 Plus: Accumulated depreciation of equipment sold ($30,000 − $9,000) ..................................... 21,000 Accumulated depreciation, beg. of year ......... (140,000) Depreciation expense ................................................. $ 43,500 (2) Cash from sale of equipment Carrying amount of equipment...................................... $9,000 Less: Loss on sale ....................................................... (3,000) Cash received ................................................................. $6,000
Taking It Further: Both the proceeds and the repayment should be shown separately. Information in financial statements is usually condensed and regrouped so that proceeds from issuing a note and repayments do not necessarily relate to the same debt instrument. Showing both separately allows the user to tie the amounts to note disclosure about the various debt instruments.
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PROBLEM 17-12A DIATESSARON INC. Cash Flow Statement – Direct Method Year Ended December 31, 2017 Operating activities Cash receipts From customers ...................................................... $637,000 (1) From interest ........................................................... 4,500 Cash payments To suppliers..................................... $(471,000) (2) For operating expenses .................. (104,000) (3) For interest ...................................... (3,000) For income tax................................. (15,000) (4) (593,000) Net cash provided by operating activities ............. 48,500 Investing activities Acquisition of long-term investment.. (101,500) Purchase of equipment .......................... (105,000) Sale of equipment ................................... 6,000 (6) Net cash used by investing activities ...................... (200,500) Financing activities Issue of note payable .................................. 28,000 Issuance of common shares ...........................105,000 Payment of dividends ($15,000 − $6,000) ... (9,000) Repayment of note payable ........................ (3,000) Net cash provided by financing activities ............... 121,000 Net decrease in cash ............................................................ (31,000) Cash, January 1 ................................................................... 98,000 Cash, December 31 ............................................................. $67,000
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PROBLEM 17-12A (Continued) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Less: Increase in accounts payable.................. (3) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense* .............................. (4) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income tax payable ............. (5) Cash from sale of equipment Carrying amount of equipment.................................. Less: Loss on sale .................................................... Cash received .............................................................
*
$663,000 (26,000) $637,000 $432,000 49,500 481,500 (10,500) $471,000 $147,500 (43,500) $104,000 $14,000 1,000 $15,000 $9,000 (3,000) $6,000
Depreciation expense Accumulated depreciation, end of year .................... $162,500 Plus: Accumulated depreciation of equipment sold ($30,000 − $9,000) ..................................... 21,000 Accumulated depreciation, beg. of year ......... (140,000) Depreciation expense .................................................. $43,500
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PROBLEM 17-12A (Continued)
Taking It Further: Accounts payable can arise from various expenditures. The accounts payable used for purchases is necessary to calculate cash payments to suppliers. Accounts payable can also relate to operating expenses and the information is necessary to properly match the accrual to the related expense. If payments to suppliers and payments for operating expenses are grouped together on the cash flow statement, the information would not be necessary.
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PROBLEM 17-13A (a)
Net cash provided (used) by operating activities − net cash (provided) used by investing activities = free cash flow ($ in U.S. millions)
(b)
Potash:
$2,614 − $1,160 = $1,454
Agrium:
$1,312 − $2,068 = $(756)
Potash appears to be in the stronger financial position. It generates more cash from operating activities, it is investing in property, plant, and equipment, and it is also paying down its debt. It also has a higher profit, and a higher free cash flow.
Taking It Further: Agrium appears to be in a growth stage as well as Potash Corporation as both companies spent more than $1.1 billion on investing activities. Agrium was forced to borrow from creditors and/or investors to finance its purchases of property, plant, and equipment, or other businesses.
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PROBLEM 17-1B
Transaction 1. Paid telephone bill for the month. 2. Sold land for cash, at a gain.* 3. Acquired land by issuing common shares. 4. Paid a cash dividend to preferred shareholders. 5. Performed services for cash. 6. Performed services on account. 7. Purchased inventory for cash. 8. Purchased inventory on account. 9. Paid income tax. 10. Made principal repayment on a trade note payable. 11. Paid semi-annual bond interest. 12. Received rent from a tenant in advance. 13. Recorded depreciation expense. ** 14. Reacquired common shares at a price greater than the average cost of the shares. 15. Issued preferred shares for cash. 16. Collected cash from customers on account. 17. Issued a note payable. 18. Paid insurance for the month.
(a) Classification O I
(b) Cash
NC
NE
F
−
O O O O O
+ NE − NE −
O
−
O
−
O
+
O
NE
F
−
F
+
O
+
F O
+ −
− +
Interest paid can be classified as a financing activity. * The gain on sale of land would appear in the operating section of the cash flow statement if the indirect method was used.
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PROBLEM 17-1B (Continued) ** Depreciation expense is added to cash from operating activities when using the indirect method, not because it is a source of cash, but rather to cancel the deduction from profit because there is no source of cash from depreciation expense. Taking It Further: Operating activities can decrease cash without decreasing profit in the following cases: Prepayments in excess of consumption of goods or services; Payments on current liabilities (related to operating activities) in excess of current year’s expenses.
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PROBLEM 17-2B (a)
LUI INC. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2017
Operating activities Profit ......................................................... $90,500 Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ......................... $28,500 Loss on sale of equipment ................. 9,500 Decrease in accounts receivable ....... 21,000 Increase in inventory .......................... (32,000) Decrease in prepaid expenses ........... 7,000 Decrease in accounts payable ........... (5,000) Increase in accrued expenses payable 8,500 Increase in interest payable ............... 3,500 Decrease in income tax payable ........ (6,500) 34,500 Net cash provided by operating activities $125,000 (b) LUI INC. Cash Flow Statement (Partial)—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts From customers (1)..................................... $841,000 Cash payments To suppliers ................................ $(529,000) (2) For operating expenses ......... (146,500) (3) For interest ............................. (4,000) (4) For income taxes.................... (36,500) (5) (716,000) Net cash provided by operating activities $125,000
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PROBLEM 17-2B (Continued) Calculations (1)
(2)
(3)
(4)
(5)
Cash receipts from customers Sales ............................................................ Add: decrease in accounts receivable ..... Cash receipts from customers ..................
$820,000 21,000 $841,000
Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ......................... Cost of purchases ...................................... Add: decrease in accounts payable ......... Cash payments to suppliers ......................
$492,000 32,000 524,000 5,000 $529,000
Cash payments for operating expenses Operating expenses .................................. Less: Increase in accrued expenses payable Decrease in prepaid expenses.......... Cash payments for operating expenses ...
$162,000 (8,500) (7,000) $146,500
Cash payments for interest Interest expense ............................................... Less: increase in interest payable................... Cash payments for interest ..................................
7,500 (3,500) $4,000
Cash payments for income taxes Income tax expense.................................... Add: Decrease in income tax payable ...... Cash payments for income taxes ..............
$30,000 6,500 $36,500
Taking It Further: The direct method of preparing the operating activities section will always produce the same amount of cash provided (used) by operations as the indirect method. The two methods differ in presentation format only and present the same net cash inflows and outflows.
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PROBLEM 17-3B (a) SABLE ISLAND LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2017 Operating activities Profit .............................................................................. $169,500 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense .............................. $50,000 Gain sale of equipment ............................ (23,000) Decrease in accounts receivable ............ 8,000 Increase in prepaid expenses ................. (2,500) Increase in accounts payable.................. 5,000 Decrease in income tax payable ............. (5,250) Increase in interest payable .................... 450 Increase in unearned revenue ................. 3,750 36,450 Net cash provided by operating activities $205,950 (b) SABLE ISLAND LTD. Cash Flow Statement (Partial)—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts from customers ............................... $911,750 (1) Cash payments For operating expenses .............. $(639,500) (2) For interest .................................. (4,550) (3) For income tax............................. (61,750) (4) (705,800) Net cash provided by operating activities ..... $205,950
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PROBLEM 17-3B (Continued) Calculations: (1)
Cash receipts from customers Fees earned .............................................. $900,000 Add: Decrease in accounts receivable .. $ 8,000 Add: Increase in unearned revenue ....... 3,750 11,750 Cash receipts from customers ................................ $911,750
(2)
(3)
(4)
Cash payments for operating expenses Operating expenses ........................................... Add: Increase in prepaid expenses ................. Less: Increase in accounts payable ................. Cash payments for operating expenses ...........
$642,000 2,500 (5,000) $639,500
Cash payments for interest expense Interest expense ....................................................... Less: Increase in interest payable .......................... Cash payments for income tax................................
$5,000 (450) $4,550
Cash payments for income tax Income tax expense ................................................. Add: Decrease in income tax payable .................. Cash payments for income tax................................
$56,500 5,250 $61,750
Taking It Further: The indirect method of preparing the operating activities section focuses on the differences between profit and net cash flow from operating activities. It is also easier to prepare than the direct method and provides fewer details to the company’s competitors. It is usually considered less meaningful to users than the direct method since it does not show the specific cash receipts and payments related to operations.
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PROBLEM 17-4B BIRD CORP. Cash Flow Statement (Partial) Year Ended December 31, 2017 (a) Investing activities Sale of equipment (1) ................................. $ 1,000 Sale of building (2)...................................... 35,500 Purchase of land and building (Note X) ........ (25,000) Purchase of equipment (1) ........................... (40,000) Net cash used by investing activities ..................... $(28,500) (b) Profit reported by Bird Corp. In 2017 is $66,250 per calculation (5). (c) Financing activities Repayment of notes payable (3) ................ $(157,000) Repayment of mortgage payable (4) ......... (15,000) Payment of cash dividends (5) .................. (6,250) Issuance of preferred shares ..................... 50,000 Repurchase of common shares (6) ........... (29,300) Net cash used by financing activities ... $ (157,550) (d) Note X: Land costing $50,000 and building costing $130,000 were acquired by paying $25,000 cash and using a note payable for $155,000.
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PROBLEM 17-4B (Continued) Calculations: (1) Transactions involving Equipment: Equipment Jan. 1, 2017 Purchases Dec. 31, 2017
480,000 40,000 492,000
Disposal
28,000
Accumulated Depreciation—Equipment Disposal
22,000
Jan. 1, 2017 Depreciation Dec. 31, 2017
192,000 48,000 218,000
Cost of equipment sold.................................... Accumulated depreciation (derived above) ... Net carrying amount ........................................ Less: Loss on sale of equipment .................... Cash proceeds from sale.................................
$28,000 22,000 6,000 5,000 $ 1,000
Cash .................................................................. Accumulated Depreciation-Equipment........... Loss on Disposal.............................................. Equipment .....................................................
1,000 22,000 5,000
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PROBLEM 17-4B (Continued) Calculations: (Continued) (2) Transactions involving Buildings: Building Jan. 1, 2017 Purchases Dec. 31, 2017
1,250,000 130,000 1,310,000
Disposal
70,000
Accumulated Depreciation—Building Disposal
52,500
Jan. 1, 2017 Depreciation Dec. 31, 2017
600,000 31,250 578,750
Cost of building sold (derived)........................ Accumulated depreciation (derived above) ... Net carrying amount ........................................ Add: Gain on sale of building.......................... Cash proceeds from sale.................................
$70,000 52,500 17,500 18,000 $35,500
Cash .................................................................. Accumulated Depreciation-Building ............... Gain on Disposal ......................................... Building .........................................................
35,500 52,500 18,000 70,000
(3) Transactions involving Notes Payable: Notes Payable Repayments
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Jan. 1, 2017 New note Dec. 31, 2017
216,000 155,000 214,000
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PROBLEM 17-4B (Continued) Calculations: (Continued) (4) Transactions involving Mortgage Payable: Mortgage Payable Repayments
Jan. 1, 2017
350,000
Dec. 31, 2017
335,000
15,000
(5) Transactions involving Retained Earnings: Retained Earnings Jan. 1, 2017 Profit (b) Dec. 31, 2017
240,000 66,250 300,000
Cash Dividends—Preferred Dividends decl. 6,250 Closing entry Dec. 31, 2017 0
6,250
Closing div.
6,250
Since there are no dividends payable reported at the end of either fiscal year, the amount of the dividends declared for preferred shares is the amount of dividends paid.
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PROBLEM 17-4B (Continued) Calculations: (Continued) (6) Transactions involving Common Shares: Common Shares Reacquisition
Jan. 1, 2017
154,000
Dec. 31, 2017
123,200
30,800
Contributed Surplus—Reacquisition of Common Shares Jan. 1, 2017 0 Reacquisition 1,500 Dec. 31, 2017 1,500 Common Shares ................................................... 30,800 Contributed Surplus—Reacquisition of Common Shares ................................ Cash.............................................................. (e)
Cash December 31, 2017 Cash December 31, 2016 Net increase in cash for fiscal year 2017 Add: Cash used in investing activities (a) Cash used in financing activities (c) Cash provided from operating activities
1,500 29,300 $ 21,000 5,000 16,000 28,500 157,550 $202,050
Taking It Further: A net cash inflow from investing activities can be either favourable or unfavourable. It is only favourable if the company is disposing of assets it no longer needs, and is not disposing of long-term assets to generate cash it cannot obtain otherwise.
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PROBLEM 17-5B (a) GAUDET COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $38,000 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) ............................ $6,000 Increase in accounts receivable.................. (9,000) Increase in inventory ................................. (16,000) Decrease in accounts payable .................. (12,000) Increase in income taxes payable............ 6,000 (25,000) Net cash provided by operating activities 13,000 Investing activities Sale of equipment (1)....................................... 10,000 Purchase of equipment ................................... (5,000) Net cash provided by investing activities
5,000
Financing activities Dividends paid ............................................. Issuance of notes payable .......................... Net cash used by financing activities
(23,000)
(33,000) 10,000
Net decrease in cash......................................................... Cash, Jan. 1 ....................................................................... Cash, Dec. 31 .....................................................................
(5,000) 33,000 $ 28,000
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PROBLEM 17-5B (Continued) (a) (Continued) (1) Transactions involving Equipment: Equipment Jan. 1, 2017 Purchases Dec. 31, 2017
78,000 5,000 70,000
Disposal
13,000
Accumulated Depreciation—Equipment Disposal
3,000
Jan. 1, 2017 Depreciation Dec. 31, 2017
24,000 6,000 27,000
Cost of equipment sold.........................................$13,000 Accumulated depreciation (derived above) ... 3,000 Net carrying amount ........................................ 10,000 No gain or loss on income statement ............. 0 Cash proceeds from sale .....................................$ 10,000 Cash .................................................................. Accumulated Depreciation-Equipment........... Equipment .....................................................
10,000 3,000 13,000
(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $13,000 – $5,000 = $8,000
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PROBLEM 17-5B (Continued)
Taking It Further: It is possible to have had a negative cash balance at any point in the year if there is an arrangement with the bank that Gaudette’s bank account can go into an overdraft position. Depending on the timing of major disbursements, such as the payment of dividends, there might not be sufficient cash in the bank account at that date.
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PROBLEM 17-6B (a) WANWRIGHT COMPANY Cash Flow Statement—Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................$102,660 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense ............................... $35,500 Gain on disposal .......................................... (5,000) Increase in accounts receivable................ (33,800) Increase in inventory ................................. (29,250) Increase in accounts payable ..................... 14,420 Decrease in salaries payable.................... (3,730) (21,860) Net cash provided by operating activities 80,800 Investing activities Sale of plant assets (1) .................................... 15,000 Sale of investments ......................................... 22,500 Purchase of plant assets ............................. (141,000) Net cash used by investing activities (103,500) Financing activities Dividends paid .................................................(38,000) Issuance of common shares....................... 50,000 Issuance of notes payable .......................... 70,000 Net cash provided by financing activities
82,000
Net increase in cash.......................................................... 59,300 Cash, Jan. 1 ....................................................................... 33,400 Cash, Dec. 31 ..................................................................... $ 92,700
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PROBLEM 17-6B (Continued) (a) (Continued) (1) Transactions involving Plant Assets: Plant Assets Jan. 1, 2017 Purchases Dec. 31, 2017
205,000 141,000 310,000
Disposal
36,000
Accumulated Depreciation Disposal
26,000
Jan. 1, 2017 Depreciation Dec. 31, 2017
Cost of plant assets sold ................................. Accumulated depreciation (derived above) ... Net carrying amount ........................................ Gain on disposal .............................................. Cash proceeds from sale.................................
40,000 35,500 49,500
$36,000 26,000 10,000 5,000 $ 15,000
(b) Free cash flow = Cash provided (used) by operating activities – Cash outlays for capital expenditures = $80,800 – $141,000 + $15,000 = $(45,200)
Taking It Further: A loss does not necessarily mean the company has a reduction in cash from operating activities. For example, a loss may be created (or increased) by noncash expenses such as deprecation which do not use cash. Or the company may have significant operating expenses which have not used cash because the company has not paid for the expenses yet, and has instead increased its liabilities. Finally, the company may be collecting its accounts receivables, which increases cash, but this will not increase profit.
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PROBLEM 17-7B KING CORP. Cash Flow Statement—Indirect Method Year Ended July 31, 2017 Operating activities Profit ................................................................................$106,500 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense (1) .......................... $51,000 Gain on sale of land .................................. (30,000) Loss on sale of equipment (1).................. 6,000 Increase in accounts receivable .............. (14,000) Increase in inventory ................................ (12,000) Increase in prepaid expenses .................. (1,500) Decrease in accounts payable ................. (9,000) Increase in salaries payable .................... 2,700 Increase in income taxes payable............ 4,500 (2,300) Net cash provided by operating activities 104,200 Investing activities Sale of land (Note X) .................................... 55,000 Sale of equipment (1) .................................. 14,000 Purchase of land.......................................... (100,000) Purchase of equipment (1) .......................... (80,000) Net cash used by investing activities (111,000) Financing activities Sale of common shares............................... 35,000 Payments on mortgage note payable (2) .......(15,000) Net cash provided by financing activities 20,000 Net increase in cash.......................................................... 13,200 Cash, Aug. 1, 2016............................................................. 11,000 Cash, July 31, 2017 ........................................................... $ 24,200
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PROBLEM 17-7B (Continued) Note X: Land was sold for $90,000 and the proceeds from the sale were cash of $55,000 and a note receivable for $35,000. (1) Transactions involving Equipment: Equipment Aug. 1, 2016 Purchases July 31, 2017
170,000 80,000 225,000
Disposal
25,000
Accumulated Depreciation—Equipment Disposal
5,000
Aug. 1, 2016 Depreciation July 31, 2017
35,000 51,000 81,000
Cost of equipment sold.................................... Carrying value – given ..................................... Accumulated depreciation...............................
$25,000 20,000 $ 5,000
Carrying value .................................................. Less: Cash proceeds from the sale ................ Loss on sale of equipment ..............................
$20,000 14,000 $ 6,000
Cash .................................................................. Accumulated Depreciation-Equipment........... Loss on Disposal.............................................. Equipment .....................................................
14,000 5,000 6,000
(2) Beginning balance of mortgage note payable Less: Principal repayments during year Ending balance of mortgage note payable
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$ 80,000 15,000 $ 65,000
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PROBLEM 17-7B (Continued) Taking It Further: A net cash inflow from financing activities can be either favourable or unfavourable. It is favourable if the company is acquiring financing through debt or issue of shares to finance production or acquire long-term assets. It is unfavourable when the company is seeking to generate cash it cannot obtain otherwise. When combined with low or negative cash from operating activities and cash inflows from investing activities, the company may be sacrificing long-term profitability for shortterm survival.
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PROBLEM 17-8B KING CORP. Cash Flow Statement—Direct Method Year Ended July 31, 2017 Operating activities Cash receipts From customers (1)....................... From interest (2) ............................
$913,250 3,500 $916,750
Cash payments To suppliers (3) ............................. $(573,750) For operating expenses (4)........... (188,800) For interest (5) ............................... (6,500) For income tax (6) ......................... (43,500) (812,550) Net cash provided by operating activities ........... 104,200 Investing activities Sale of land (Note X) .................................... $ 55,000 Sale of equipment (7) .................................. 14,000 Purchase of land.......................................... (100,000) Purchase of equipment (7) .......................... (80,000) Net cash used by investing activities (111,000) Financing activities Sale of common shares............................... 35,000 Payments on mortgage note payable (8) .......(15,000) Net cash provided by financing activities 20,000 Net increase in cash.......................................................... 13,200 Cash, Aug. 1, 2016............................................................. 11,000 Cash, July 31, 2017 ........................................................... $ 24,200 Note X: Land was sold for $90,000 and the proceeds from the sale were cash of $55,000 and a note receivable for $35,000.
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PROBLEM 17-8B (Continued) Calculations: (1) Cash receipts from customers Sales..................................................................... Less: Increase in accounts receivable ............. (2) Cash receipts from interest Interest revenue................................................... (3) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Add: Decrease in accounts payable ................. (4) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense (7) .......................... Add: Increase in prepaid expenses.................... Less: Increase in salaries payable ..................... (5) Cash payments for interest Interest expense .................................................. (6) Cash payments for income tax Income tax expense ............................................ Less: Increase in income taxes payable............
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$927,250 (14,000) $913,250 $3,500 $552,750 12,000 564,750 9,000 $573,750 $241,000 (51,000) 1,500 (2,700) $188,800 $6,500 $48,000 (4,500) $43,500
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PROBLEM 17-8B (Continued) Calculations: (Continued) (7) Transactions involving Equipment: Equipment Aug. 1, 2016 Purchases July 31, 2017
170,000 80,000 225,000
Disposal
25,000
Accumulated Depreciation—Equipment Disposal
5,000
Aug. 1, 2016 Depreciation July 31, 2017
Cost of equipment sold.................................... Carrying value – given ..................................... Accumulated depreciation...............................
35,000 51,000 81,000
$25,000 20,000 $ 5,000
(8) Beginning balance of mortgage note payable $ 80,000 Less: Principal repayments during year 15,000 Ending balance of mortgage note payable $ 65,000 Taking It Further: If King Corp. was reporting under IFRS instead of ASPE, the interest received could be also be classified as investing activities. As well, the interest paid could be classified as financing activities.
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PROBLEM 17-9B (a) WAYFARER INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $75,600 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense ............................. $69,300 (1) Loss on sale of equipment ..................... 3,600 Increase in accounts receivable................ (46,800) Increase in inventory ............................... (111,600) Increase in accounts payable ..................... 40,500 Decrease in income tax payable ............ (3,600) (48,600) Net cash provided by operating activities ........ 27,000 Investing activities Acquisition of long-term investment ........... (176,400) Sale of equipment ........................................ 12,600 (2) Net cash used by investing activities ...................... (163,800) Financing activities Issue of note payable ...................................... 90,000 Repayment of note payable ........................ (9,000) Net cash provided by financing activities ............... 81,000 Net decrease in cash ............................................................ (55,800) Cash, January 1 ................................................................. 176,400 Cash, December 31 ........................................................... $120,600 Note: Common shares were issued to purchase equipment costing $225,000.
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PROBLEM 17-9B (Continued) Calculations: (1) Depreciation expense Accumulated depreciation, end of year ................... $292,500 Plus: Accumulated depreciation of equipment 28,800 sold ($45,000 – $16,200)............................... Accumulated depreciation, beg. of year....... (252,000) Depreciation expense ............................................... $ 69,300 (2) Cash from sale of equipment Carrying amount of equipment.................................. $16,200 Less: Loss on sale .................................................... (3,600) Cash received ............................................................. $12,600
(b) WAYFARER INC. Cash Flow Statement (partial)– Direct Method Year Ended December 31, 2017 Operating activities Cash receipts From customers ........................... $1,090,800 (1) From interest ................................ 9,900 $1,100,700 Cash payments To suppliers ...................................... (843,300) (2) For operating expenses .................... (196,200) (3) For interest .................................... (5,400) For income tax............................... (28,800) (4) (1,073,700) Net cash provided by operating activities ............. 27,000
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PROBLEM 17-9B (Continued) Calculations: (1) Cash receipts from customers Sales ..........................................................................$1,137,600 Less: Increase in accounts receivable ................. (46,800) $1,090,800 (2) Cash payments to suppliers Cost of goods sold .............................................. $772,200 Add: Increase in inventory ............................... 111,600 Cost of goods purchased ................................... 883,800 Less: Increase in accounts payable.................. (40,500) $843,300 (3) Cash payments for operating expenses Operating expenses ............................................ $265,500 Less: Depreciation expense* .............................. (69,300) $196,200 (4) Cash payments for income tax Income tax expense ............................................ $25,200 Add: Decrease in income tax payable ............. 3,600 $28,800 (5) Cash from sale of equipment Carrying amount of equipment .................................... $16,200 Less: Loss on sale ...................................................... (3,600) Cash received ............................................................... $12,600 *Depreciation expense Accumulated depreciation, end of year ................... $292,500 Plus: Accumulated depreciation of equipment sold ($45,000 – $16,200)................................. 28,800 Accumulated depreciation, beg. of year....... (252,000) Depreciation expense ............................................... $ 69,300
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PROBLEM 17-9B (Continued)
Taking It Further: The decrease in cash during the year has been caused primarily by the purchase of the long-term investment. Cash from operating activities yielded a positive amount although substantially less than profit. This could be cause for concern, in particular since a large portion of the difference is due to a large increase in inventory during the year. The purchase of a long-term investment may be cause for concern since the investment amount is large compared to the company’s balance sheet. The rationale for the purchase is important since the company may be setting aside funds for a future capital project.
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PROBLEM 17-10B (a) GALENTI INC. Cash Flow Statement—Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $90,310 Adjustments to reconcile profit to net cash provided by operating activities Depreciation expense ............................... $58,700 Gain on sale of equipment........................... (8,750) Loss on sale of short-term investments ...... 7,500 Proceeds from sale of short-term investments, net of purchases ............ 5,000 (1) Increase in accounts receivable................ (43,800) Increase in inventory ................................... (9,250) Decrease in prepaid expenses ..................... 6,000 Increase in accounts payable ....................... 8,420 Decrease in accrued expenses payable .. (6,730) 17,090 Net cash provided by operating activities ................ 107,400 Investing activities Sale of equipment ........................................ $15,550 (2) Purchase of equipment (Note X) .................... (71,000) Net cash used by investing activities ....................... (55,450) Financing activities Sale of common shares .................................. $50,000 Retirement of note payable .............................(10,000) (3) Payment of cash dividends .............................(36,500) (4) Net cash provided by financing activities ............. 3,500 Net increase in cash......................................................... 55,450 Cash, January 1................................................................ 47,250 Cash, December 31 .......................................................... $102,700 Note X: During the year, the company acquired equipment with a cost of $141,000 by paying $71,000 cash and incurring a note payable.
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PROBLEM 17-10B (Continued) Calculations: (1) Short-term investments, end of year ........................ $94,500 Plus: Carrying value of investments sold ($15,000 + $7,500).......................................... 22,500 Less: Short-term investments, beginning of year .. (107,000) Payment for purchase of short-term investments ... $ 10,000 Proceeds from the sale of short-term investments . $ 15,000 Cash transactions involving short-term investments for the year shown net ($15,000 – $10,000) ... $5,000 (2) Accumulated depreciation for equipment sold removed from accounts = $40,000 − ($49,500 − $58,700 depreciation expense) = $49,200 Carrying amount of equipment sold = Cost $56,000 − Accumulated depreciation $49,200 = $6,800 Cash proceeds = Carrying amount $6,800 + Gain on sale $8,750 = $15,550 Cash .......................................................... Accumulated Depreciation—Equipment Gain on Disposal ................................. Equipment ............................................
15,550 49,200 8,750 56,000
(3) Retirement of note payable Note payable, beginning of year............................... $ 80,000 Note issued to purchase equipment ........................ 70,000 Less: Note payable, end of year .............................. (140,000) Retirement of note payable....................................... $ 10,000
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PROBLEM 17-10B (Continued) Calculations: (Continued) (4) Payment of cash dividends Retained earnings, beginning of year ....................... $121,790 Add: Profit.................................................................. 90,310 Less: Retained earnings, end of year ....................... (175,600) Dividends declared and paid ...................................... $ 36,500 (b) GALENTI INC. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2017 Operating activities Cash receipts From customers ........................... $263,700 (1) From trading investments .......... 5,000 $268,700 Cash payments To suppliers................................. $(100,290) (2) For operating expenses .............. (25,400) (3) For income tax............................. (32,670) For interest .................................. (2,940) (161,300) Net cash provided by operating activities ...... 107,400 Calculations: (1)
(2)
Cash receipts from customers Sales ............................................................ Less: Increase in accounts receivable .....
Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ........................ Cost of goods purchased........................... Less: Increase in accounts payable ..........
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$307,500 (43,800) $263,700 $ 99,460 9,250 108,710 (8,420) $100,290
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PROBLEM 17-10B (Continued) Calculations: (Continued) (3)
Cash payments for operating expenses Operating expenses ................................... Less: Decrease in prepaid expenses ....... Add: Decrease in accrued expenses payable
$24,670 (6,000) 6,730 $25,400
Taking It Further: Galenti’s management should consider investing excess cash in short-term investments that are low risk and easily liquidated to earn a return on the excess cash.
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PROBLEM 17-11B MILK RIVER LTD. Cash Flow Statement – Indirect Method Year Ended December 31, 2017 Operating activities Profit ................................................................................ $29,750 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense* ........................... $ 9,500 Gain on sale of equipment .................... (2,000) Impairment loss on goodwill ................. 11,000 Increase in accounts receivable ........... (8,000) Increase in inventory ............................. (13,000) Increase in accounts payable................ 3,000 Decrease in income taxes payable ....... (2,000) (1,500) Net cash provided by operating activities ............. 28,250 Investing activities Sale of equipment ............................................... 10,500 Purchase of equipment (Note X) ........................ (8,000) Net cash provided by investing activities 2,500 Financing activities Issue of common shares ................................. 4,000 Repayment of notes payable ** ....................... (26,750) Net cash used by financing activities ....................... (22,750) Net increase in cash ................................................................ 8,000 Cash, January 1 .................................................................. 5,000 Cash, December 31 ............................................................. $13,000 Note X: During the year, the company acquired equipment with a cost of $24,000 by paying $8,000 cash and incurring a note payable of $16,000.
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PROBLEM 17-11B (Continued) *Depreciation expense Cost of equipment...................................................... $12,000 Accumulated depreciation (calculated) .................... (3,500) Carrying amount ....................................................... $ 8,500 Accumulated depreciation, beginning...................... $24,000 Less: depreciation for equipment sold..................... (3,500) Add: depreciation expense (calculated) ................... 9,500 Accumulated depreciation, ending ........................... $30,000 ** Repayment of note payable Notes payable, beginning ......................................... $52,750 Add: notes issued for purchase of equipment....... 16,000 68,750 Less: repayment of notes (calculated) .................... (26,750) Notes payable, ending .............................................. $42,000
Taking It Further: Purchases and sales of equipment should be shown separately. The usefulness of the information is enhanced by showing sources of cash from selling equipment separately from cash used to purchase equipment. Purchases of equipment indicate reinvestment in the productive capacity of the company; whereas, sales of equipment indicate disposal of old equipment and/or selling capital assets to generate cash. If the purchases and sales are netted, the detail of this type of information is lost.
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PROBLEM 17-12B MILK RIVER LTD. Cash Flow Statement – Direct Method Year Ended December 31, 2017 Cash flows from operating activities Cash receipts from customers (1) ... Cash payments To suppliers (2)............................. $(150,000) For operating expenses (3).......... (54,500) For interest ................................... (4,000) For income tax (4) ........................ (11,250) Net cash provided by operating activities
$248,000
(219,750) 28,250
Investing activities Sale of equipment ............................. 10,500 Purchase of equipment (Note X) ...... (8,000) Net cash provided by investing activities
2,500
Financing activities Issue of common shares .................. 4,000 Repayment of notes payable............ (26,750) Net cash used by financing activities
(22,750)
Net increase in cash................................................ Cash, January 1....................................................... Cash, December 31 .................................................
8,000 5,000 $ 13,000
Note X During the year, the company acquired equipment with a cost of $24,000 by paying $8,000 cash and incurring a note payable of $16,000.
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PROBLEM 17-12B (Continued) Calculations: (1)
Cash receipts from customers Sales ............................................................. Less: Increase in accounts receivable ....... Cash receipts from customers ....................
$256,000 (8,000) $248,000
(2) Cash payments to suppliers Cost of goods sold....................................... Add: Increase in inventory ......................... Cost of goods purchased ............................ Less: Increase in accounts payable .......... Cash payments to suppliers .......................
$140,000 13,000 153,000 (3,000) $150,000
(3) Cash payments for operating expenses Accumulated depreciation, beginning........ Less: depreciation for equipment sold....... Add: depreciation expense ......................... Accumulated depreciation, ending .............
$24,000 (3,500) 9,500 $30,000
Operating expenses ..................................... Less: Depreciation expense ...................... Cash payments for operating expenses.....
$64,000 (9,500) $54,500
(4) Cash payments for income tax Income tax expense ..................................... Add: Decrease in income tax payable ........ Cash payments for income tax ...................
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$ 9,250 2,000 $11,250
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PROBLEM 17-12B (Continued)
Taking It Further: Payments for purchases of equipment need to be shown as uses of cash in the investing activities section. If equipment is purchased, but financed with debt or shares, there is no cash flow involved. These transactions can be omitted from the cash flow statement since they did not affect the company’s cash position. Users still need to reconcile the changes in equipment, debt, and share capital. Noncash transactions are, therefore disclosed, in the notes to the financial statements.
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PROBLEM 17-13B (a)
Net cash provided (used) by operating activities − net cash (provided) used by investing activities = free cash flow ($ in U.S. millions) The Gap: $2,129 − $596 = $1,533 lululemon: $314 - $120 = $194
(b)
The Gap appears to be in the stronger financial position. It generates strong cash from operating activities to expand and invest as well as repay debt.
Taking it Further: Due to the differing sizes of the two businesses being compared, it is difficult to assess if either are growing or downsizing. Neither business appears to be downsizing. Both have substantial amounts of cash and cash equivalents at the end of the year compared to their profit earned for the year.
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BYP17-1 FINANCIAL REPORTING PROBLEM (a)
For the purpose of its cash flow statement, Corus uses cash and cash equivalents, which consist of cash and short-term deposits with maturities of less than three months at the date of purchase.
(b) Per Corus’ 2014 cash flow statement, cash and cash equivalents decreased by $69,681,000. (c)
The one significant investing activity reported in Corus’ cash flow statement was a business combination in the amount of $497,393,000 involving Teletoon Canada Inc.
(d) The most significant financing activity on Corus’ cash flow statement was the increase in bank loans in the amount of $333,243,000. (e)
As indicated by note 24 to the financial statements, Corus had no significant noncash investing and financing activities in 2014.
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BYP17-2 INTERPRETING FINANCIAL STATEMENTS (a)
Cash from operating activities Cash used in investing activities Cash from financing activities Increase in cash for the year
$25.0 (11.1) (13.9) $0
(b) Andrew Peller Limited’s creditors should not be too worried about the absence of cash on the balance sheet. This is a perfectly normal situation for a large number of businesses who use operating lines of credit instead of cash to deal with the cash demands of day-to-day operations. The company generated far less ($13.3 million) in cash from operating activities in 2013. The fact that operating activities are generating a significant greater amount cash flow from operations in 2014 means there is less cause for concern. (c) The profit for the year was calculated using accrual accounting. Increases in noncash current assets and decreases in noncash current liabilities can result in cash provided from operations that is higher than the amount of profit reported in the income statement. As well, profit is calculated using some expenses, which do not involve cash, such as depreciation expense. (d) Free Cash Flow = Cash provided by operating activities − Cash used in investing activities = $25.0 million − $11.1 million = $13.9 million Free cash flow indicates the amount of discretionary cash flow that Andrew Peller Limited has at its disposal. In this case, free cash flow is equal to the net cash outflows for financing activities for the 2014 fiscal year.
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BYP17-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.
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BYP 17-4 COMMUNICATION ACTIVITY MEMO To:
Investors
From:
Accountant
Re:
Cash flow statement
It is more difficult to manipulate cash-based data than accrualbased data, but it is not impossible. It is possible to manipulate cash flows from operating activities by reclassifying operating cash flows as investing or financing activities. As well, it is possible to manipulate cash balances. For example, management could delay payment of accounts payable. This would improve operating cash flows from operating activities. Which statement provides a better measure of the company’s performance will depend upon the investor. For example, shareholders investing in the company’s common shares for the long-term will find the accrual-based income statement more useful as it provides a better indication of the long-term profitability of the company. Short-term creditors will find the cash flow statement more useful as it provides a better indication of the company’s ability to generate cash and repay its current obligations. The cash flow statement can sometimes provide an early warning of liquidity or solvency problems.
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BYP17-5 “ALL ABOUT YOU” ACTIVITY (a) Your cash position at August 31, 2017 is close to half of the cash you had at September 1, 2016. If you were to maintain the same spending patterns over the next year you could be completely out of cash by August 31, 2017. (b) My Cash Flow Statement Year Ended August 31, 2018 Operating activities Cash received from summer job Cash contribution from parents Cash paid for rent, utilities, cable, Internet Cash paid for groceries Cash paid for clothes Cash paid for gas, insurance, parking Cash paid for miscellaneous Cash paid for interest on credit card Cash used in operating activities Investing activities Tuition and books Laptop and printer Cash used in investing activities
2017
$ 8,000 4,000 (4,000) (3,600) (3,000) (4,600) (500) 0 (3,700)
$ 8,000 3,600 (4,000) (3,200) (3,000) (4,420) (500) (180) (3,700)
(7,500)
(7,000) (1,200) (8,200)
(7,500)
Financing activities Student loan Loan from parents Repayment of credit card Purchases on credit card Cash provided from financing activities Decrease in cash Cash, September 1 Cash, August 31 Solutions Manual .
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7,500
7,500 1,500
(1,000) 6,500
1,000 10,000
(4,700) 2,100 $(2,600)
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BYP17-5 (Continued) (c)
The projected cash flow statement indicates that without any additional loans from your parents, you will have a cash deficiency of $2,600.
(d) The projected cash flow statement and the resulting ending cash deficiency indicate that you will need to borrow the additional $1,500 from your parents. (e)
Unless there are reductions in the level of spending, it is not realistic at this time to expect that you will be able to pay off your credit card debt immediately. This means that additional interest charges will have to be added to a revised projected cash flow statement.
(f)
Actions to improve your cash flow could include: 1. Getting a part-time job while at school. 2. Curtailing some expenses, particularly those that are somewhat discretionary, such as clothes. 3. Taking the bus instead of using a car.
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BYP17-6 Santé Smoothie Saga Santé Smoothies & Sweets Ltd. Year Ended May 31, 2018
(a)
Cash provided by operating activities Cash used by investing activities Cash (used) provided by financing activities Increase in cash Cash at the end of the year Cash at the beginning of the year
Net cash provided by operating activities Net cash (used) by investing activities Free cash flow
(c)
$235,279 (157,833)
$1,137,650 (4,545,728)
(37,071) 40,375 199,443 $ 159,068
7,406,647 3,998,569 4,469,552 $ 470,983
Santé Smoothies & Sweets Ltd. Year Ended May 31, 2018
(b)
Coffee Beans Ltd. Year Ended December 31, 2017
$235,279 (157,833) $ 77,446
Coffee Beans Ltd. Year Ended December 31, 2017
$1,137,650 (4,545,728) $(3,408,078)
Santé’s and Coffee Bean’s cash performance, although not similar, are both very strong. Santé’s cash provided by operating activities exceeds cash used in investing activities by 49%. In comparison, Coffee Beans’ cash used in investing activities exceed cash obtained from operating activities by 300%. On the other hand, Coffee Beans was able to obtain cash from financing activities 63% greater than the amount of the cash used in investing activities. The financing activities of Santé were modest in comparison.
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BYP17-6 (Continued) (c) (Continued) Coffee Beans’ long-term liabilities increased by close to $3.2 million in 2017 from 2016. At the same time the cash provided from financing activities totalled $7.4 million. This means there has been a substantial equity or debt investment into Coffee Beans in the last year. In spite of that, no dividends were paid during the year. It appears that with its strong cash position Coffee Beans is in a good position to expand and diversify. (d)
Santé is a profitable company that generated $235,279 cash from operations which was greater than the profit reported by the company. The cash generated from operating activities was more than the amount required for both investing activities and financing activities. While meeting its investing requirements Santé was able to pay a dividend of $120,000 to its shareholders and still increase its cash. Investing in Santé will provide Coffee Beans the opportunity to diversify while increasing the company’s cash flow.
(e)
Before selling shares and/or becoming employed by Coffee Beans Ltd., the Koebels should obtain a full set of financial statements. The financial statements and accompanying notes to the financial statements might give some insights as to what were the main activities and transactions that lead to such a substantial increase in cash and debt, yet only marginally improved profit performance. If the Koebels sell their business, they should insist on getting paid in cash instead of in shares of Coffee Beans, as their share ownership in the combined business would be far too small to have any meaningful influence over the whole operations. Given the fact that no dividends were paid by Coffee Beans in the past two years, it would be difficult for the Koebel’s to get a return on their investment as shareholders.
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CHAPTER 18 Financial Statement Analysis ASSIGNMENT CLASSIFICATION TABLE
1, 2, 3
Brief Exercises Problems Exercises Set A 1, 2 15 2, 5, 7
Problems Set B 2, 5, 7
2. Explain and apply horizontal analysis.
4
3, 4, 5
1, 2, 4
1, 3
1, 3
3. Explain and apply vertical analysis.
5, 6, 7
6, 7
3, 4, 5
2, 3
2, 3
4. Identify and use ratios to analyze liquidity.
8, 9, 10, 11, 17
6, 7, 8, 9, 15, 16, 17, 18
4, 5, 6, 7, 8, 9, 10, 11
4, 5, 6, 7, 8, 9, 10, 11
10, 11, 15, 16, 17, 18 12, 13, 14, 15, 16, 17, 18, 19 19
4, 5, 6, 7, 8, 9, 10, 11 2, 4, 5, 6, 7, 8, 9, 10, 11
4, 5, 6, 7, 8, 9, 10, 11 2, 4, 5, 6, 7, 8, 9, 10, 11
1, 3, 8
1, 3, 8
Learning Objectives
Questions
1. Identify the need for, and tools of, financial analysis.
5. Identify and use ratios to analyze solvency. 6. Identify and use ratios to analyze profitability.
7. Recognize the limitations of financial statement analysis.
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Prepare horizontal analysis and identify changes.
Moderate
25-35
2A
Prepare vertical analysis, calculate profitability ratios, and compare.
Moderate
45-55
3A
Interpret horizontal and vertical analysis.
Moderate
25-30
4A
Calculate ratios.
Moderate
45-55
5A
Calculate and evaluate ratios.
Moderate
45-55
6A
Calculate ratios.
Moderate
45-55
7A
Calculate and evaluate ratios.
Moderate
50-60
8A
Calculate and evaluate ratios.
Moderate
50-60
9A
Evaluate ratios.
Moderate
25-35
10A
Evaluate ratios.
Simple
20-25
11A
Calculate missing information.
Complex
25-35
1B
Prepare horizontal analysis and identify changes.
Moderate
25-35
2B
Prepare vertical analysis, calculate profitability ratios, and compare.
Moderate
45-55
3B
Interpret horizontal and vertical analysis.
Moderate
25-30
4B
Calculate ratios.
Moderate
45-55
5B
Calculate and evaluate ratios.
Moderate
45-55
6B
Calculate ratios.
Moderate
45-55
7B
Calculate and evaluate ratios.
Moderate
50-60
8B
Calculate and evaluate ratios.
Moderate
50-60
9B
Evaluate ratios.
Moderate
25-35
10B
Evaluate ratios.
Simple
20-25
11B
Calculate missing information.
Complex
25-35
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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-ofChapter Material Learning Objectives Identify the need for, and tools of, financial analysis. 2. Explain and apply horizontal analysis.
Knowledge Comprehension Q18-1 Q18-2 BE18-1 Q18-3 BE18-2 E18-15
Application P18-2A P18-2B
Analysis P18-5A P18-7A P18-5B P18-7B
Q18-4
Q18-5
BE18-3 BE18-4 BE18-5 E18-1
E18-2 E18-4 P18-1A P18-3A
P18-1B P18-3B
3.
Explain and apply vertical analysis.
Q18-6
Q18-5 Q18-7
E18-4 E18-5
P18-3A P18-3B
4.
Identify and use ratios to analyze liquidity.
Q18-8 Q18-10 BE18-16 BE18-19
Q18-11 Q18-17 BE18-8 BE18-20 BE18-21 E18-14
BE18-6 BE18-7 E18-3 P18-2A P18-2B BE18-10 BE18-11 E18-7 E18-17 P18-4A P18-6A P18-4B P18-6B
Q18-9 BE18-22 E18-6 E18-8 E18-9 E18-15 E18-16 E18-18 P18-5A P18-7A
P18-8A P18-9A P18-10A P18-11A P18-5B P18-7B P18-8B P18-9B P18-10B P18-11B
5.
Identify and use ratios to analyze solvency.
Q18-12 BE18-19
Q18-13 Q18-14 Q18-17 BE18-12 BE18-20 E18-14
BE18-13 E18-10 E18-17 P18-4A P18-6A P18-4B P18-6B
BE18-14 E18-11 E18-16 E18-18 P18-5A P18-7A P18-8A P18-9A
P18-10A P18-11A P18-5B P18-7B P18-8B P18-9B P18-10B P18-11B
6.
Identify and use ratios to analyze profitability.
Q18-15 Q18-16 BE18-19
Q18-17 Q18-19 BE18-15 BE18-20 BE18-21
BE18-16 BE18-17 E18-12 E18-13 E18-17 P18-2A P18-4A P18-6A P18-4B P18-6B
Q18-17 Q18-18 BE18-18 E18-14 E18-16 E18-18 E18-19 P18-3A P18-5A P18-7A P18-8A
P18-9A P18-10A P18-11A P18-3B P18-5B P18-7B P18-8B P18-9B P18-10B P18-11B
7.
Recognize the limitations of financial statement analysis.
Q18-19 BE18-22 E18-19 P18-1A P18-3A
P18-8A P18-1B P18-3B P18-8B
BYP18-1 BYP18-2 BYP18-3
BYP18-6
1.
Broadening Your Perspective
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BYP18-4
BYP18-5
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Synthesis Evaluation
Chapter 18
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Accounting Principles, Seventh Canadian Edition
ANSWERS TO QUESTIONS 1.
Short-term creditors and long-term creditors are interested in short-term liquidity and long-term solvency of a company. They look at the ability of the lender to pay obligations when they become due. On the other hand, the primary focus of shareholders is the company’s profitability to assess the likelihood of dividends and growth potential of the share price.
2.
(a) An intracompany basis of comparison compares the same item with prior periods, or with other financial items in the same period, for one company. A store may compare this year’s sales to last year’s sales, for example. (b) An intercompany basis of comparison compares the same item with one or more other company’s financial statements. A store may compare its current year’s sales with another company’s sales for the same period, for example. The intercompany basis of comparison can provide insight into a company's competitive position in relation to other companies.
3.
The three common tools used in analysis are: horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis is used mainly in intracompany comparisons. Vertical analysis is used in both intra- and intercompany comparisons. Ratio analysis can be used in both types of comparisons.
4.
The percentage change for a base year is the amount for the period in question divided by the base-year amount, and the result is multiplied by 100 to express the answer as a percentage. For the calculation of the percentage change for a period, the previous period amount is subtracted from the current period amount. The result is divided by the amount from the previous period and then multiplied by 100 to express the answer as a percentage.
5.
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 financial statement is compared with the amount of that same item on one or more earlier financial statements. Vertical analysis (also called common size analysis) expresses each item within a financial statement in terms of a percent of a relevant total or other common basis within the same statement, for the same time period. Horizontal and vertical analysis differ in that horizontal analysis compares data across more than one year, while vertical analysis compares data within the same year. Horizontal and vertical analyses are similar in that they both use percentages to demonstrate numerical relationships.
Solutions Manual .
18-4
Chapter 18
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 6.
(a) On a balance sheet, total assets and total liabilities plus shareholders’ equity are both assigned a value of 100%. (b) On an income statement, the figure for net sales or revenue is assigned a value of 100%.
7.
Yes, it can. By converting the accounting numbers to percentages, companies of vastly different sizes can be more readily compared.
8.
(a) Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. (b) Short-term creditors such as suppliers would be the type of users who would be most interested in liquidity ratios.
9.
A high current ratio might be hiding liquidity problems with regards to inventory or accounts receivable. For example, a high level of inventory will cause the current ratio to increase. Increases in inventory can be due to the fact that inventory is not selling and may be obsolete. Increases in the current ratio will also occur if the company’s accounts receivable increase. An increase in accounts receivable could indicate the company is having trouble collecting its overdue accounts, which again would mean liquidity problems for the business.
10.
The difference between the current ratio and acid-test ratio is that the current ratio includes inventory, prepayments, and supplies in the assets for the numerator, while the acid-test ratio does not.
11.
From the list of liquidity ratios given in the textbook, three ratios provide a calculation where a lower result is considered a better result. The three ratios include the collection period, days sales in inventory, and the operating cycle. The operating cycle adds the number of days for the collection period and the number of days sales in inventory. The fewer the number of days in the cycle, the better off the business can be from the point of view of liquidity.
12.
(a) Solvency ratios measure the ability of the company to survive over a long period of time and be able to pay off all of its debt. (b) Long-term lenders such as banks, mortgage companies, and leasing companies would be the most interested users of solvency ratios.
13.
Wong’s solvency is better than that of its competitor. It is carrying a slightly lower percentage of debt than its competitor (37% versus 39%) and has a higher interest coverage ratio (3 versus 2.5).
Solutions Manual .
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Chapter 18
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 14.
One of the solvency ratios, the debt to total assets ratio, generates a percentage which, when the result is low, it is interpreted as a desired result. Since fewer of the business’ assets are financed with debt and instead financed with equity, the business is not burdened to service the debt and meet the deadlines for repayments on large amounts of debt.
15.
(a) Profitability ratios measure the profit or operating success of a company for a specific period of time. (b) Shareholders and potential investors would be most interested in profitability ratios.
16.
Investors have a higher expectation of future earnings from Microsoft than from General Motors. Investors favour Microsoft, which has a higher earnings multiple in its price-earnings ratio.
17.
(a) Asset turnover (b) Acid-test ratio (c) Operating cycle (d) Return on equity (e) Interest coverage
18.
1.
Alternative accounting policies. Differences in accounting policies can make intercompany comparisons difficult and misleading.
2.
Other comprehensive income. Other comprehensive income, if significant, should not be ignored in financial analysis yet few, if any, ratios include it.
3.
Quality of information. The information used for financial analysis is only good if it is of high quality— relevant, transparent, and easily understood.
4.
Economic factors. It is important to understand the impact of the economy on the financial results and to separate, where possible, changes resulting from general economic conditions and those resulting from management influences.
19.
McCain Foods has chosen to adopt IFRS, although this adoption was not mandatory. McCain Foods’ management likely wishes to report financial results which have been prepared using the accounting policies that are consistent with its global competitors. Cavendish, on the other hand, might not perceive any additional benefit in adopting IFRS and so it chooses to follows ASPE as do the vast majority of private companies. Certain accounting policies differ under ASPE and IFRS, which may lead to distortions for comparative purposes.
Solutions Manual .
18-6
Chapter 18
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Accounting Principles, Seventh Canadian Edition
QUESTIONS (Continued) 20.
Other comprehensive income is the gains and losses that are not included in profit, but still affect shareholders’ equity. Other comprehensive income is added to profit to determine comprehensive income. Most financial analysis ratios exclude other comprehensive income. For example, profitability ratios generally use data from the income statement and not the statement of comprehensive income. In fact, there are no standard ratio formulas incorporating comprehensive income. In cases where other comprehensive income is significant, and depending on the source of the income, some analysts will adjust profitability ratios to incorporate the effect of total comprehensive income.
Solutions Manual .
18-7
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 18-1 1. 2. 3. 4. 5.
Intracompany Intercompany Horizontal analysis Vertical analysis Ratio analysis
(e) (c) (d) (b) (a)
BRIEF EXERCISE 18-2 (a) Analysis of a company's dividend history (b) Comparison of differentsized companies (c) Comparison of gross profit to net sales among competitors (d) Calculation of a company’s sales growth over time
Basis of Comparison
Tool of Analysis
intracompany
horizontal
intercompany
vertical
intercompany
vertical
intracompany
horizontal
BRIEF EXERCISE 18-3 Cash Accounts receivable Inventory Prepaid expenses Total current assets
Solutions Manual .
2017 120%
2016 225%
2015 150%
2014 100%
179% 154% 100% 157%
151% 148% 0% 146%
131% 122% 45% 122%
100% 100% 100% 100%
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-4 2017 (47%) 18% 4% n/a 8%
2016 50% 15% 22% (100%) 19%
2017
2016
Change
as a %
(a) Net Income
$450,000
$500,000
$(50,000)
-10%
(b) Net Income
2018 $522,000
2017 $450,000
Change $72,000
as a % 16%
Cash Accounts receivable Inventory Prepaid expenses Total current assets
2015 50% 31% 22% (55%) 22%
BRIEF EXERCISE 18-5
(c) The change was a decrease in 2017 and an increase in 2018.
Solutions Manual .
18-9
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-6 2017 Current assets Property, plant, and equipment Goodwill Total assets
Amount $1,530,000 3,130,000
Percentage 32.8% 67.0%
10,000 $4,670,000
0.2% 100.0% 2016
Current assets Property, plant, and equipment Goodwill Total assets
Current assets Property, plant, and equipment Goodwill Total assets
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18-10
Amount $1,175,000
Percentage 28.9%
2,800,000 90,000 $4,065,000
68.9% 2.2% 100.0%
2015 Amount Percentage $1,225,000 30.1% 2,850,000 $4,075,000
69.9% 0.0% 100.0%
Chapter 18
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-7 Income Statement Amount Percent $1,934 100.0% 1,612 83.4% 322 16.6% 218 11.3% 104 5.4% 31 1.6% $ 73 3.8%
Net sales Cost of goods sold Gross profit Operating expenses Profit before income tax Income tax expense Profit
Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place.
Solutions Manual .
18-11
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-8 (a)
Deterioration: A decrease in the receivables turnover would be viewed as deterioration. It is taking longer to collect the accounts receivable.
(b) Improvement: A decrease in the collection period would be viewed as an improvement. It takes fewer days to collect accounts receivable. (c)
Deterioration: The increase in the days sales in inventory would be viewed as deterioration. It is taking the company longer to sell the inventory and consequently there is a greater chance of inventory obsolescence, delays in obtaining cash inflows, and higher carrying costs.
(d) Improvement: An increase in the inventory turnover would be viewed as an improvement. It takes fewer days to sell inventory. (e)
Deterioration: A decrease in the acid-test ratio would be viewed as deterioration because the company has fewer liquid assets to pay off liabilities in the very near future.
(f)
Deterioration: An increase in the operating cycle would be viewed as deterioration because it is taking longer for the business to purchase inventory, sell it on account, and collect the cash.
Solutions Manual .
18-12
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-9 1.
(a) Current ratio
2.
Acid-test ratio
$40,918,000 $18,644,000
=
=
$8,041,000 + $4,947,000 + $6,545,000 $18,644,000
=
2.2
=
1.05
(b) Underwood’s current ratio is a little more than the recommended 2:1. Given the steep decline in the acid-test ratio, it appears a large portion of its liquidity is tied up in inventory. If they have an issue with slow moving inventory, the acid-test ratio indicates they may run into liquidity issues.
BRIEF EXERCISE 18-10 (a) 2017 Receivables (1) turnover Collection (2) period
=
=
$3,960,000 [($550,000 + $520,000) ÷ 2]
=
7.4
times
7.4
=
49.3
days
$3,100,000 [($520,000 + $480,000) ÷ 2]
=
6.2
times
=
58.9
days
365
÷
2016 Receivables (1) turnover Collection (2) period
=
=
365
÷
6.2
(b) The management of accounts receivable has improved substantially by decreasing the collection period by almost ten days.
Solutions Manual .
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Chapter 18
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-11 (a) Beginning Inventory Purchases Ending Inventory Cost of Goods Sold
(1)
Inventory turnover
Inventory turnover
365 ÷
4.3
=
2016 $4,581,000 = = ($860,000 + $940,000) ÷ 2
(2) Days sales in = inventory
(b)
2016 $860,000 4,661,000 (940,000) $4,581,000
2017 $4,260,000 = = ($940,000 + $1,020,000)÷2
(2) Days sales = in inventory
(1)
2017 $940,000 4,340,000 (1,020,000) $4,260,000
365 ÷
5.1
=
4.3
times
85
days
5.1
times
72
days
The management of inventory is deteriorating as days sales in inventory has increased by almost two weeks.
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18-14
Chapter 18
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-12 (a)
Improvement: The decrease in debt to total assets would be viewed as an improvement because it means that the company has reduced its obligations to creditors and has raised its equity "buffer."
(b) Deterioration: A decrease in interest coverage would be viewed as deterioration because it means that the company's ability to meet interest payments as they come due has weakened. (c)
Improvement: An increase in free cash flow would be viewed as an improvement because it means that the company has more flexibility in using cash for capital expenditures.
(d) Improvements: A decrease in debt to total assets combined with an increase in interest coverage would be viewed as improvements because the company has reduced its obligations to creditors, has raised its equity "buffer,” and the company's ability to meet interest payments as they come due has strengthened.
BRIEF EXERCISE 18-13 ($ in thousands) Debt to (a) total assets
=
Interest (b) coverage =
$960,358 $1,700,838 $422,561*
=
=
56.5%
21.2 times
$19,956 *$422,561 = $295,410 + $19,956 + $107,195
(c) Free cash flow = $355,872 - $84,244 = $271,628
Solutions Manual .
18-15
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-14 (a)
The debt to total assets ratio for Culleye Corporation has deteriorated, because there is proportionately more debt compared to total assets than there was in 2016. Culleye’s interest coverage ratio has improved. The business can pay its interest expense more times in 2017 than it could in 2016.
(b) While interest coverage is important, it is a reflection of a single year’s performance. On the other hand, debt, especially non-current debt carries over from year to year. The improvement in the interest coverage ratio is overshadowed by the deterioration in the debt to total assets ratio. Consequently, the overall solvency of Culleye has deteriorated in 2017.
BRIEF EXERCISE 18-15 (a)
Improvement: An increase in the gross profit margin would be viewed as an improvement because it means that a greater percentage of net sales is going towards profit.
(b) Deterioration: A decrease in asset turnover would be viewed as deterioration because it means the company has become less efficient at using its assets to generate sales. (c)
Improvement: An increase in the return on equity would be viewed as an improvement because it means more profit was generated per dollar of equity investment.
(d) Deterioration: A decrease in earnings per share would be viewed as deterioration because the profit for each share is a smaller amount. (e)
Deterioration: A decrease in profit margin would be viewed as deterioration because there is less profit as a percentage of net sales compared to the previous year.
Solutions Manual .
18-16
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-16 ($ in millions) (a) 2014 (1) Gross profit margin (2)
Profit margin
=
$53
=
= 24.8%
= 0.12%
$42,611
2013 (1) Gross profit margin (2)
$42,611 – $32,063 $42,611
Profit Margin
= =
$32,371 – $24,701 $32,371 $627 $32,371
= 23.7%
=
1.9%
(b) While gross profit improved slightly, the profit margin decreased to close to nil. The 2014 performance indicates that operating costs appeared to have increased.
BRIEF EXERCISE 18-17 Asset (a) turnover Return on (b) assets
=
$750,000
=
1.4
times
$550,000* =
$60,000 $550,000
=
10.9%
=
$60,000 $380,000**
=
15.8%
Return on (c) equity
*Average total assets ($600,000 + $500,000) ÷ 2 =$550,000 **Average shareholders’ equity ($450,000 + $310,000) ÷ 2 = $380,000
Solutions Manual .
18-17
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-18 Ignoring all other factors, if an investor wants to purchase shares for growth, Apple would be the better choice of the two as indicated by the higher price-earnings ratio. Although Apple pays out a lower percentage of profits as dividends, it is viewed to have more future earnings potential than Chevron since Apple has a higher price-earnings ratio. If instead, the investor is looking for income, Chevron, an oil company, would be a better choice since it pays close to 40% of its profits as dividends. In addition, Chevron is considered a less risky investment as it has a lower price-earnings ratio.
BRIEF EXERCISE 18-19 Ratio Acid-test Asset turnover Collection period Debt to total assets Gross profit margin Interest coverage Inventory turnover Operating cycle Profit margin Return on equity
(a) Classification L P L S P S L L P P
(b) Direction Higher Higher Lower Lower Higher Higher Higher Lower Higher Higher
BRIEF EXERCISE 18-20 (a) (b) (c) (d) (e)
Asset turnover Acid-test ratio Operating cycle Return on equity Interest coverage
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18-18
Chapter 18
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Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-21 (a) 2017
Average accounts receivable
=
$1,090 + $965 2
= $1,027.50
2016
Average accounts receivable
=
$965 + $880 2
=
2017
Average total assets
=
$27,510 + $26,760 = $27,135.00 2
2016
Average total assets
=
$26,760 + $23,815 = $25,287.50 2
2017
Average shareholders' equity
=
2016
Average shareholders' equity
=
$922.50
$12,830 + $12,575 2
=
$12,702.50
=
$11,752.50
$12,575 + $10,930 2
(b) The averages calculated in part (a) could be used in the following ratios: 1. Receivables turnover 2. Asset turnover 3. Return on assets 4. Return on equity (c)
Averages are used in certain ratio calculations. When a figure from the income statement is compared with a figure from the balance sheet in a ratio, the balance sheet figure is averaged by adding together the beginning and ending balances and dividing them by 2. That is because income statement figures cover a period of time (i.e., a year) and balance sheet figures are at a point in time—in this case, the beginning and the end of the year. Comparisons of end-ofperiod figures with end-of-period figures, or period figures with period figures, do not require averaging.
Solutions Manual .
18-19
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE 18-22 (a) Stirling Corporation $200,000 Inventory = = 20 turnover $10,000
Inventory turnover
=
Bute Inc. $180,000 = $12,000
15
times
times
(b) In times of falling prices, FIFO will result in a higher cost of goods sold than if the average cost formula were used. As well, the ending inventory under FIFO will be based on the newest inventory purchased at the lower price. This could result in the inventory turnover ratio being higher simply because of the choice of the FIFO cost formula, all other factors being equal. Without converting the inventory turnover ratio to the same cost formula, or fully understanding the effects of the different cost formulas on this ratio, a true comparison of inventory turnover could be difficult.
Solutions Manual .
18-20
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 18-1 DRESSAIRE INC. Balance Sheet
Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings (a) Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings (b) Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings
Solutions Manual .
2017 $120,000 400,000 90,000
2016 $ 80,000 350,000 70,000
2015 $100,000 300,000 65,000
145,000 150,000 135,000
125,000 115,000 120,000
150,000 100,000 85,000
2017 120%
2016 80%
2015 100%
133%
117%
100%
138%
108%
100%
97% 150% 159%
83% 115% 141%
100% 100% 100%
2017
2016
50% 14% 29%
(20%) 17% 8%
16% 30% 13%
(17%) 15% 41%
18-21
Chapter 18
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Accounting Principles, Seventh Canadian Edition
EXERCISE 18-2 Net sales increased by 10% in 2016 but then fell back within 1% of the level of net sales of 2015. Cost of goods sold had essentially the same trend as net sales over the three-year period. Operating expenses grew by a larger percentage in 2016 than sales but declined in 2017 below the 2015 level. This means that operating expenses were brought under control in 2017, compared to sales, as they should not rise at a faster rate than sales. As a result, profit from operations (sales less cost of goods sold less operating expenses) also increased over the three-year period. Income tax expense increased faster than sales over the total of the three years. However, many factors can affect income tax that are beyond the control of the company and it is hard to draw any further interpretations from this change. Given that profit from operations has grown, we can conclude that profit likely increased as well, despite the increase in income tax expense, which is a fraction of income before income tax. It may help to make up numbers to better understand the direction of the changes over the three years. One possible set of hypothetical numbers follows. Note that the percentages are taken from the text; the subtotals and 2016 and 2017 numbers are calculated based on the hypothetical numbers from 2015 and the percentages. Net sales Cost of goods sold Gross profit Operating expenses Profit from operations and before income tax Income tax expense Profit
2017 101% $2,020 100% 1,200 820 99% 495 325
2016 110% $2,200 111% 1,332 868 112% 560 308
2015 100% $2,000 100% 1,200 800 100% 500 300
106%
105%
100%
48 $ 277
47 $ 261
45 $ 255
It would be possible to show that profit could go down, but it would take assumptions like extremely high tax rates and low operating costs to arrive at such a result.
Solutions Manual .
18-22
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-3 FLEETWOOD CORPORATION Income Statement Year Ended December 31
Sales Cost of goods sold Gross profit Operating expenses Profit before income tax Income tax expense Profit
2017 Amount Percent $800,000 100.0% 550,000 68.8% 250,000 31.3% 175,000 21.9%
2016 Amount Percent $600,000 100.0% 375,000 62.5% 225,000 37.5% 125,000 20.8%
75,000 18,750 $ 56,250
100,000 25,000 $ 75,000
9.4% 2.3% 7.0%
16.7% 4.2% 12.5%
Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place.
Solutions Manual .
18-23
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-4 (a) BLACKBERRY LIMITED Balance Sheet February 28, 2015 and March 1, 2014 (in U.S. millions)
Assets Current assets Non-current assets Total assets Liabilities and Shareholders' Equity Current liabilities Non-current liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity
Solutions Manual .
Increase (Decrease) Amount Percent
2015
2014
$4,167 2,382 $6,549
$4,848 2,704 $7,552
$(681) (322) $(1,003)
-14.0% -11.9% -13.3%
$1,363 1,755 3,118 3,431
$2,268 1,659 3,927 3,625
$ (905) 96 (809) (194)
-39.9% 5.8% -20.6% -5.4%
$6,549
$7,552
18-24
$(1,003)
-13.3%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-4 (Continued) (b) BLACKBERRY LIMITED Balance Sheet February 28, 2015 and March 1, 2014 (in U.S. millions)
Assets Current assets Non-current assets Total assets Liabilities and Shareholders' Equity Current liabilities Non-current liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity
(c)
2015 Amount Percent $4,167 63.6% 2,382 36.4% $6,549 100.0%
2014 Amount Percent $4,848 64.2% 2,704 35.8% 100.0% $7,552
$1,363
20.8%
$2,268
30.0%
1,755 3,118 3,431
26.8% 47.6% 52.4%
1,659 3,927 3,625
22.0% 52.0% 48.0%
$6,549
100.0%
$7,552
100.0%
The two most significant changes from 2014 to 2015 include the proportion of the business that is financed with debt compared to equity, and the decrease in current liabilities. While debt made up 52% of the financing in 2014, the percentage declined to 47.6% in 2015. The decline in current liabilities makes up most of the total decline in liabilities and shareholders’ equity. There were corresponding large decreases in current assets in 2015, but the liquidity of the business remained in a strong position.
Solutions Manual .
18-25
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-5 If we make the assumption that there are no other factors impacting the income statement than those stated in the data provided, then we can determine the vertical percentage of profit for each year as follows: 2017: 100.0% – 59.4% – 19.6% – 4.2% = 16.8% 2016: 100.0% – 60.5% – 20.4% – 3.8% = 15.3% 2015: 100.0% – 60.0% – 20.0% – 4.0% = 16.0% It would appear that profit declined as a percentage of net sales between 2015 and 2016, and increased from 2016 to 2017.
Solutions Manual .
18-26
Chapter 18
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Accounting Principles, Seventh Canadian Edition
EXERCISE 18-6 (a) (1) and (2) Receivables turnover Collection period
Receivables turnover Collection period
2017 $6,420,000 = = ($850,000 + $750,000) ÷ 2 =
365 ÷
=
8.0
2016 $6,240,000 = = ($750,000 + $650,000) ÷ 2 =
365 ÷
=
8.9
8.0
times
46
days
8.9
times
41
days
4.5
times
81
days
5.0
times
73
days
(3) and (4)
Inventory turnover
2017 $4,540,000 = = ($1,020,000 + $980,000)÷2
Days sales in = inventory
Inventory turnover
365 ÷
4.5
=
2016 $4,550,000 = = ($980,000 + $840,000) ÷ 2
Days sales in = inventory
365 ÷
5.0
=
(5) Operating cycle = Days sales in inventory + Collection period 2017: 127 days = 81 days + 46 days 2016: 114 days = 73 days + 41 days Solutions Manual .
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-6 (Continued) (b) Management should be concerned with the fact that inventory is moving more slowly in 2017 than it did in 2016, by an extra 8 (81 – 73) days. As for receivables turnover, it is taking an extra 5 (46 – 41) days to collect accounts. Taken together, the company’s operating cycle has increased (deteriorated) by 13 (127 – 114) days in 2017. The decrease in the receivables turnover ratio could be caused by taking on bad credit risks or because less attention is being paid to collecting accounts. The decrease in inventory turnover may be because of poor pricing decisions or because the company has obsolete inventory. Or the company may have decided to increase the amount of inventory that is kept on hand. Management needs to review and address each of these.
Solutions Manual .
18-28
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-7 ($ in millions) (a) 2017
2016
Current ratio = 1.30:1 ($2,465 $1,890)
= 1.59:1 ($1,314 $825)
Acid-test ratio = 0.81:1 [($795 + $55 + $676) $1,890]
= 0.89:1 [($91 + $60 + $586) $825]
Receivables turnover = 13.1 times ($8,258 [($676 + $586) ÷ 2])
= 7.3 times ($3,940 [($586 + $496) ÷ 2])
Collection period = 28 days (365 ÷ 13.1 times)
= 50 days (365 ÷ 7.3 times)
Inventory turnover = 7.5 times ($5,328 [($898 + $525) ÷ 2])
= 4.8 times ($2,650 [($525 + $575) ÷ 2])
Days sales in inventory = 49 days (365 ÷ 7.5 times)
= 76 days (365 ÷ 4.8 times)
Operating cycle = 77 days (49 + 28)
= 126 days (76 + 50)
(b) 1. 2. 3. 4. 5. 6. 7.
Solutions Manual .
Current ratio Worse Acid-test ratio Worse Receivables turnover Better Collection period Better Inventory turnover Better Days sales in inventory Better Operating cycle Better
18-29
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-8 (a)
The company’s collection of its accounts receivable has deteriorated over the past three years. It is taking the company longer to collect its outstanding receivables as evidenced by the decrease in the receivables turnover.
(b) The company is selling its inventory more slowly since the inventory turnover is declining. (c)
Overall, the company’s liquidity has deteriorated. The increase in the current ratio is most likely caused by the increase in inventory and receivables due to the slowdown in the movement of these assets. The acid-test ratio is also likely inflated because of the slow moving receivables. In total, the increase in the operating cycle indicates deteriorating liquidity.
EXERCISE 18-9 From an overall perspective, Hakim’s liquidity is deteriorating. Although the current and acid-test ratios are improving in the current year over the previous year, the drop in both the receivable and inventory turnovers is more worrisome. Slow moving inventory and slow collections will ultimately hurt the business’ ability to meet its current obligations in the future.
Solutions Manual .
18-30
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-10 (a)
Debt to total = assets Free cash flow
=
Interest coverage
=
Debt to total = assets Free cash flow
Interest coverage
2017 $2,177 $3,886
=
56.0%
$475
=
$450
($406 + $27 + $174) $27
=
22.5 times
2016 $1,959 $3,708
=
52.8%
– $300
=
$280
($375 + $17 + $152) $17
=
32.0 times
$925
= $580
=
(b) Debt to total assets Free cash flow Interest coverage
Solutions Manual .
–
Worse Better Worse
18-31
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-11 (a)
The debt to total assets has gradually improved over the past three years.
(b)
The interest coverage has deteriorated over the past three years.
(c)
The company’s solvency initially appears to be improving as evidenced by its decreased reliance on debt. However, its interest coverage ratio is dropping significantly in spite of the reduced reliance on debt. This is likely caused by decreasing profits. Overall, its solvency appears to be relatively stable given the differing directions of the company’s debt to total assets and interest coverage ratios.
Solutions Manual .
18-32
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-12 ($ in thousands) 2017 (a) Gross profit margin
(b) Profit margin
$750 – $480 = $750
$60 $750
36.0%
= 8.0%
Asset (c) turnover
$750 1.4 = times ($600 + $500) 2
(d) Return on assets
$60 = 10.9% ($600 + $500) 2
(e) Return on shareholders’ equity
$60 = 15.8% ($450 + $310) 2
Solutions Manual .
18-33
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-13 (a) ($ in thousands) 2017
2016
Gross profit margin
$500 – $375 = $500
Profit margin
$33.5 $500
25.0%
= 6.7%
$400 – $290 $400
= 27.5%
$30.0 $400
= 7.5%
Asset turnover
$500 1.6 = times ($350 + $275) 2
$400 1.5 = times ($275 + $274.467) 2
Return on assets
$33.5 = 10.7% ($275 + $350) 2
$30.0 = 10.9% ($275 + $274.467) 2
Return on $33.5 = 28.7% equity ($133.5 + $100) 2
(b)
Gross profit margin Profit margin Asset turnover Return on assets Return on equity
Solutions Manual .
$30.0 ($100 + $50) 2
= 40.0%
Worse Worse Better Worse Worse
18-34
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-14 (a)
Potash Corporation of Saskatchewan Inc. (Potash) is far more profitable than Agrium Inc. (Agrium). Its profit margin of 21.6% is significantly higher than that of Agrium’s, at 4.5%. On the other hand, Potash’s return on equity is lower at 8.3% compared to that of Agrium at 10.7%. This inconsistency is likely due to varying capital structures of the two fertilizer companies. Note that earnings per share are not comparable between companies because of differing capital structures.
(b)
Investors favour Potash, but not by a large margin. Potash has a higher price-earnings ratio of 22.4 times earnings compared to Agrium’s 20.0 times. Potash’s higher profitability picture in the current period leads investors to believe it has a better opportunity for future profitability than Agrium.
(c)
Investors would purchase shares in Potash for dividend income. The payout ratio is higher with Potash.
Solutions Manual .
18-35
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-15 (a) Ratio Acid-test ratio Asset turnover Current ratio Debt to total assets Gross profit margin Interest coverage Inventory turnover Operating cycle Profit margin Receivables turnover Return on assets Return on equity (c)
Classification L P L S P S L L P L P P
(b) Long compared to Circular B B W B B B B B B B B W
The comparison that was done in part (b) was an intercompany comparison.
Solutions Manual .
18-36
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-16 ($ in thousands except for share price) (a)
(b)
1.
Asset turnover
P
=
2.
Current ratio
L
=
$1,234,716 ($1,609,416 + $1,591,378) ÷ 2
=
$151,909
.77 times
= 0.45
$335,930 3.
Debt to total assets
S
=
$877,567 $1,609,416
= 54.5%
4.
Earnings per share
P
=
$76,271 62,973
=
5.
Free cash flow
S
= $180,258 –
6.
Interest coverage
S
=
7.
Priceearnings ratio P
=
$106,712
$76,271 + $21,948 + $21,144 $21,948 $44.83
$1.21
= $73,546
=
5.4 times
=
37 times
$1.21 8.
9.
Profit margin P
=
$76,271 $1,234,716
=
6.2%
P
=
$76,271 ($1,609,416 + $1,591,378) ÷ 2
=
4.8%
P
=
$76,271 ($731,849 + $748,272) ÷ 2
=
10.3%
Return on assets
Return on 10. equity
Solutions Manual .
18-37
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-17 (a) Current ratio
=
$35,500* = 3.4
$10,370 *$ 5,300 + $21,200 + $9,000 = $35,500 (b) Acid-test ratio
=
$ 5,300 + $21,200 $10,370
= 2.6
(c) Receivables turnover
=
$120,000 ($21,200 + $23,400) ÷ 2
= 5.4
Times
= 68
Days
(d) Collection period =
365
÷
5.4
(e) Inventory turnover =
$70,000 ($9,000 + $7,000) ÷ 2
=
8.8
Times
= 41
Days
(f)
Days sales in inventory
(g)
Profit margin
=
365
(h)
Asset turnover
=
$14,000 $120,000
= 11.7%
(i)
Return on assets
=
$120,000 ($110,500 + $120,100) ÷ 2
= 1.0 times
(j)
Return on equity
=
$14,000 ($110,500 + $120,100) ÷ 2
= 12.1%
=
$14,000 ($100,130* + $89,000**) ÷ 2
= 14.8%
(k)
Debt to total assets
=
÷
$10,370 $110,500
8.8
= 9.4%
*($75,000 + $25,130) = $100,130 **($69,000 + $20,000) = $89,000
Solutions Manual .
18-38
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-18 (a)
Receivables turnover is calculated as net sales ÷ average accounts receivable. Net credit sales of $1,950,000 ÷ 13 = accounts receivable of $150,000.
(b)
Inventory turnover is calculated as cost of goods sold ÷ average inventory. So cost of goods sold of $1,267,500 ÷ 6.5 = $195,000. Or total current assets of $365,000 – cash of $20,000 – accounts receivable of $150,000 = inventory of $195,000.
(c)
Current assets of $365,000 + non-current assets of $435,000 = total assets of $800,000.
(d)
Current ratio is current assets ÷ current liabilities = 2:1. So current assets of $365,000 ÷ 2 = current liabilities $182,500.
(f)
Debt to total assets ratio = 70% so total assets of $800,000 × 70% = $560,000.
(e)
Non-current liabilities = total liabilities of $560,000 less current liabilities of $182,500 = $377,500.
(h)
Total liabilities and shareholders’ equity = total assets of $800,000.
(g)
Shareholders’ equity = Total liabilities and shareholders’ equity of $800,000 – total liabilities (f) above of $560,000 = $240,000.
Solutions Manual .
18-39
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-18 (Continued) Summary of results: MAIN RIVER CORP. Balance Sheet December 31, 2017 Assets Current assets Cash Accounts receivable Inventory Total current assets Non-current assets Total assets
$ 20,000 150,000 195,000 365,000 435,000 $800,000
Liabilities and Shareholders’ Equity Current liabilities Non-current liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity
$182,500 377,500 560,000 240,000 $800,000
Solutions Manual .
18-40
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE 18-19 Most financial analysis ratios exclude other comprehensive income. There are no standard ratio formulas incorporating comprehensive income. Nevertheless, other comprehensive income (loss) should not be ignored in assessing the profitability performance of a company. If we analyze the change in the profit, we can see that over the three-year period it has declined, although it has seen a small increase in 2017. If, however, we analyze the change in the total comprehensive income, we see a significant increase in 2016, compared to a significant decrease in profit in 2015. Total comprehensive income declined significantly in 2017 while profit increased slightly. By its nature, other comprehensive income is often volatile. Consequently, further analysis as to the sources of comprehensive income and reasons for the changes between years would be worthwhile.
Solutions Manual .
18-41
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 18-1A (a) WESTJET AIRLINES LTD. Income Statement Horizontal Analysis Year Ended December 31 2014 2013 Revenue 129% 119% Operating expenses 124% 116% Profit from operations 185% 155% Other expenses 173% 55% Profit before income taxes 188% 179% Income tax expense 180% 175% Profit 191% 181%
2012 112% 108% 146% 71% 163% 166% 162%
2011 100% 100% 100% 100% 100% 100% 100%
2012
2011
107% 128% 119%
115% 103% 108%
100% 100% 100%
149% 99% 121% 116%
126% 94% 108% 107%
100% 100% 100% 100%
119%
108%
100%
WESTJET AIRLINES LTD. Balance Sheet Horizontal Analysis December 31 2014 2013 Assets Current assets 121% Non-current assets 142% Total assets 134% Liabilities & Shareholders’ Equity Current liabilities 142% Non-current liabilities 132% Total liabilities 136% Shareholders' equity 130% Total liabilities and shareholders' equity 134%
Solutions Manual .
18-42
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-1A (Continued) (b) In a horizontal analysis of the income statement over the past four years, WestJet’s 29% increase in revenue has translated into an even greater percentage increase in profit. Although the 73% increase in other expenses is large, the increase is modest considering the absolute amounts involved each year. In a horizontal analysis of the balance sheet, current assets have increased 21%, but were outpaced by the 42% increase in current liabilities over the same period. There would have been large distributions of dividends in the period because the percentage increase in profit is far greater than the percentage increase in shareholders’ equity (the absolute numbers for shareholders’ equity far exceed the profit of course). (c) Similar to a horizontal analysis of the base-year amount, a horizontal analysis of the percentage change for each year is limited to condensed information available on the financial statements. While these percentages can show a number of meaningful facts and indicators, the detailed composition of each category and the interrelationship between these various percentages would also be of importance. Trend analysis is the most useful.
Taking It Further: The horizontal analysis for fiscal years prior to those provided in part (a) above would be interpreted with additional information and disclosure. This additional information would have been provided in the notes to the financial statements concerning the impact the implementation of IFRS had on financial statement elements. Without this in hand, the user of the analysis risked drawing conclusions from information that had not been prepared using consistent accounting practices and standards, which could in turn lead to faulty conclusions.
Solutions Manual .
18-43
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-2A (a)
CHEN INC. AND CHUAN LTD. Income Statements Year Ended December 31, 2017
Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Interest expense Profit before income tax Income tax expense Profit
Chen Amount Percent $1,849,035 100.0% 1,060,490 57.4% 788,545 42.6%
Chuan Amount Percent $539,038 100.0% 338,006 62.7% 201,032 37.3%
502,275
27.2%
89,000
16.5%
286,270 6,800
15.5% 0.4%
112,032 1,252
20.8% 0.2%
279,470 83,841 $ 195,629
15.1% 4.5% 10.6%
110,780 27,695 $ 83,085
20.6% 5.1% 15.4%
Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place.
(b) Gross Profit Margin: Gross profit ÷ Net sales Chen = $788,545 ÷ $1,849,035 = 42.6%
Chuan = $201,032 ÷ $539,038 = 37.3%
Profit Margin: Profit ÷ Net sales Chen = $195,629 ÷ $1,849,035 = 10.6%
Solutions Manual .
Chuan = $83,085 ÷ $539,038 = 15.4%
18-44
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-2A (Continued) (b) (Continued) Asset Turnover: Net sales ÷ Average total assets Chen Asset turnover = $1,849,035 ÷ $894,750 = 2.1 times
Chuan Asset turnover = $539,038 ÷ $251,313 = 2.1 times
Return on Assets: Profit ÷ Average total assets Chen = $195,629 ÷ $894,750 = 21.9%
Chuan = $83,085 ÷ $251,313 = 33.1%
Return on Equity: Profit ÷ Average shareholders’ equity Chen Return on Equity = $195,629 ÷ $724,430 = 27.0% (c)
Chuan Return on Equity = $83,085 ÷ $186,238 = 44.6%
Chuan is the more profitable company. Although Chen has a higher gross profit margin, Chuan has a better profit margin, which means it can generate more profit per dollar of sales. Chuan’s assets are returning more even though the asset turnover is the same as Chen’s. Finally Chuan’s investors are enjoying a much better return on their investment.
(d) The analysis in (c) is an intercompany comparison, which involves comparing ratios for different companies.
Solutions Manual .
18-45
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-2A (Continued)
Taking It Further: Ratio analysis helps us compare companies of differing sizes. However, we should be able to see Chen enjoying some economies of scale being the larger business of the two. This does not appear to be the case. The operating expenses as a percentage of sales are much higher in the case of Chen. On the other hand, being a larger company helps it obtain lower prices for the goods that are sold, as is demonstrated by its gross profit margin percentage.
Solutions Manual .
18-46
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-3A (a)
The horizontal and vertical analysis statements demonstrate that the company’s control over its cost of goods sold was relatively steady in 2015 and 2016. However, cost of goods sold increased significantly as a percentage of net sales in 2017, and is increasing faster than net sales. Operating expenses also increased, and at a faster pace than that exhibited by cost of goods sold. The trend of increasing costs faster than increasing sales is worrisome.
(b)
Interest expense has reduced substantially over the fouryear period. This reduction is likely due to the reduction in interest rates charged and the amount of the debt on the balance sheet. Although the horizontal analysis draws attention to a major increase in the other revenues, that attention is later diminished when inspecting the vertical analysis income statement. That statement reveals that in absolute terms, the amount of other revenue involved is very small and so a major increase of 140% over the four-year period turns out to have a modest effect on the profit.
(c)
Horizontal and vertical analysis of the balance sheet, as well as the financial statements themselves, would also be useful in assessing the company’s performance and financial position. In addition, ratio analysis would help complete the picture. Finally, understanding any external economic or other factors that may be affecting costs would also be useful.
Solutions Manual .
18-47
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-3A (Continued)
Taking It Further: (a) Percentage of base-period amount: The amount for the period in question is divided by the base-year amount, and the result is multiplied by 100 to express the answer as a percentage. If an item has no value in a base year and a value in the next year, no percentage change can be calculated. (b) Percentage change for a period: The amount from the previous period is subtracted from the current period amount. The result is divided by the amount from the previous period and then multiplied by 100 to express the answer as a percentage. If a negative amount appears in the base and there is a positive amount the following year, or vice versa, no percentage change can be calculated.
Solutions Manual .
18-48
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-4A (a) 2017 1.
Gross profit = margin
2.
Profit margin
3.
Earnings per share
4.
Receivables turnover
5.
Collection period
6.
Inventory turnover
2016
* D
$886,750 $2,055,750
= 43.1%
$807,000 $1,818,500
= 44.4%
=
$251,475 $2,055,750
= 12.2%
$203,000 $1,818,500
= 11.2%
I
=
$251,475 57,000
=
$ 4.41
$203,000 55,000
=
$ 3.69
I
=
14.2
times
times
D
=
25.7
days
=
$2,055,750 $181,600 + $107,800 2 365
= =
÷
14.2
$1,169,000 = 6.7 $216,800 + $133,000 2
times
$1,818,500 $107,800 + $102,800 2 365
÷
=
17.3
17.3
=
21.1
days
D
=
8.1
times
D
$1,011,500 $133,000 + $115,500 2
_ Solutions Manual
18-49 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-4A (Continued) 2017 Days sales = in inventory Return on 8. shareholders’ = equity 7.
9.
Return on assets
=
10. Current ratio =
365
÷
6.7
=
54.5
days
365
$251,475
÷
8.1
$618,175 + $566,700 2
$566,700 + $465,400 2
$251,475 = 23.9% $1,136,350 + $970,200 2
$203,000 $970,200 + $852,800 2
$ 485,650 $ 328,175
=
1.48
$ $
=
0.82
$369,900 - $133,000 $208,500
11.
Acid-test ratio
=
$485,650 - $216,800 $328,175
12.
Asset turnover
=
$2,055,750 = $1,136,350 + $970,200 2 $518,175 $1,136,350
=
45.1
days
1.95
times
369,900 208,500
$1,818,500 $970,200 + $852,800 2 $403,500 $970,200
= 45.6%
=
39.3%
I
=
22.3%
I
=
1.77
D
=
1.14
D
=
2.00
times D
= 41.6%
D
* (b) D denotes deterioration, while I denotes improvement _ Solutions Manual
18-50 .
D
$203,000 = 42.4%
13. Debt to total = assets
*
2016
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-4A (Continued)
Taking It Further: As calculated in ratio no. 5, the collection period for Pristine Interiors is 25.7 days in 2017. Ratio No. 7. shows the business has days sales in inventory of 54.5 days in 2017. Combined (25.7 + 54.5) is 80.2 days for the operating cycle. This result is worse than the 75day operating cycle of the nearest competitor. On the surface, this ratio would indicate that Pristine has a liquidity problem. An investigation into such policies as the terms provided to customers may explain the worse performance.
Solutions Manual .
18-51
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-5A (a) 2017 1.
Profit margin
=
2.
Asset turnover
=
3.
Earnings per share
=
Price4. earnings ratio = 5. 6.
7.
Payout ratio Debt to total assets
Gross profit margin
$45,000 $700,000
=
$700,000 $640,000 + $600,000 2 $45,000 32,000
*$25,000
6.4%
=
1.13
=
$1.41
times
$30,000 $650,000
=
$650,000 $600,000 + $533,000 2 $30,000 31,000
÷
$45,000
=
5.67
=
55.6%
times
=
1.15
times
=
5.15 times
=
60.0%
=
27.5%
=
_ 38.5%
$0.97 **$18,000
4.6%
= $0.97
$5.00
$8.00 $1.41
=
2016
÷
$30,000
= $155,000 $640,000
=
24.2%
=
40.0%
$165,000 $600,000
= $280,000 $700,000
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$250,000 $ 650,000
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-5A (Continued) (a) (Continued) The amount of dividends paid were calculated from the statement of income and the retained earnings balances on the balance sheet: Retained Earnings Dec. 31, 2016 Add Net income for 2017 Less Retained Earnings Dec. 31, 2017 Dividends declared and paid in 2017 Retained Earnings Dec. 31, 2015 Add Net income for 2016 Less Retained Earnings Dec. 31, 2016 Dividends declared and paid in 2016 (b)
$125,000 45,000 170,000 145,000 *$25,000 $113,000 30,000 143,000 125,000 **$18,000
Based on the results of the comparative ratio analysis for Landwehr Corporation, we can see that profitability has improved based on the gross profit margin, the profit margin, and the earnings per share ratios. By the end of 2017 the financial position of the company has improved in that there is less debt compared to total assets. In spite of the fact that the dividend payout has reduced slightly as a percentage of net income, shareholders have bid up the market price of the shares, making the price-earnings ratio increase. The priceearnings ratio remains modest.
Taking It Further: Julie is correct. Profitability is only one area of concern when managing the success and well-being of a business. Liquidity and solvency issues are also important. By using the three common tools of financial analysis: horizontal analysis, vertical analysis, and ratio analysis, Roberto Landwehr will get a better understanding of the business’ performance and will be able to detect areas that need his further attention.
Solutions Manual .
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-6A Liquidity Ratios 1.
Current ratio
=
2.
Acid-test ratio
=
3.
Receivables turnover
$318,900 $208,500 $68,100 + $107,800 $208,500
=
1.5
=
0.8
$1,948,500 = ($113,200* + $107,900**)÷2 * $113,200 = $107,800 + $5,400 ** $107,900 = $102,800 + $5,100 =
4.
Collection period
=
5.
Inventory turnover
=
6.
Days sales in inventory =
7.
365
÷
17.6
17.6 times
=
21 days
$1,025,500 = ($143,000 + $115,500) ÷ 2
7.9 times
365
÷
7.9
=
46 days
46 days
+
21 days
=
67 days
Operating cycle
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Chapter 18
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-6A (Continued) Solvency Ratios Debt to 8. total assets
=
Interest coverage
=
9.
$312,500 $998,200
=
$407,000*
=
31.3%
14.5 times
$28,000 * $407,000 = $265,300 + $113,700 + $28,000 Free cash 10. flow
=
=
$154,900
$923,000 $1,948,500
=
47.4%
=
$265,300 $1,948,500
=
13.6%
=
$1,948,500 = ($998,200 + $852,800) ÷ 2
Profitability Ratios Gross profit 11. margin = Profit 12. margin Asset 13. turnover
14. Return on assets
Solutions Manual .
$ 316,200 –
$161,300
$265,300 = ($998,200 + $852,800) ÷ 2 =
18-55
2.1 times
28.7%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-6A (Continued) Profitability Ratios (Continued) 15.
Return on = shareholders’ equity
$265,300 = ($685,700 + $465,400) ÷ 2
46.1%
$4.57
Earnings per 16. share
=
$265,300 [60,000 − (4,000 ÷ 2)]
=
17. Payout ratio
=
$5,000
= 1.9%
÷
$265,300
Taking It Further: The Cable Company’s liquidity appears to be strong mainly because of the high receivables and inventory turnover ratios. Its operating cycle of 67 days is likely reasonable, depending on what the norm is among its competitors. With respect to solvency, since a significant percentage of its assets are financed with equity, the debt to total assets and interest coverage ratios are strong. Finally, profitability also appears to be very good mainly because of the high gross profit margin and return on equity ratios. Industry averages would be useful to confirm this assessment, as would comparative ratios for The Cable Company for prior years.
Solutions Manual .
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7A (a) and (b) 2017
Liquidity Ratios
2016
Current 1. ratio
=
$364,000* $187,000
Acid-test 2. ratio
=
$209,000* = 1.1 $187,000 * $209,000 = $95,000 + $114,000
Receivables 3. turnover =
Collection 4. period
(b) Change
$343,000** $182,000
= 1.9
$675,000*** = 5.8 ($118,000* + $115,000**)÷2
= 1.9
NC
$195,000* = 1.1 $182,000 *$195,000 = $85,000 + $110,000 times
*$118,000 = $114,000 + $4,000 **$115,000 = $110,000 + $5,000
$630,000*** = 5.6 ($115,000* + $111,000**)÷2 *115,000 = $110,000 + $5,000 **$111,000 = $108,000 + $3,000
NC
times
F
days
F
= 365
÷
5.8
= 63
days
365
÷
5.6
= 65
*$754,000 - $390,000 **$648,000 - $305,000 ***Net Credit Sales 2017= $900,000 x .75 = $675,000 ***Net Credit Sales 2016= $840,000 x .75= $630,000
_ Solutions Manual
18-57 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7A (Continued) (a) and (b) (Continued) Liquidity Ratios (Continued) Inventory 5. turnover =
6.
7.
Days sales in inventory
2017
2016
$625,000 = 4.9 times ($130,000 + $125,000) ÷ 2
$575,000 = 5.2 times ($125,000 + $97,000) ÷ 2
=
Operating = cycle
(b) Change
365
÷
4.9
74 days
+
63 days
= 74
days
= 137 days
365
÷
5.2
70 days
+
65 days
= 70
U
days
U
= 135 days
U
_ Solutions Manual
18-58 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7A (Continued) (a) and (b) (Continued) 2017 Solvency Ratios Debt to 8. total assets = Interest coverage
=
Free cash 10. flow
=
9.
$377,000 $754,000
(b) Change
2016 = 50.0%
$332,000 $648,000
=
51.2%
F
$111,000* $105,000* = 3.2 times = 5.3 times $35,000 $20,000 *$111,000 = $57,250 + $35,000 + $18,750 *$105,000 = $65,000 + $20,000 + $20,000 $103,500 – $115,500
= $(12,000)
$129,000 – $35,000 =
U
$94,000
U
_ Solutions Manual
18-59 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7A (Continued) (a) and (b) (Continued) 2017 Profitability Ratios Gross profit 11. margin = Profit 12. margin
=
Asset 13. turnover
=
Return on 14. assets
15.
Return on equity
(b) Change
2016
$275,000 $900,000
= 30.6%
$265,000 $840,000
= 31.5%
U
$57,250 $900,000
= 6.4%
$65,000 $840,000
= 7.7%
U
$900,000 = ($754,000 + $648,000) ÷ 2
1.3 times
$840,000 = ($648,000 + $630,000) ÷ 2
1.3 times NC
$57,250 = ($754,000 + $648,000) ÷ 2
8.2%
$65,000 = ($648,000 + $630,000) ÷ 2
10.2%
U
$65,000 ($316,000 + $259,000) ÷ 2 = 22.6%
U
=
= $57,250 ($377,000 + $316,000) ÷ 2 = 16.5%
_ Solutions Manual
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7A (Continued) (a) and (b) (Continued) Profitability Ratios (Continued) Earnings 16. per share = 17.
2017 $57,250 20,000
Payout ratio =
$3,000 ÷
(b) Change
2016 = $2.86
$65,000 20,000
$57,250 = 5.2%
$8,000
÷
$65,000
= $3.25
U
= 12.3%
U
_ Solutions Manual
18-61 .
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7A (Continued) (c) (1) Liquidity: Stayed essentially the same The overall liquidity of Click and Clack is slightly better with respect to the receivables turnover, but worse for inventory turnover than the previous year, but the changes are small. (2) Solvency: Deteriorated Although the debt to total assets ratio improved slightly, the interest coverage ratio worsened. A large amount of cash was used in investing activities during 2017 which in turn increased the debt and corresponding interest charges. Free cash consequently turned negative and the interest coverage ratio has deteriorated. (3) Profitability: Deteriorated Profitability has decreased slightly. Profit was mostly affected by the large increase in interest charges. This explains why the gross profit margin decreased slightly but the return on equity decreased dramatically. The return on assets declined correspondingly.
Taking It Further: The problem is employing intracompany comparison. It is hard to say which is more useful—intercompany or intracompany comparisons—as both provide valuable information. When two companies in the same industry are compared, then intercompany comparisons can be very useful. A business might obtain feedback that they are doing well from an intracompany analysis, but may not be doing as well on an intercompany comparison, possibly failing to keep pace with pricing increases or cost control opportunities that the company’s competitors are taking advantage of.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-8A (a) ($ in thousands) Big Rock Brewery Inc.
Liquidity Ratios
Brick Brewing Co. Ltd.
1.
Current ratio
=
$9,680 $4,958
= 2.0
2.
Receivables turnover
=
$36,755 $1,413
= 26
times
Collection period
=
365
= 14.0
days
Inventory turnover
=
$18,930 $3,398
= 5.6
times
Days sales in inventory
=
Operating cycle
=
3.
4.
÷
26
$10,838 $6,335
= 1.7
$36,333 $6,179
= 5.9
times
= 61.9
days
= 7.1
times
365
÷
5.9
$26,136 $3,676
365
÷
= 65.2
days
365
÷
= 51.4
days
65.2
+ 14.0 = 79.2
days
51.4
+ 61.9 = 113.3
days
5.6
7.1
_ Solutions Manual
18-63 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-8A (Continued) (a) (Continued) Solvency Ratios 5. Debt to total assets
=
6.
=
Interest coverage
Profitability Ratios 7. Gross profit = margin 8. 9.
Profit margin
=
Asset turnover
Brick Brewing Co. Ltd. $10,552 = 23.5% $44,934
N/A no interest expense
$1,395 + $535 +$627 $535
4.8 times
=
$17,825 $36,755
= 48.5 %
$10,197 $36,333
= 28.1%
$624 $36,755
= 1.7%
$1,395 $36,333
= 3.8%
$36,755 $45,412
=
$36,333 $45,651
=
$624 $45,412
= 1.4%
$1,395 $45,651
= 3.1%
$624 $34,200
= 1.8%
$1,395 $33,447
= 4.2%
=
10. Return on assets 11.
Big Rock Brewery Inc. $9,724 = 20.2% $48,167
0.8
times
0.8
times
=
Return on equity
=
_ Solutions Manual
18-64 .
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-8A (Continued) (b)
Liquidity: When looking at the liquidity ratios, one can conclude that Big Rock is more liquid than Brick. Where there is a larger discrepancy in the performance is in the collection of accounts receivable. It is taking Brick more than four times as much time to collect accounts receivable compared to Big Rock. Big Rock has also outpaced Brick for its inventory turnover. Solvency: The debt to total assets ratio is similar between Big Rock and Brick. Where Big Rock is noticeably better, is in its absence of any interest expense. Profitability: In spite of a much better gross profit margin, Big Rock realizes very little profit. Brick is more profitable and has a better return on assets and return on equity although the ratios are an indication of poor overall profitability performance.
Taking It Further: Most financial analysis ratios exclude other comprehensive income. There are no standard ratio formulas incorporating comprehensive income. Nevertheless, other comprehensive income (loss) should not be ignored in assessing the profitability of a company. Key profitability ratios should be recalculated including other comprehensive income if it is significant and depending on its composition.
Solutions Manual .
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-9A (a) Fournitures Ltée’s accounts receivable management can be assessed by reviewing the company’s receivables turnover, which indicates how often the company is “turning” over its receivables; that is, how long the company is taking to collect its accounts receivable. Fournitures Ltée’s receivables turnover of 11.8 times can also be expressed as an average collection period of 31 days (365 ÷ 11.8). This receivables turnover is reasonable when compared to its credit terms of 30 days. This can be compared to Supplies Unlimited’s average collection period of 40.1 days (365 ÷ 9.1), which indicates collections for Supplies Unlimited are taking longer than the 30-day credit terms. As well, Fournitures Ltée’s receivables turnover is better than Supplies Unlimited, indicating that Fournitures Ltée’s management is doing a better job at controlling the collection of the company’s receivables. (b) Fournitures Ltée’s ability to manage its inventory can be measured by the inventory turnover ratio. Currently Fournitures Ltée is turning over its inventory 6 times per year which can also be expressed as approximately every 61 days (365 ÷ 6 times). Supplies Unlimited is turning over its inventory 3.1 times per year or approximately every 118 days (365 ÷ 3.1 times). It appears that Fournitures Ltée is turning over its inventory much faster than its competitor. (c) Supplies Unlimited’s current ratio could be higher than Fournitures Ltée’s because of its slower accounts receivable and inventory turnovers. It could also have a higher level of prepaid expenses or similar type of current assets.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-9A (Continued) (d) Fournitures Ltée is the less solvent company of the two companies as it has a higher proportion of assets financed with debt, as demonstrated by its debt to total asset ratio of 35% (compared to Supplies Unlimited’s debt to total assets ratio of 30.3%). This percentage is still very good in general. The other ratio that pinpoints solvency is the interest coverage ratio. In this case, since Fournitures Ltée has proportionately more debt, it is not surprising to note that it has a lower interest coverage ratio. (e) Fournitures Ltée’s lower gross profit margin may be attributable to a number of factors: The company may be selling its products at a lower price hoping to increase its sales volume and hence profit. The company may be paying more for the cost of its inventory than the competition. This may occur if, for example, Fournitures Ltée is not able to purchase inventory in the same quantity for the same price as its competition. Fournitures Ltée might not be able to take advantage of reduced costs from bulk purchases because it has overextended its credit and is unable to obtain additional debt financing. Fournitures’ higher profit margin could be the result of lower operating expenses or more other income than Supplies Unlimited. (f)
The price-earnings ratio reflects investors’ assessment of the future prospects of a company. As indicated by the higher price-earnings ratio, investors appear to believe that Fournitures Ltée has the better possibility for growing its profit.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-9A (Continued) Taking It Further: Financial leverage is said to be positive if a company is able to earn a higher return on equity by using borrowed money in its operations than it has to pay on the borrowed money. A quick measure of leverage is calculated by comparing the amount the percentage of return on equity exceeds return on assets. Fournitures Ltée’s return on equity exceeds its return on assets by a 5.2% return while Supplies Unlimited has an excess of 3.5% return.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-69A (a) DavidsTea is more liquid, with a much better current ratio than that of Starbucks. On the other hand, DavidsTea turns over inventory more slowly than Starbucks. The operating cycles of the two companies are similar in total. (b) The debt to total assets of 100% for DavidsTea means there is no equity. On the other hand Starbucks has about half of its assets financed with debt and half with equity. Starbucks is also able to cover its interest 50 times. Starbucks has excellent solvency when compared to DavidsTea. (c) Although the gross profit of the two companies is similar, the profit margin percentage for Starbucks is almost three times that of DavidsTea. Similarly the return on assets is much stronger with Starbucks. Overall profitability is better with Starbucks. The only ratio that is not in support of Starbucks’s superior profitability is its asset turnover.
Taking It Further: Based only on its higher price-earnings ratio, investors favour DavidsTea over Starbucks. This is inconsistent with Starbucks’s superior profitability. The price-earnings ratio of DavidsTea is more a reflection on its low profit (earnings, in the price-earnings ratio) than it is about good financial performance.
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-11A (a)
Gross profit margin is 40% so gross profit of $500,000 (c) ÷ 40% = net sales of $1,250,000.
(b) Net sales of $1,250,000 less gross profit of $500,000 = cost of goods sold of $750,000. (c)
Profit from operations of $166,250 plus operating expenses of $333,750 = gross profit of $500,000.
(d) Profit before income taxes $155,750 plus interest expense $10,500 = profit from operations of $166,250. (e)
Income tax rate is 20%. Profit after income tax is $124,600 so profit before income tax $124,600 ÷ .8 (100% – 20%) = $155,750.
(f)
Income tax is profit before income taxes of (e) $155,750 × 20% = $31,150 or profit after income tax is $124,600 × .25 = $31,150, or more simply profit before income taxes of (e) $155,750 less profit of $124,600 given = $31,150.
Summary of results: SCHWENKE CORPORATION Income Statement Year Ended December 31, 2017 Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Interest expense Profit before income taxes Income tax expense Profit
Solutions Manual .
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$1,250,000 750,000 500,000 333,750 166,250 10,500 155,750 31,150 $ 124,600
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-11A (Continued) (g) Current assets of $190,000 less cash of $7,500 less inventory of $93,750 = accounts receivable of $88,750. (h) Inventory turnover is 8 times and so cost of goods sold of $750,000 ÷ 8 = inventory of $93,750. (i)
Current ratio is 3:1 so current liabilities of $63,333 × 3 = current assets of $190,000(rounded).
(j)
Total assets of $833,333 less current assets of $190,000 = property, plant, and equipment of $643,333.
(k)
Asset turnover is 1.5 times so net sales of $1,250,000 ÷ 1.5 = total assets and (n) total liabilities and shareholders’ equity of $833,333.
(l)
Total liabilities of $183,333 less non-current liabilities of $120,000 = current liabilities of $63,333.
(m) Total liabilities and shareholders’ equity of $833,333 less shareholders’ equity of $650,000 = total liabilities of $183,333.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-11A (Continued) Summary of results: SCHWENKE CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash Accounts receivable Inventory Total current assets Property, plant, and equipment Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders’ Equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
$
7,500 88,750 93,750 190,000 643,333 $833,333 $ 63,333 120,000 183,333 250,000 400,000 650,000 $833,333
Taking it Further: Because of the large number of figures that are omitted at the beginning of each of the financial statements, it is necessary to work backwards, using totals and sub-totals along with the ratios given.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-1B (a) LULULEMON ATHLETICA INC. Income Statement Year Ended December 31
Revenue Operating expenses Profit from operations Other expenses Profit before income taxes Income tax expense Profit
2015 180% 205% 161% 190% 132% 137% 129%
2014 159% 174% 148% 159% 137% 111% 151%
2013 137% 141% 134% 137% 131% 105% 146%
2012 100% 100% 100% 100% 100% 100% 100%
LULULEMON ATHLETICA INC. Balance Sheet Horizontal Analysis Feb. 1 2015 Assets Current assets 180% Non-current assets 166% Total assets 176% Liabilities and Shareholders’ Equity Liabilities Current liabilities 155% Non-current liabilities 188% Total liabilities 162% Shareholders’ equity 179% Total liabilities and equity 176%
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Feb. 2 2014
Feb. 3 2013
Jan. 29 2012
179% 148% 170%
149% 127% 143%
100% 100% 100%
113% 156% 121% 181% 170%
129% 124% 128% 146% 143%
100% 100% 100% 100% 100%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-1B (Continued) (b) lululemon athletica has seen some significant revenue growth over the four-year period. The increase in operating expenses, grouped with cost of goods sold, has outpaced the increase in revenue. Revenue increased 80% but operating expenses doubled in the period. This is not a positive trend and costs and pricing may need to be carefully reviewed. Further analysis to determine the composition of this increase (what is cost of goods sold and other operating expenses) would be helpful. Other expenses is not a significant dollar amount and by its nature can be expected to vary over the years. Income tax expense increased dramatically in 2015, causing a larger decline in profit in that year The horizontal analysis of the balance sheet adds additional insight into lululemon’s financial performance and position. Current assets have increased at the exact same rate as revenues. The shareholders’ equity increase generally has exceeded the trend of profit. Coinciding with the decrease in profit is the increase in non-current liabilities, in 2015. The increase in assets over the period is similar to the increase in liabilities and does not raise a liquidity or solvency concern. Non-current liabilities are small in comparison to non-current assets, which enhances lululemon’s financial flexibility. Shareholders’ equity experienced a decrease in 2015, likely from the repurchase of shares.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-1B (Continued) (c)
Similar to a horizontal analysis of the base-year amount, a horizontal analysis of the percentage change for each year is limited to condensed information available on the financial statements. While these percentages can show a number of meaningful facts and indicators, the detailed composition of each category and the interrelationship between these various percentages would also be of importance. Trend analysis is the most useful.
Taking It Further: Because operating expenses are growing faster than the revenues, lululemon should examine both expenses and revenue to turn this trend around. For example, it should review the items included in the operating costs and determine where they may be able to reduce costs. Alternatively, lululemon could look at ways to increase their revenues or at increasing prices as a means to improve the revenue figure.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-2B (a)
Income Statement Year Ended June 30, 2017 Manitou Muskoka Amount Percent Amount Percent Net sales $360,000 100.0% $1,400,000 100.0% Cost of goods sold 200,000 55.6% 720,000 51.4% Gross profit 160,000 44.4% 680,000 48.6% Operating expenses 60,000 16.7% 272,000 19.4% Profit from operations 100,000 27.8% 408,000 29.1% Rental income 12,000 3.3% 24,000 1.7% Profit before income tax 112,000 31.1% 432,000 30.9% Income tax expense 22,400 6.2% 95,040 6.8% Profit $ 89,600 24.9% $ 336,960 24.1% Note: The percentages shown in the above table do not add perfectly because of rounding discrepancies that occur from rounding the results to one decimal place. (b) Gross Profit Margin as indicated above: Gross profit ÷ Net sales Manitou = $160,000 ÷ $360,000 = 44.4%
Muskoka = $680,000 ÷ $1,400,000 = 48.6%
Profit Margin: Profit ÷ Net sales Manitou = $89,600 ÷ $360,000 = 24.9%
Solutions Manual .
Muskoka = $336,960 ÷ $1,400,000 = 24.1%
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-2B (Continued) (b) (Continued) Asset Turnover: Net sales ÷ Average total assets Manitou: Asset Turnover $360,000 ÷ $457,500 = 0.8 times
Muskoka Asset Turnover $1,400,000 ÷ $1,725,000 = 0.8 times
Return on Assets: Profit ÷ Average total assets Manitou: $89,600 ÷ $457,500 = 19.6%
Muskoka $336,960 ÷ $1,725,000 = 19.5%
Return on Equity: Profit ÷ Average shareholders’ equity Manitou: Return on Equity $89,600 ÷ $204,800 = 43.8% (c)
Muskoka Return on Equity $336,960 ÷ $743,480 = 45.3%
Muskoka is slightly more profitable. Muskoka has a better gross profit margin, but a slightly lower profit margin than does Manitou. Manitou has lower operating expenses, compared to Muskoka. Muskoka’s return on equity is also slightly better. Its asset turnover is the same and its return on assets slightly lower than that of Manitou.
(d) The comparison in (c) above is an intercompany comparison, which involves comparing ratios for different companies.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-2B (Continued)
Taking It Further: Ratio analysis helps us compare companies of differing sizes. However, we should be able to see Muskoka enjoying some economies of scale being the larger business of the two. This does not appear to be the case. The operating expenses as a percentage of sales are higher in the case of Muskoka compared to Manitou. On the other hand, Muskoka has better buying power and can obtain lower prices for the goods that it purchases, as is demonstrated by its gross profit percentage.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-3B (a)
Although the operating expenses have been increasing over the past four years, when these are expressed as a percentage of revenues in the vertical analysis, it is clear that in spite of the fact that the absolute amounts are greater over time, their proportion as a percentage of revenue is smaller, demonstrating that the company has control over the operating expenses.
(b)
Interest expense is decreasing over the four-year period. This reduction is likely due to the reduction in interest rates charged and the amount of the debt on the balance sheet. Although the horizontal analysis draws attention to a major increase in the other revenues, that attention is later diminished when inspecting the vertical analysis income statement. That statement reveals that in absolute terms, the amount of other revenue involved is very small and so an increase of 240% over a four-year period turns out to have a modest effect on the profit.
(c)
Horizontal and vertical analysis of the balance sheet, as well as the financial statements themselves, would be useful in assessing the company’s performance and financial position. In addition, ratio analysis would help complete the picture. Finally, understanding any external economic or other factors would also be useful.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-3B (Continued) Taking It Further: For a new public company, historical financial information is not as readily available to perform meaningful analysis. Although some historical financial information would be found in the prospectus, it would not be useful in assessing comparisons under the new capital structure which includes all of the cash financing obtained from the initial public offering. Consequently, meaningful horizontal or vertical analysis cannot be prepared for its first full year of operations.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-4B (a) 2017
2016
*
=
$1,033,750 $2,153,650
= 48.0%
$818,000 $1,828,500
= 44.7%
=
$203,085 $2,153,650
= 9.4%
$199,000 $1,828,500
= 10.9%
D
c
Earnings per = share
$203,085 57,000
=
$ 3.56
$199,000 57,000
=
$ 3.49
I
d
Receivables turnover
=
$2,153,650 $142,600 + $122,800 2
=
16.23 times
16.21
times
I
e
Collection period
=
=
22.5
days
=
22.5
days
N C
Inventory turnover
=
=
7.91
times
=
8.84
times
D
a
b
f
Gross profit margin Profit margin
365
÷
16.23
$1,119,900 $170,000 + $113,000 2
$1,828,500 $122,800 + $102,800 2 365
÷
16.21
$1,010,500 $113,000 + $115,500 2
=
I
* D denotes deterioration, while I denotes improvement, NC denotes no change
_ Solutions Manual
18-81 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-4B (Continued) 2016
2017 Days sales g in inventory = Return on common h shareholders’ = equity i
Return on assets
j
Current ratio
k
Acid-test ratio
l
÷
7.91
$203,085 $609,700 + $556,700
=
46
days
365
÷
8.84 =
$199,000 $556,700 + $465,400
= 34.8%
$199,000 $970,200 + $852,800 2
=
$ 435,650 $211,250
=
$ $
=
$435,650 - $170,000 $211,250
= 1.26
Asset turnover
Debt to total assets =
$2,153,650 = $1,040,950 + $970,200 2 $431,250 $1,040,950
41
days
D
=
38.9%
D
=
21.8%
D
=
1.79
I
=
1.24
I
2
2 $203,085 = 20.2% $1,040,950 + $970,200 2
=
= m
365
*
2.06
364,900 203,500
$364,900 - $113,000 $203,500
2.14 times
$1,828,500 $970,200 + $852,800 2 $413,500 $970,200
= 41.4%
=
2.01
times
= 42.6%
I _
Solutions Manual
18-82 .
I
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-4B (Continued) Taking It Further: As calculated in ratio no. 5, the collection period for Andy’s Art Company is 22.5 days in 2017. Ratio No. 7. shows the business has days sales in inventory of 46 days in 2017. Combined (22.5 + 46) is 68.5 days for the operating cycle. This result is worse than the 60-day operating cycle of the nearest competitor. On the surface, this ratio would indicate that Andy’s Art Company has a liquidity problem. An investigation into such policies as the terms provided to customers may explain the worse performance.
Solutions Manual .
12-83
Chapter 12
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-5B (a) 2017 1.
Gross profit margin
=
2.
Asset turnover
=
$710,000 $640,000 + $600,000 2
3.
Earnings per share
=
$55,000 32,000
Price4. earnings ratio = 5. 6.
7.
Payout ratio Debt to total assets
Profit margin
$290,000 $710,000
=
*$35,000
40.8%
=
1.15
=
$1.72
times
$260,000 $660,000
=
$660,000 $600,000 + $533,000 2 $40,000 31,000
÷
$55,000
=
4.65
=
63.6%
times
=
1.17
times
=
3.88 times
=
70.0%
$1.29 **$28,000
39.4%
= $1.29
$5.00
$8.00 $1.72
=
2016
÷
$40,000
= $145,000 $640,000
=
$55,000 $710,000 Solutions Manual
=
=
22.7%
$165,000 $600,000
=
27.5%
7.7%
$40,000 $ 660,000
=
6.1%
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-5B (Continued) (a) (Continued) The amount of dividends paid were calculated from the statement of income and the retained earnings balances on the balance sheet: Retained Earnings Dec. 31, 2016 Add Net income for 2017 Less Retained Earnings Dec. 31, 2017 Dividends declared and paid in 2017 Retained Earnings Dec. 31, 2015 Add Net income for 2016 Less Retained Earnings Dec. 31, 2016 Dividends declared and paid in 2016 (b)
$125,000 55,000 180,000 145,000 *$35,000 $113,000 40,000 153,000 125,000 **$28,000
Based on the results of the comparative ratio analysis for Lauer Corporation, we can see that profitability has improved based on the gross profit margin, the profit margin, and the earnings per share ratios. By the end of 2017 the financial position of the company has improved in that there is less debt compared to total assets. In spite of the fact that the dividend payout has reduced as a percentage of net income, shareholders have bid up the market price of the shares, making the price-earnings ratio increase. The price-earnings ratio remains modest.
Taking It Further: Brittany is correct. Profitability is only one area of concern when managing the success and well-being of a business. Liquidity and solvency issues are also important. By using the three common tools of financial analysis: horizontal analysis, vertical analysis, and ratio analysis, Mr. Lauer will get a better understanding of the business’ performance and will be able to detect areas that need his further attention.
Solutions Manual .
18-85
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-6B Liquidity Ratios
1.
Current ratio
= $250,500 $180,150
2.
Acid-test ratio
=
3.
Receivables turnover
=
4.
Collection period
=
5.
Inventory turnover
=
6.
Days sales in inventory
7.
= 1.4
$154,100* $180,150 *$154,100 = $49,380 + $104,720
= 0.9
$790,000 = 7.6 ($110,220* + $98,300**)÷2 * $110,220 = $104,720 + $5,500 ** $98,300 = $93,800 + $4,500
=
365
÷
7.6
= 48
$540,000 = ($96,400 + $74,000) ÷ 2
times
days
6.3
times
365
÷
6.3
= 58
days
58
+
48
= 106
days
Operating cycle =
Solutions Manual .
18-86
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-6B (Continued) Solvency Ratios 8. Debt to total assets 9.
Interest coverage
10. Free cash flow
=
$73,270 + $12,930 + $3,200 = 27.9 times $3,200
=
$116,780
$51,660
=
$65,120
= 31.6%
=
$73,270 $790,000
= 9.3%
=
$790,000 ($715,800 + $672,000) ÷ 2
= 1.1 times
=
$73,270 ($715,800 + $672,000) ÷ 2
= 10.6%
=
$73,270 ($445,650 + $396,000) ÷ 2
= 17.4%
14. Return on assets
Solutions Manual .
–
$250,000 $790,000
13. Asset turnover
15. Return on equity
= 37.7%
=
Profitability Ratios 11. Gross profit = margin 12. Profit margin
$270,150 $715,800
18-87
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-6B (Continued) Profitability Ratios (Continued) 16.
Earnings per share
=
$73,270 15,000
17
Payout ratio
=
$23,620
= $4.88 ÷
$73,270
= 32.2%
Taking It Further: The Rose Packing’s liquidity appears to be a bit weak, based primarily on its collection period of 48 days. However, it is hard to assess its collection period without knowing the company’s credit terms. Its inventory turnover ratio may be reasonable, depending on what the norm is among its competitors and the packing industry. With respect to solvency, since a significant percentage of its assets are financed with equity, the debt to total assets and interest coverage ratios are strong. Finally, profitability also appears to be reasonable based on ratios. Industry averages would be useful to confirm this assessment, as would comparative ratios for the company for prior years.
Solutions Manual .
18-88
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7B (a) and (b)
2017
Liquidity Ratios
Current 1. ratio
=
$415,000 $337,750
= 1.2
Acid-test 2. ratio
=
$50,000 + $100,000 $337,750
= 0.4
Receivables 3. turnover =
Collection 4. period
Change
2016
$360,000 $315,000 $42,000 + $87,000 $315,000
$1,000,000 = 10.2 times ($105,000* + $91,000**)÷2 * $105,000 = $100,000 + $5,000 ** $91,000 = $87,000 + $4,000
= 1.1
F
= 0.4
NC
$940,000 = 11.0 ($91,000* + $80,000**)÷2) * $91,000 = $87,000 + $4,000 ** $80,000 = $77,000 + $3,000
times
U
days
U
= 365
÷
10.2
= 36
days
365
÷
11.0
= 33
_ Solutions Manual
18-89 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7B (Continued) Liquidity Ratios (Continued) 2017 5.
Inventory turnover
6.
Days sales in inventory =
7.
Operating cycle
=
Chan -ge
2016
$650,000 = 3.0 ($240,000 + $200,000) ÷ 2
times
$635,000 = 3.6 ($200,000 + $150,000) ÷ 2
times
U
365
÷
3.0
= 122
days
365
÷
3.6
= 101
days
U
122
+
36
= 158
days
101
+
33
= 134
days
U
=
_ Solutions Manual
18-90 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7B (Continued) Solvency Ratios 2017 Debt to total assets
=
Interest coverage
=
Free cash 10. flow
=
8.
9.
$437,750 $1,240,000
Chan -ge
2016 = 35.3%
$415,000 $1,135,000
= 36.6%
F
$150,000* $125,000* = 4.3 times = 3.6 times $35,000 $35,000 *$150,000 = $97,750 + $17,250 + $35,000 *$125,000 = $76,500 + $13,500 + $35,000 $133,500 –
$110,000 = $23,500
$180,500 –
$56,000
F
= $124,500
U
_ Solutions Manual
18-91 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7B (Continued) Profitability Ratios 2017 Gross profit 11. margin
Change
2016
=
$350,000 $1,000,000
= 35.0%
$305,000 $940,000
= 32.4%
F
Profit 12. margin
=
$97,750 $1,000,000
= 9.8%
$76,500 $940,000
= 8.1%
F
Asset 13. turnover
=
=0.9 times
U
= 6.9%
F
$1,000,000 =
0.8 times
($1,240,000 + $1,135,000)÷2 Return on 14. assets
$97,750
=
= 8.2% ($1,240,000 + $1,135,000)÷2
$940,000 ($1,135,000 + $1,075,000)÷2 $76,500 ($1,135,000 + $1,075,000)÷2
_ Solutions Manual
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7B (Continued) Profitability Ratios (Continued)
Return on 15. equity
2017 $97,750 = 12.8% = ($802,250 + $720,000) ÷ 2
Earnings 16. per share
=
17.
$97,750 100,000
= $0.98
÷
= 15.9%
2016 $76,500 ($720,000 + $659,000) ÷ 2 $76,500 100,000
Chan -ge
= 11.1%
F
= $0.77
F
= 20.3%
U
Payout ratio = $15,500
$97,750
$15,500
÷
$76,500
_ Solutions Manual
18-93 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-7B (Continued) (c) (1) Liquidity: Deteriorated Track’s overall liquidity has deteriorated in 2017 compared to 2016 in spite of a modest improvement in the current ratio. Both the receivables and inventory turnover ratios have deteriorated and consequently the operating cycle worsened by 24 days. (2) Solvency: Improved The debt to total assets ratio improved slightly. The interest coverage ratio improved even more so; consequently, overall solvency improved. A larger amount of cash was used in investing activities during 2017 compared to 2016 which resulted in a large decrease in free cash flow. (3) Profitability: Improved Profitability, with the exception of the asset turnover ratio which decreased slightly, has improved overall.
Taking It Further: The problem is employing intracompany comparison. It is hard to say which is more useful—intercompany or intracompany comparisons—as both provide valuable information. When two companies in the same industry are compared, then intercompany comparisons can be very useful. A business might obtain feedback that they are doing well from an intracompany analysis, but may not be doing as well on an intercompany comparison, possibly failing to keep pace with pricing increases or cost control opportunities that the company’s competitors are taking advantage of.
Solutions Manual .
18-94
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-8B (a) ($ in millions) Hudson’s Bay
Liquidity Ratios 1.
Current ratio
2.
Receivables = turnover
3.
=
Inventory turnover
=
Days sales = in inventory 4.
Operating cycle
$2,829 $2,144
= 1.32
$8,169 $281
= 29.1
times
÷
= 13
days
$4,893 $2,199
= 2.2
times
365
÷
2.2
= 166
days
365
13
+
166
= 179
days
61
=
Collection period
Nordstrom
365
29.1
$5,224 $2,800
= 1.87
$13,506 $2,242
= 6.0
times
= 61
days
= 5.2
times
÷ 5.2
= 70
days
+
= 131
days
365 ÷
6.0
$8,406 $1,632
= 70
_ Solutions Manual
18-95 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-8B (Continued) (a) (Continued) Solvency Ratios 5.
Debt to total assets =
6.
Interest coverage
=
Hudson’s Bay $6,580 $9,072
8.
Profit margin
=
9.
Asset turnover
=
Return on 10. assets Return on 11. equity
$6,805 $9,245
= 72.5%
$238 + $262 - $19 $262
= 1.8
$3,276 $8,169
=
Profitability Ratios: Gross profit = 7. margin
Nordstrom
times
$5,100 $13,506
40.1%
$238 $8,169
= 2.9%
$8,169 $8,507
= 1.0
$238 $8,507 $238 $2,268
$720 + $138+$465 $138
= 73.6%
=
37.8%
$720 $13,506
= 5.3%
$13,506 $8,910
= 1.5
= 2.8%
$720 $8,910
= 8.1%
= 10.5%
$720 $2,260
= 31.9%
times
times
= 9.6
times
= =
_ Solutions Manual
18-96 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-8B (Continued) (b) Liquidity: Nordstrom is the better performer. Nordstrom has a much stronger current ratio than Hudson’s Bay. Hudson’s Bay collects its receivables more quickly than Nordstrom, likely because most of their sales are cash or bank credit cards. Nordstrom’s inventory turnover is more than double that of Hudson’s Bay. Solvency: Nordstrom is the better performer. Although the source of financing from debt as a percentage of assets is similar between the two companies, Nordstrom is in a far better position to pay its interest. Profitability: Nordstrom is the better performer. Although Hudson’s Bay has a higher gross profit margin, it is not translating into a higher profit margin. Both the return on assets and return on equity for Hudson’s Bay are a fraction of the Nordstrom returns.
Taking It Further: Most financial analysis ratios exclude other comprehensive income. There are no standard ratio formulas incorporating comprehensive income. Nevertheless, other comprehensive income (loss) should not be ignored in assessing the profitability of a company. Key profitability ratios should be recalculated including other comprehensive income if it is significant and depending on its composition.
Solutions Manual .
18-97
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-9B (a) Accounts receivable management can be assessed by reviewing each company’s receivables turnover ratio and average collection period. Refresh’s average collection period of 35 days (365 ÷ 10.4) days is reasonable when compared to its credit terms of 30 days. Flavour’s average collection period of 37 days (365 ÷ 9.8) days is marginally worse than that of Refresh. (b) Each company’s ability to manage its inventory can be measured by the inventory turnover ratio. Currently Refresh is turning over its inventory 5.8 times per year, which can also be expressed as days in inventory of approximately 63 days (365 ÷ 5.8 times). When compared to the turnover of 9.9 or 37 days (365 ÷ 5.8 times) times for Flavour, it appears that Refresh is turning over its inventory at a much slower rate than its competitor. (c) Refresh’s current ratio could be higher than Flavour’s because of its slower inventory turnover. It could also have a higher level of prepaid expenses or similar type of current assets. (d) Refresh is the more solvent of the two companies. Refresh has a much lower debt to total assets ratio, indicating that Refresh has a lower percentage of its assets financed by debt. As well, Refresh has a higher interest coverage ratio indicating that Refresh has a better ability to service its debt as interest payments become due.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-9B (Continued) (e) Refresh’s higher gross profit margin may be attributable to a number of factors: The company may be selling its products at a higher price. The company may be paying less for the cost of its inventory than the competition. This may occur if, for example, Refresh is able to purchase inventory in large volumes and receives purchase discounts. Flavour might not be able to take advantage of reduced costs from bulk purchases because it has overextended its credit and is unable to obtain additional debt financing. Refresh’s lower profit margin is most likely the result of higher operating expenses or less other income. (f)
The price-earnings ratio reflects investors’ assessment of the future prospects of a company. As indicated by the higher price-earnings ratio, investors appear to believe that Refresh has the better possibility for growing its profit.
Taking It Further: Financial leverage is said to be positive if a company is able to earn a higher return on equity by using borrowed money in its operations than it has to pay on the borrowed money. A quick measure of leverage is calculated by comparing the amount the percentage of return on equity exceeds return on assets. Flavour Corp’s return on equity exceeds its return on assets by an excellent 19.7% return while Refresh Ltd. has an excess of 14.5% return.
Solutions Manual .
18-99
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-10B (a)
Both Rogers and Shaw seem to have extremely low current ratios. This should not be considered alarming as there are likely large customer deposits as current liabilities which will be used for payments on account. When compared to each other, Shaw has the better liquidity as evidenced by all three liquidity ratios. A detailed composition of the current assets and current liabilities of each company would help confirm this initial assessment.
(b) As for solvency, Shaw is again the better performer of the two companies. Shaw has less debt compared to total assets and also has a much better ability to cover its interest. (c)
Likely due to the different capital structures of the two companies, the conclusions concerning profitability have mixed results. From the profit margin, Shaw’s performance is far stronger than Rogers. Asset turnover is similar between companies, but where opposite trends are revealed is in the return on assets and equity. Rogers has lower equity as a percentage of total assets and the return on equity is considerably stronger than that of Shaw and that of its own return on assets. A detailed composition of the equity of each company would help confirm this initial assessment
Taking It Further: Investors seem to favour Rogers as it has a higher priceearnings ratio. This is consistent with (c) as investors would likely favour a company with a better return on equity.
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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-11B (a)
Cost of goods sold is net sales of $11,000,000 less gross profit of $4,400,000 = $6,600,000 or 60% of net sales.
(b) Gross profit is 40% of net sales of $11,000,000 or $4,400,000. (c)
Gross profit of $4,400,000 less operating expenses of $1,600,000 equals profit from operations of $2,800,000.
(d) Profit from operations of $2,800,000 less profit before income taxes of $2,357,000 equals interest expense of $443,000. (e)
Profit of $1,650,000 plus income tax expense of $707,000 equals profit before income taxes of $2,357,000.
(f)
Profit margin is 15% of sales. Net sales × 15% equals profit of $1,650,000.
Summary of results: VIEUX CORPORATION Income Statement Year ended December 31, 2017 Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Interest expense Profit before income taxes Income tax expense Profit
Solutions Manual .
18-101
$11,000,000 6,600,000 4,400,000 1,600,000 2,800,000 443,000 2,357,000 707,000 $ 1,650,000
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM 18-11B (Continued) (g) Total current assets of $2,650,000 less accounts receivable (h) of $1,100,000 and inventory (i) of $825,000 equals cash of $725,000. (h) Receivables turnover is 10 times and so net sales of $11,000,000 ÷ 10 = accounts receivable of $1,100,000. (i)
Inventory turnover is 8 times and so cost of goods sold of $6,600,000 ÷ 8 = inventory of $825,000.
(j)
Total assets of $7,500,000 less property, plant, and equipment of $4,420,000 and long-term investments of $430,000 equal current assets of $2,650,000.
(k)
Return on assets is 22% so profit of $1,650,000 ÷ 22% equals total assets of $7,500,000.
(l)
Current ratio is 2:1 and so current assets (g) of $2,650,000 ÷ 2 equals current liabilities of $1,325,000.
(m) Total liabilities of $4,100,000 less current liabilities (l) of $1,325,000 equals non-current liabilities of $2,775,000. (n) Total liabilities and shareholders’ equity of $7,500,000 less shareholders’ equity of $3,400,000 equals total liabilities of $4,100,000. (o) Total liabilities and shareholders’ equity is equal to total assets of $7,500,000.
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Accounting Principles, Seventh Canadian Edition
PROBLEM 18-11B (Continued) Summary of results: VIEUX CORPORATION Balance Sheet December 31, 2017 Assets Current assets Cash Accounts receivable Inventory Total current assets Long-term investments Property, plant, and equipment Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders’ Equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
$ 725,000 1,100,000 825,000 2,650,000 430,000 4,420,000 $7,500,000 $1,325,000 2,775,000 4,100,000 1,500,000 1,900,000 3,400,000 $7,500,000
Taking It Further: Because of the large number of figures that are omitted at the beginning of each of the financial statements, it is necessary to work backwards, using totals and sub-totals along with the ratios given.
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Accounting Principles, Seventh Canadian Edition
BYP18-1 FINANCIAL REPORTING PROBLEM (a) CORUS ENTERTAINMENT INC. Consolidated Statement of Financial Position (in thousands) August 31, 2014 August 31, 2013 Amount Percentage Amount Percentage Current Cash and cash equivalents Accounts receivable Promissory notes receivable Income taxes recoverable Prepaid expenses and other Total current assets Other assets and investments Property, plant and equipment Program and film rights Film investments Broadcast licenses Goodwill Deferred tax assets Total assets
$11,585 183,009
0.4% 6.6%
9,768 13,032 217,394 76,674 143,618 330,437 63,455 979,984 934,859 38,161 $2,784,582
0.4% 0.5% 7.8% 2.8% 5.2% 11.9% 2.3% 35.2% 33.6% 1.4% 100.0%
$81,266 164,302 47,759 351 16,392 310,070 210,470 151,192 232,587 62,274 515,036 646,045 39,463 $2,167,137
3.7% 7.6% 2.2% 0.0% 0.8% 14.3% 9.7% 7.0% 10.7% 2.9% 23.8% 29.8% 1.8% 100.0%
_ Solutions Manual
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Accounting Principles, Seventh Canadian Edition
BYP18-1 (Continued) (a) (Continued) CORUS ENTERTAINMENT INC. Consolidated Statement of Financial Position (in thousands) August 31, 2014 Amount Percentage LIABILITIES Current Accounts payable and accrued liabilities Provisions Total current liabilities Long-term debt Other long-term liabilities Deferred tax liabilities Total liabilities SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Equity - Non-controlling interest Total shareholders' equity Total liabilities and shareholders' equity BYP18-1 (Continued)
August 31, 2013 Amount Percentage
$170,411 5,314 175,725 874,251 171,793 252,687 1,474,456
6.1% 0.2% 6.3% 31.4% 6.2% 9.1% 53.0%
$164,443 3,941 168,384 538,966 93,241 145,713 946,304
7.6% 0.2% 7.8% 24.9% 4.3% 6.7% 43.7%
967,330 8,385 313,361 3,767 17,283 1,310,126 $2,784,582
34.7% 0.3% 11.3% 0.1% 0.6% 47.0% 100.0%
937,183 7,221 256,517 1,653 18,259 1,220,833 2,167,137
43.2% 0.3% 11.8% 0.1% 0.8% 56.3% 100.0% _
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BYP18-1 (Continued) (a) (Continued) CORUS ENTERTAINMENT INC. Consolidated Statements of Income Years Ended August 31 (in thousands) 2014 Amount Percentage Revenues Direct cost of sales, general and administrative expenses Depreciation and amortization Interest expense and debt financing Broadcast license and goodwill impairment Business acquisition, integration and restructuring costs Gains, losses and other expenses Income before income taxes Income tax expense Net income
2013 Amount Percentage
$833,016
100.0%
$751,536
100.0%
543,378
65.2%
500,562
66.6%
24,068 48,320 83,000
2.9% 5.8% 10.0%
26,812 69,828 5,734
3.6% 9.3% 0.8%
46,792 (122,144) 209,602 53,433 $156,169
5.6% -14.7% 25.2% 6.4% 18.7%
7,343 (58,954) 200,211 34,462 $165,749
1.0% -7.8% 26.6% 4.6% 22.1%
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BYP18-1 (Continued) (b) The focus of interest on the Corus statement of financial position is not on current assets or liabilities as they make up a very small portion of the totals. Liquidity is not an issue of concern. Rather the attention should be given to the large portion of the assets made up of broadcast licenses and goodwill, which together make up 68.8% of total assets in 2014. In the previous year, these assets made up 53.6% of the total assets. The large increase is explained by an acquisition during 2014 which generated a gain on acquisition close in amount to the size of the net income. Long-term debt increased 62% from the acquisition, while share capital increased modestly. Solvency would not appear to an issue in spite of total liabilities representing 53% of total assets in 2014, up from 43.7% in 2013, due to the acquisition. On the income statement, as mentioned earlier, the unusual gain from acquisition sustained the profitability of Corus to its prior year level. The major charges representing 10% of total revenues came from broadcast license and goodwill impairment. Business acquisition, integration and restructuring costs were also incurred that are unusual and likely not recurring in the future.
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BYP18-2 INTERPRETING FINANCIAL STATEMENTS (a) In terms of liquidity, both companies have low current ratios and identical acid-test ratios. CN’s receivables turnover is higher than those of CP and so overall, CN’s liquidity is slightly better than CP’s. (b) CN has less free cash flow than CP but both have enough to maintain financial flexibility. Since CP has more debt to total assets, this explains in part why it is worse off concerning its ability to pay its interest costs. (c) CN is more profitable. All of its ratios are better than those of CP, except the asset turnover which is the same.
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BYP18-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook.
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BYP18-4 COMMUNICATION ACTIVITY Memorandum Re: Limitations of financial statement analysis In evaluating the financial performance of a company, it is important to understand the limitations of financial statement analysis. I have identified the following questions to raise at the audit committee: Alternative accounting policies: What significant judgements and estimates were required in the choice of IFRS policies by EasyMix? Which key accounting policies have changed in the transition from ASPE to IFRS? Has the effect of the recent implementation to IFRS been adequately explained in the MD&A and notes to the financial statements? How do the policies of this company compare to those used by its key competitors in the cement industry? Comparability of data: What efforts have been made to explain the impact of the transition from ASPE to IFRS in the ratios reported to the audit committee and the board? Has there been any impact on the calculation or choice of ratios used to meet debt covenants, in particular? Economic factors: How have the changing prices of commodities and foreign exchange affected this industry? Has the decrease in demand for the construction industry affected this company significantly, and if so, how? Risk assessment: Have all business risks been properly assessed and disclosed?
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BYP18-5 “ALL ABOUT YOU” ACTIVITY (a)
When evaluating the financial statement ratios, a reading of the Management’s Discussion and Analysis (MD&A) will provide some key information for interpreting trends and explaining possible anomalies in the ratio performance for the period. MD&A gives context to the financial information in order to draw more informed conclusions. The purpose of the MD&A of Canadian Tire’s is to provide a description of the economic, financial, and other factors behind the business, usually broken down by its main products, services, or departments. It provides management’s perspective on such topics as the company’s past plans, current performance, and future goals. This section of the annual report is not audited, and is prepared from the point of view of management. It is not intended to be used in isolation.
(b)
The quoted closing price for CTC.a on the TSX Composite Index was as follows at the given dates: January 2, 2015 $122.22 December 27, 2013 $99.84
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BYP18-5 (Continued) (c) 2014 = $ 8,510.2 $ 4,578.8
1.
Current Ratio
2.
Inventory turnover
=
3.
Debt to total assets
=
4.
Interest coverage =
5.
Gross profit margin
6.
Return on assets
Solutions Manual .
61.3%
=
9.1
times
=
$639.3 $12,462.9
=
5.1%
=
4.5%
=
11.5%
=
16.0
$604.0 =
25.5%
Price-earnings = ratio
Payout ratio
=
times
32.5%
=
10.
5.4
=
Return on equity
9.
$639.3 + $108.9 + $238.9 $108.9
=
$4,046.0 $12,462.9
= 8.
$8,922.4 $14,553.2
1.9
= Profit margin
7.
$8,416.9 $1,623.8 + $1,481.0 2
=
=
$639.3 $14,553.2 + $13,630.0 2 $639.3 $5,630.8 + $5,449.9 2 $122.22 $7.65
$154.1
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BYP18-5 (Continued) (c) (Continued) 2013 = $ 7,977.8 $ 4,322.1
1.
Current ratio
2.
Inventory turnover
=
3.
Debt to total assets
=
4.
Interest coverage =
5.
Gross profit margin
6.
Return on assets
Solutions Manual .
60.0%
=
8.4
times
=
$564.4 $11,785.6
=
4.8%
=
4.2%
=
11.1%
=
14.3
$561.2 =
21.3%
Price-earnings = ratio
Payout ratio
=
times
31.6%
=
10.
5.4
=
Return on equity
9.
$564.4 + $105.8 + $220.2 $105.8
=
$3,722.3 $ 11,785.6
= 8.
$8,180.1 $13,630.0
1.8
= Profit margin
7.
$8,063.3 $1,481.0 + $1,503.3 2
=
=
$564.4 $13,630.0 + $13,228.6 2 $564.4 $5,449.9 + $4,764.3 2 $99.84 $6.96
$119.6
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BYP18-5 (Continued) (c) (Continued) Ratio 1. Current ratio 2. Inventory turnover 3. Debt to total assets 4. Interest coverage 5. Gross profit margin 6. Profit margin 7. Return on assets 8. Return on equity 9. Price-earnings ratio 10. Payout ratio
2014 1.9:1 5.4 times 61.3% 9.1 times 32.5% 5.1% 4.5% 11.5% 16.0 times 25.5%
2013 Comparison 1.8:1 Better 5.4 times Same 60.0% Worse 8.4 times Better 31.6% Better 4.8% Better 4.2% Better 11.1% Better 14.3 times Better 21.3% Better
(d)
The five-year stock chart showing the closing price of the CTC.a stock performance over the past five years demonstrates a fairly smooth climb in the stock price over that period, with few noticeable declines.
(e)
Ratios and stock performance show positive trends.
(f)
Both tools are helpful in assessing some financial considerations in an investment choice. The history of the business and the means that it has taken to grow its operations would be a major factor in explaining it increased earnings and profits. Mark’s Workwear and Forzani acquisitions of the recent past explain much of the growth of the business.
(g)
Message boards may alert a potential investor to some information that could not be found in the annual report. An investor would be well advised to do their own research as well as read analysts’ reports on the current status of the business. Analysts follow the company carefully and provide ratings and recommendations as well as expectations of the performance of the stock in the future.
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BYP18-6 Santé Smoothie Saga (a)
Santé Smoothies & Sweets Ltd. is far more liquid than the public company Okanagan Fruit & Vegetable Corp. Of course, its current ratio is very high, consistent with the excess cash it has on hand. Its receivables turnover is much higher than Okanagan Fruit & Vegetable Corp.; however, it is unlikely that Sante’s has as many receivables as the larger, public company. Its inventory turnover is much lower, but it likely only produces what it can sell most days. A larger bakery would be expected to have more inventory to meet its larger distribution requirements.
(b) Both companies have good debt to total asset ratios, and correspondingly strong times interest earned ratios. Overall, Santé Smoothies & Sweets Ltd. Ltd. remains in the better solvency position. (c)
From a profitability point of view, Santé Smoothies & Sweets Ltd.’s performance is far better than that of Okanagan Fruit & Vegetable Corp. Santé’s gross profit margin, profit margin, return on common shareholders’ equity, and return on assets ratios are multiples of those experienced by Okanagan. Again, this is not unusual as Santé’s business model is quite different than that of Okanagan. It can adjust its pricing as more of a specialty baker and is likely also doing less volume. Its families’ salaries and other expenses also might not be reflective of those of a much larger, public company such as Okanagan Fruit & Vegetable Corp.
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BYP18-6 (Continued) (d) Compared to 2017, Okanagan Fruit & Vegetable Corp.’s ratios in 2018 are generally worsening. All three liquidity ratios have declined. The debt to total assets ratio has deteriorated slightly, but the times interest earned ratio has improved significantly, leading to an overall improvement in solvency. As for profitability, all profitability ratios are declining, with the exception of the dividend payout ratio and the price earnings ratio. Investors may be bidding up the market value of Okanagan Fruit & Vegetable Corp.’s common shares because of the increase in the dividend payout ratio. (e)
Overall, Santé’s is stronger than Okanagan in liquidity, solvency, and profitability. This is likely because of differences in the size and flexibility of the company’s business model as outlined in parts (a) and (c).
(f)
Because of market volatility, it is possible that the market price of the Okanagan Fruit & Vegetable Corp. common shares could decline at a time when Santé’s needs the cash for operations and is forced to sell the investment at a loss. Consequently, considering an equity investment by investing in the shares of another company for a shortterm return may not be the most appropriate option. To maintain liquidity and reduce its risk, Santé’s should instead consider investing in a debt (fixed income) investment to ensure that they don’t experience a loss on their investment.
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APPENDIX B Sales Taxes SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE B-1 There are two main types of sales taxes in Canada, the federal Goods and Services Tax (GST) or Harmonized Sales Tax (HST) and the Provincial Sales Tax (PST) sometimes called the Retail Sales Tax. For a business that is a registrant which charges GST/HST to its customers, all GST/HST paid by the business on all purchases is recovered and does not represent a cost to the business. On the other hand, the PST is not recoverable and the amount paid by the business is included as a cost of purchasing an asset or paying for a service. From the perspective of a consumer, the two types of taxes are viewed as the same because neither tax is fully recoverable.
BRIEF EXERCISE B-2 Accounts Receivable .................................... 1,839.60 Sales......................................................... GST Payable ($1,600 × 5%) .................... QST Payable ($1,600 × 9.975%)............. Cost of Goods Sold ....................................... Merchandise Inventory ..........................
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B-1
1,600.00 80.00 159.60
900.00 900.00
Appendix B
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BRIEF EXERCISE B-3 Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. QST Payable ($800 × 9.975%)...................... Accounts Receivable ............................
800.00 40.00 79.80
Merchandise Inventory ................................ Cost of Goods Sold ...............................
450.00
919.80
450.00
BRIEF EXERCISE B-4 Accounts Receivable ................................... 1,839.60 Sales........................................................ GST Payable ($1,600 × 5%) ................... QST Payable ($1,600 × 9.975%)............ Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. QST Payable ($800 × 9.975%)...................... Accounts Receivable ............................
1,600.00 80.00 159.60
800.00 40.00 79.80 919.80
BRIEF EXERCISE B-5 Accounts Receivable .................................... Service Revenue .....................................
450 450
BRIEF EXERCISE B-6 Accounts Receivable .................................... Service Revenue ..................................... GST Payable ($700 × 5%) .......................
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735 700 35
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BRIEF EXERCISE B-7 Merchandise Inventory ................................. GST Recoverable ($4,100 × 5%) ................... Accounts Payable...................................
4,100 205 4,305
BRIEF EXERCISE B-8 Accounts Payable.......................................... GST Recoverable ($500 × 5%) ............... Merchandise Inventory ..........................
525 25 500
BRIEF EXERCISE B-9 Merchandise Inventory ................................. HST Recoverable ($4,100 × 13%) ................. Accounts Payable...................................
4,100 533 4,633
BRIEF EXERCISE B-10 Accounts Payable.......................................... HST Recoverable ($500 × 13%) ............. Merchandise Inventory ..........................
565 65 500
BRIEF EXERCISE B-11 Supplies ($600 × 1.05) ................................... GST Recoverable ($600 × 5%) ...................... Cash .........................................................
630 30 660
BRIEF EXERCISE B-12 Supplies .......................................................... HST Recoverable ($600 × 15%) .................... Cash .........................................................
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B-3
600 90 690
Appendix B
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BRIEF EXERCISE B-13 Vehicles .......................................................... HST Recoverable ($32,000 × 14%) ............... Accounts Payable...................................
32,000 4,480 36,480
BRIEF EXERCISE B-14 Vehicles ($32,000 × 1.07) .............................. GST Recoverable ($32,000 × 5%) ................. Accounts Payable...................................
34,240 1,600 35,840
BRIEF EXERCISE B-15 Merchandise Inventory ................................. Supplies ($300 × 1.08) ................................... GST Recoverable ($5,300 × 5%) ................... Accounts Payable...................................
5,000 324 265 5,589
BRIEF EXERCISE B-16 GST Payable ................................................... GST Recoverable .................................... Cash .........................................................
6,120
PST Payable ................................................... Cash .........................................................
8,570
940 5,180
8,570
BRIEF EXERCISE B-17 Cash ................................................................ HST Payable ................................................... HST Recoverable ....................................
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690 3,920 4,610
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SOLUTIONS TO EXERCISES EXERCISE B-1 Province of Manitoba GENERAL JOURNAL Account Titles and Explanation May
1
3
5
7
12
31
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Rent Expense ............................................ GST Recoverable ($7,300 × 5%).............. Cash ....................................................
Debit
Credit
7,300 365 7,665
Accounts Receivable—Marvin ................ 28,250 Sales .................................................... GST Payable ($25,000 × 5%) ............. PST Payable ($25,000 × 8%) .............
25,000 1,250 2,000
Cost of Goods Sold .................................. 18,600 Merchandise Inventory......................
18,600
Sales Returns and Allowances ............... GST Payable ($800 × 5%)......................... PST Payable ($800 × 8%) ......................... Accounts Receivable—Marvin .........
800 40 64 904
Merchandise Inventory ............................ 11,000 GST Recoverable ($11,000 × 5%)............ 550 Accounts Payable—Macphee........... Furniture ($600 × 1.08) ............................. GST Recoverable ($600 × 5%)................. Cash ...................................................
648 30
GST Payable.............................................. GST Recoverable ............................... Cash ...................................................
7,480
B-5
11,550
678 1,917 5,563
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EXERCISE B-2 Province of Alberta GENERAL JOURNAL Account Titles and Explanation
Date May
1
Rent Expense ............................................. GST Recoverable ($7,300 × 5%) ............... Cash ..................................................
Debit
Credit
7,300 365 7,665
3 Accounts Receivable—Marvin ................. 26,250 Sales.................................................. 25,000 GST Payable ($25,000 × 5%) ........... 1,250 Cost of Goods Sold ................................... 18,600 Merchandise Inventory ................... 18,600 5 Sales Returns and Allowances ................ GST Payable ($800 × 5%) .......................... Accounts Receivable—Marvin .......
800 40 840
7 Merchandise Inventory.............................. 11,000 GST Recoverable ($11,000 × 5%) ............. 550 Accounts Payable—Macphee.......... 11,550 12
Furniture ..................................................... GST Recoverable ($600 × 5%) .................. Cash ...................................................
600 30
31 GST Payable ............................................... GST Recoverable .............................. Cash ...................................................
7,480
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630 1,917 5,563
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EXERCISE B-3 Province of Ontario GENERAL JOURNAL Account Titles and Explanation
Date May
1
Debit
Rent Expense ..................................... HST Recoverable ($7,300 × 13%) ..... Cash ..............................................
7,300 949
3 Accounts Receivable—Marvin ......... Sales.............................................. HST Payable ($25,000 × 13%) .....
28,250
Cost of Goods Sold ........................... Merchandise Inventory ...............
18,600
5 Sales Returns and Allowances ........ HST Payable ($800 × 13%) ................ Accounts Receivable—Marvin ...
800 104
7 Merchandise Inventory ..................... HST Recoverable ($11,000 × 13%) ... Accounts Payable—Macphee .....
11,000 1,430
12
8,249 25,000 3,250
18,600
904
12,430
Furniture ............................................. HST Recoverable ($600 × 13%) ........ Cash ..............................................
600 78
31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................
7,480
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B-7
Credit
678 1,917 5,563
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EXERCISE B-4 Province of Manitoba
Date Nov.
1
4
6
7
12
30
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GENERAL JOURNAL Account Titles and Explanation
Debit
Rent Expense ........................................... GST Recoverable ($5,500 × 5%) ............. Cash ....................................................
5,500 275
Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................
8,000 400
Accounts Payable—Comet ..................... Purchase Returns and Allowances GST Recoverable ($500 x 5%)
525
Credit
5,775
8,400 500 25
Accounts Receivable—Solar Star ......... 11,300 Sales ................................................... GST Payable ($10,000 × 5%)............. PST Payable ($10,000 × 8%) .............
10,000 500 800
Computer Equipment ($1,200 × 1.08)..... GST Recoverable ($1,200 × 5%) ............. Cash ....................................................
1,296 60 1,356
GST Payable ............................................. GST Recoverable ............................... Cash ....................................................
2,520
B-8
985 1,535
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EXERCISE B-5 Province of Alberta GENERAL JOURNAL Account Titles and Explanation
Date Nov.
Debit
1 Rent Expense ............................................. GST Recoverable ($5,500 × 5%) ............... Cash ..................................................
5,500 275
4 Purchases ................................................. GST Recoverable ($8,000 × 5%) ............. Accounts Payable—Comet ................
8,000 400
6 Accounts Payable—Comet ..................... Purchase Returns and Allowances... GST Recoverable ($500 x 5%) ..........
525
Credit
5,775
8,400 500 25
7 Accounts Receivable—Solar Star ............ 10,500 Sales.................................................. 10,000 GST Payable ($10,000 × 5%) ........... 500 12 Computer Equipment ................................ GST Recoverable ($1,200 × 5%) ............... Cash ...................................................
1,200 60
30 GST Payable ............................................... GST Recoverable .............................. Cash ...................................................
2,520
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1,260 985 1,535
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EXERCISE B-6 Province of Ontario GENERAL JOURNAL Account Titles and Explanation
Date Nov.
1
Debit
Rent Expense ..................................... HST Recoverable ($5,500 × 13%) ..... Cash ..............................................
5,500 715
4 Purchases........................................... HST Recoverable ($8,000 × 13%) ..... Accounts Payable—Comet..........
8,000 1,040
6 Accounts Payable—Comet............... Purchase Returns and Allowance HST Recoverable ($500 x 13%) ..
565
7 Accounts Receivable—Solar Star ... Sales............................................... HST Payable ($10,000 × 13%) ......
11,300
12 Computer Equipment ........................ HST Recoverable ($1,200 × 13%) ..... Cash ..............................................
1,200 156
31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................
2,520
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B-10
Credit
6,215
9,040 500 65 10,000 1,300
1,356 985 1,535
Appendix B
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EXERCISE B-7 Date
GENERAL JOURNAL Account Titles and Explanation
Debit
June 1 Freight Out ($200 × 1.07) .................. GST Recoverable ($200 × 5%) ......... Cash ..............................................
214.00 10.00
5 Repairs Expense ($800 × 1.07) ....... GST Recoverable ($800 × 5%) ......... Cash ..............................................
856.00 40.00
10 Supplies ($250 × 1.07) ...................... GST Recoverable ($250 × 5%) ......... Accounts Payable........................
267.50 12.50
224.00
896.00
280.00
13 Accounts Receivable ........................ 5,264.00 Service Revenue .......................... GST Payable ($4,700 × 5%)......... PST Payable ($4,700 × 7%) ......... 15 Cash ................................................... Accounts Receivable ..................
896.00
22 Travel Expense ($720 × 1.07) ........... GST Recoverable ($720 × 5%) ......... Cash ..............................................
770.40 36.00
30 Telephone Expense ($150 × 1.07) ... GST Recoverable ($150 × 5%) ......... Accounts Payable........................
160.50 7.50
30 GST Payable ...................................... GST Recoverable ......................... Cash ..............................................
1,890.50
30 PST Payable ...................................... Cash ..............................................
2,640.00
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B-11
Credit
4,700.00 235.00 329.00 896.00
806.40
168.00 741.60 1,148.90 2,640.00
Appendix B
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EXERCISE B12 GENERAL JOURNAL Account Titles and Explanation
Date June 8
Debit
Equipment ................................................. HST Recoverable ($1,500 × 15%) ............ Accounts Payable ..............................
1,500.00 225.00
10 Supplies..................................................... HST Recoverable ($100 × 15%) ............... Cash......................................................
100.00 15.00
12 Accounts Receivable ............................... Service Revenue ................................. HST Payable ($1,250 × 15%) ..............
1,437.50
18 Repairs Expense ...................................... HST Recoverable ($220 × 15%) ............... Cash......................................................
220.00 33.00
22 Cash ........................................................... Accounts Receivable ..........................
1,437.50
30 HST Payable .............................................. HST Recoverable ................................ Cash......................................................
2,520.60
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B-12
Credit
1,725.00
115.00 1,250.00 187.50
253.00
1,437.50 820.45 1,700.15
Appendix B
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EXERCISE B-9 GENERAL JOURNAL Account Titles and Explanation
Date June 8
Debit
Equipment ................................................. GST Recoverable ($1,500 × 5%).............. Accounts Payable ..............................
1,500.00 75.00
10 Supplies..................................................... GST Recoverable ($100 × 5%)................. Cash......................................................
100.00 5.00
12 Accounts Receivable ............................... Service Revenue ................................. GST Payable ($1,250 × 5%) ................
1,312.50
18 Repairs Expense ...................................... GST Recoverable ($220 × 5%)................. Cash......................................................
220.00 11.00
22 Cash ........................................................... Accounts Receivable.........................
1,312.50
30 GST Payable.............................................. GST Recoverable ................................ Cash......................................................
970.50
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B-13
Credit
1,575.00
105.00 1,250.00 62.50
231.00
1,312.50 315.55 654.95
Appendix B
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SOLUTIONS TO PROBLEMS PROBLEM B-1 Province of Ontario GENERAL JOURNAL Account Titles and Explanation
Date
Debit
Nov 2 Merchandise Inventory ($900 × 3) ............ HST Recoverable ($2,700 × 13%) ............. Accounts Payable—Fender Supply ....
2,700 351
4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ...............
2,938
Cost of Goods Sold ($675 × 2) .................. Merchandise Inventory ........................
1,350
5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Merchandise Inventory .........................
791
7 Sales Returns and Allow.($2,600 ÷ 2) ...... HST Payable ($1,300 × 13%) ..................... Cash.......................................................
1,300 169
Merchandise Inventory .............................. Cost of Goods Sold .............................
675
8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash.......................................................
200 26
Solutions Manual .
B-14
Credit
3,051 2,600 338
1,350 91 700
1,469 675
226
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-1 (Continued) GENERAL JOURNAL Account Titles and Explanation
Date
Debit
Nov. 10 Accounts Receivable—Regional Band.... Sales ...................................................... HST Payable ($5,100 × 13%) ...............
5,763
Cost of Goods Sold ................................... Merchandise Inventory........................
2,850
13 Merchandise Inventory ($1,900 × 2) ......... HST Recoverable ($3,800 × 13%) ............. Accounts Payable—Yamaha Canada .
3,800 494
14 Cash ............................................................ Accounts Receivable...........................
4,150
16 Accounts Payable—Yamaha Canada ...... HST Recoverable ($1,900 × 13%) ........ Merchandise Inventory.........................
2,147
20 Accounts Payable—Fender Supply ......... Cash ......................................................
3,051
Solutions Manual .
B-15
Credit
5,100 663
2,850
4,294
4,150
247 1,900
3,051
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-2 Province of British Columbia GENERAL JOURNAL Account Titles and Explanation
Date Nov
Debit
2 Merchandise Inventory ($900 × 3) ............ GST Recoverable ($2,700 × 5%) ............... Accounts Payable—Fender Supply ....
2,700 135
4 Cash ............................................................. Sales ...................................................... GST Payable ($2,600 × 5%) ................. PST Payable ($2,600 × 7%)..................
2,912
Cost of Goods Sold.................................... Merchandise Inventory ........................
1,350
5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Merchandise Inventory .........................
735
7 Sales Returns and Allow.($2,600 ÷ 2) ...... GST Payable ($1,300 × 5%) ....................... PST Payable ($1,300 × 7%) ........................ Cash.......................................................
1,300 65 91
Merchandise Inventory .............................. Cost of Goods Sold..............................
675
8 Supplies ($200 × 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash.......................................................
214 10
Solutions Manual .
B-16
Credit
2,835 2,600 130 182 1,350 35 700
1,456 675
224
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-2 (Continued) GENERAL JOURNAL Account Titles and Explanation
Date
Debit
Nov. 10 Accounts Receivable—Regional Band.... Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%) .................
5,712
Cost of Goods Sold ................................... Merchandise Inventory........................
2,850
13 Merchandise Inventory ($1,900 × 2) ......... GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada .
3,800 190
14 Cash ............................................................ Accounts Receivable...........................
4,150
16 Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Merchandise Inventory.........................
1,995
20 Accounts Payable—Fender Supply ......... Cash ......................................................
2,835
Solutions Manual .
B-17
Credit
5,100 255 357
2,850
3,990
4,150
95 1,900
2,835
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-3 Province of Ontario Date
GENERAL JOURNAL Account Titles and Explanation
Debit
Nov 2 Purchases ($900 × 3) ................................. HST Recoverable ($2,700 × 13%) ............. Accounts Payable—Fender Supply ....
2,700 351
4 Cash............................................................. Sales ...................................................... HST Payable ($2,600 × 13%) ...............
2,938
5 Accounts Payable—Western Acoustic.... HST Recoverable ($700 × 13%) ........... Purchase Returns and Allowances .....
791
7 Sales Returns and Allow.($2,600 ÷ 2) ...... HST Payable ($1,300 × 13%) ..................... Cash.......................................................
1,300 169
8 Supplies ...................................................... HST Recoverable ($200 × 13%)................. Cash....................................................... 10 Accounts Receivable—Regional Band Sales ...................................................... HST Payable ($5,100 × 13%) ...............
200 26
13 Purchases ($1,900 × 2) .............................. HST Recoverable ($3,800 × 13%).............. Accounts Payable—Yamaha Canada .
Solutions Manual .
B-18
Credit
3,051 2,600 338 91 700
1,469
226 5,763 5,100 663 3,800 494 4,294
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-3 (Continued)
Date
GENERAL JOURNAL Account Titles and Explanation
Debit
Nov. 14 Cash ............................................................ Accounts Receivable...........................
4,150
16 Accounts Payable—Yamaha Canada ...... HST Recoverable ($1,900 × 13%) ........ Purchase Returns and Allowances.....
2,147
20 Accounts Payable—Fender Supply ......... Cash ......................................................
3,051
Solutions Manual .
B-19
Credit
4,150
247 1,900
3,051
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-4 Province of British Columbia
Date Nov
GENERAL JOURNAL Account Titles and Explanation
Debit
2 Purchases ($900 × 3) ................................. GST Recoverable ($2,700 × 5%) ............... Accounts Payable—Fender Supply ....
2,700 135
4 Cash ............................................................. Sales ...................................................... GST Payable ($2,600 × 5%) ................. PST Payable ($2,600 × 7%)..................
2,912
5 Accounts Payable—Western Acoustic .... GST Recoverable ($700 × 5%) ............. Purchase Returns and Allowances .....
735
7 Sales Returns and Allow.($2,600 ÷ 2) ...... GST Payable ($1,300 × 5%) ....................... PST Payable ($1,300 × 7%) ........................ Cash.......................................................
1,300 65 91
8 Supplies ($200 × 1.07)................................ GST Recoverable ($200 × 5%) .................. Cash.......................................................
214 10
10 Accounts Receivable—Regional Band Sales ...................................................... GST Payable ($5,100 × 5%) ................. PST Payable ($5,100 × 7%)..................
5,712
Solutions Manual .
B-20
Credit
2,835 2,600 130 182 35 700
1,456
224
5,100 255 357
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-4 (Continued)
Date
GENERAL JOURNAL Account Titles and Explanation
Debit
Nov. Purchases ($1,900 × 2) .............................. GST Recoverable ($3,800 × 5%) ............... Accounts Payable—Yamaha Canada .
3,800 190
14 Cash ............................................................ Accounts Receivable...........................
4,150
16 Accounts Payable—Yamaha Canada ...... GST Recoverable ($1,900 × 5%) .......... Purchase Returns and Allowances.....
1,995
20 Accounts Payable—Fender Supply ......... Cash ......................................................
2,835
Solutions Manual .
B-21
Credit
3,990
4,150
95 1,900
2,835
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-5 (a)
Province of Alberta
Date May 1
4
5
6
10
13
18 19
Solutions Manual .
GENERAL JOURNAL Account Titles and Explanation
Debit
Rent Expense ....................................... Prepaid Rent ......................................... GST Recoverable ($3,300 × 5%) ......... Cash ................................................
1,650 1,650 165
Furniture ............................................... GST Recoverable ($4,100 × 5%) ......... Accounts Payable—George’s ......
4,100 205
Accounts Payable—George’s ............ GST Recoverable ($800 × 5%) ....... Furniture ..........................................
840
Cash ...................................................... Service Revenue ............................ GST Payable ($2,500 × 5%) ...........
2,625
Supplies ................................................ GST Recoverable ($300 × 5%) ............ Cash ................................................
300 15
Accounts Receivable—Manson ......... Service Revenue ............................ GST Payable ($1,100 × 5%) ...........
1,155
Accounts Payable—George’s ............ Cash ($4,305 − $840) .....................
3,465
Office Expense ..................................... Cash ................................................
22
B-22
Credit
3,465
4,305 40 800 2,500 125
315 1,100 55
3,465 22
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-5 (Continued) (a) (Continued)
Date May 21
25
27
GENERAL JOURNAL Account Titles and Explanation
Debit
Utilities Expense .............................. Accounts Payable ....................
150
Cash .................................................. Accounts Receivable—Manson
1,155
Accounts Receivable—Pedneault . Service Revenue........................ GST Payable ($600 × 5%)..........
630
(b) Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27
GST Recoverable $165 205 (40)
Credit
150
1,155 600 30
GST Payable
$125 15 55 30 $210
$345
A refund from the Receiver General would be received and recorded as follows: Cash .................................................. GST Payable..................................... GST Recoverable.......................
Solutions Manual .
B-23
135 210 345
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-6 (a)
Province of Ontario
Date May 1
4
5
6
10
13
18 19
Solutions Manual .
GENERAL JOURNAL Account Titles and Explanation
Debit
Rent Expense ....................................... Prepaid Rent ......................................... HST Recoverable ($3,300 × 13%) ...... Cash ................................................
1,650 1,650 429
Furniture .............................................. HST Recoverable ($4,100 × 13%) ....... Accounts Payable—George’s ......
4,100 533
Accounts Payable—George’s ............ HST Recoverable ($800 × 13%) ..... Furniture ..........................................
904
Cash ...................................................... Service Revenue ............................ HST Payable ($2,500 × 13%) .........
2,825
Supplies ................................................ HST Recoverable ($300 × 13%) .......... Cash ................................................
300 39
Accounts Receivable—Manson ......... Service Revenue ............................ HST Payable ($1,100 × 13%) .........
1,243
Accounts Payable—George’s ............ Cash ($4,633 − $904) .....................
3,729
Office Expense ..................................... Cash ................................................
22
B-24
Credit
3,729
4,633 104 800 2,500 325
339 1,100 143
3,729 22
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Seventh Canadian Edition
PROBLEM B-6 (Continued) (a) (Continued)
Date May 21
25
27
GENERAL JOURNAL Account Titles and Explanation
Debit
Utilities Expense .............................. Accounts Payable ....................
150
Cash .................................................. Accounts Receivable—Manson
1,243
Accounts Receivable—Pedneault . Service Revenue........................ HST Payable ($600 × 13%) ........
678
(b) Transaction Date May 1 May 4 May 5 May 6 May 10 May 13 May 27
HST Recoverable $429 533 (104)
Credit
150
1,243 600 78
HST Payable
$325 39 143 78 $546
$897
A refund from the Receiver General would be received and recorded as follows: Cash .................................................. HST Payable ..................................... HST Recoverable .......................
Solutions Manual .
B-25
351 546 897
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
APPENDIX C Subsidiary Ledgers and Special Journals SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE C-1 (a)
Date
(b) Accounts Receivable Subsidiary Ledger
General Ledger
Chiu Co.
Accounts Receivable
Ref.
Jan. 7 17
Debit
Credit Balance
1,800 700
Date
Ref.
1,800 Jan.31 1,100 31
Debit
Credit Balance
11,5001 2
6,400
11,500 5,100
Elbaz Inc. Date
Ref.
Debit Credit
Balance
6,000
Jan.15 24
6,000 4,000
2,000 Lewis Co.
Date
Ref.
Jan.23 29 1 2
Debit Credit Balance 3,700
3,700 0
3,700
$1,800 + $6,000 + $3,700 = $11,500 $700 + $2,000 + $3,700 = $6,400
BRIEF EXERCISE C-2 1. General ledger 2. Subsidiary ledger 3. General ledger 4. General ledger Solutions Manual .
5. 6. 7. 8.
General ledger Subsidiary ledger General ledger General ledger C-1
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE C-3 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Sales Journal Cash Payments Journal General Journal Cash Receipts Journal Cash Payments Journal Cash Receipts Journal General Journal Purchases Journal Purchases Journal Cash Payments Journal
BRIEF EXERCISE C-4 (a) Journal
(b) Journal Columns
1.
General Journal
Sales Returns and Allowances (Dr.), Accounts Receivable (Cr.), Inventory (Dr.), Cost of Goods Sold (Cr.) *
2.
Cash Receipts
Cash (Dr.), Accounts Receivable (Cr.)
3.
Cash Payments
Cash (Cr.), Merchandise Inventory (Dr.)
4.
Cash Payments
Cash (Cr.), Accounts Payable (Dr.)
5.
Cash Payments
Cash (Cr.), Merchandise Inventory (Dr.)
6.
Cash Payments
Cash (Cr.), Other Accounts (Equipment) (Dr.)
7.
Cash Receipts
Cash (Dr.), Merchandise Inventory (Cr.)
8.
Cash Payments
Cash (Cr.), Other Accounts (Drawings) (Dr.)
9.
Cash Receipts
Cash (Dr.), Sales (Cr.), Cost of Goods Sold (Dr.), Merchandise Inventory (Cr.)
* There are no column titles in the general journal, but these are the account titles that would be used in journalizing. Solutions Manual .
C-2
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE C-3 Journal
Column Titles
1.
Cash Receipts
Cash (Dr.), Sales (Cr.)
2.
Sales
Accounts Receivable (Dr.), Sales (Cr.)
3.
General
*Sales Returns and Allowances (Dr.), Accounts Receivable (Cr.)
4.
Cash Receipts
Cash (Dr.), Other Accounts (Cr.) (Purchase Returns)
5.
Cash Payments
Other Accounts (Dr.) (Freight Out), Cash (Cr.)
6.
Cash Payments
Other Accounts (Dr.) (Purchases), Cash (Cr.)
7.
Purchases
Supplies (Dr.), Accounts Payable (Cr.)
8.
Cash Payments
Other Accounts (Dr.) (Freight In), Cash (Cr.)
* There are no column titles in the general journal, but these are the account titles that would be used in journalizing.
Solutions Manual .
C-3
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BRIEF EXERCISE C-6 General Journal Date
Account Titles and Explanations
J1 Ref.
Debit
Apr. 30 Service Revenue ........................................ Rent Revenue............................................. Income Summary................................
53,800 12,000
30 Income Summary....................................... Depreciation Expense ........................ Salaries Expense ................................ Supplies Expense...............................
30,900
30 Income Summary....................................... B. Willis, Capital .................................
34,900
30 B. Willis, Capital......................................... B. Willis, Drawings .............................
18,000
Credit
65,800 8,000 19,400 3,500
34,900 18,000
BRIEF EXERCISE C-7 General Journal Date
Account Titles and Explanations
J1 Ref.
Nov. 30 Depreciation Expense ............................... Accumulated Depreciation—Furniture
Debit
Credit
6,800 6,800
BRIEF EXERCISE C-8 General Journal Date
Account Titles and Explanations
Feb. 28 Accounts Payable ($960 – $690)............... Cash ..................................................
Solutions Manual .
C-4
J1 Ref.
Debit
Credit
270 270
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE C-1 1. 2. 3. 4. 5. 6. 7.
General Journal Cash Payments Journal Cash Receipts Journal General Journal Purchases Journal Purchases Journal Cash Payments Journal
8. 9. 10. 11. 12. 13.
Cash Payments Journal General Journal Cash Receipts Journal General Journal Sales Journal Cash Receipts Journal
EXERCISE C-2 (a) and (b) Date
Account Debited
Sept. 2 T. Lu 26 M. Gafney
Solutions Manual .
WONG COMPANY Sales Journal S1 Invoice Accounts Receivable Cost of Goods Sold Dr. Dr. Merchandise Inventory No. Ref. Cr. Sales Cr. 321 2,720 1,960 322 890 570
C-5
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-2 (Continued) (a) and (c) (Continued)
Date
Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.
Sept. 3 Berko Co. 10 Leonard Co. 12 Wells Co.
n/30
Solutions Manual
175 800 7,700
Other Accounts Account Debited
Ref. Amount
Equipment
7,700
175 800
C-6 .
P1
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-3
(a) and (b)
WONG COMPANY Cash Receipts Journal
Account Credited
Date
Sept. 16 L. Maille 25 T. Lu
Ref.
Accounts Cash Receivable Dr. Cr.
860 2,720
(a) and (c)
Ch. No.
Date Sept. 11 18 24 26 30 30 30
Solutions Manual .
Payee
Sales Cr. 860
CR1 Cost of Goods Sold Dr. Other Merchandise Accounts Inventory Cr. Cr. 490
2,720
WONG COMPANY Cash Payments Journal Merch. Accounts Cash Inventory Payable Account Cr. Dr. Dr. Debited
A&F Shippers Leonard Co. Leonard Co. Freight Co. Employees names
90 450 800 75 2,360
V. Wong Berko Co.
1,250 175
CP1 Other Accounts Ref. Dr.
90 450 800 Freight Out Salaries Expense V. Wong, Drawings
75 2,360 1,250
175
C-7
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-3 (Continued) (a) and (d) WONG COMPANY General Journal Date
Account Titles and Explanations
J1 Ref.
Debit
Sept. 11 Accounts Payable—Leonard Co. ............... Merchandise Inventory........................
200
20 Sales Returns and Allowances................... Cash......................................................
860
Inventory ...................................................... Cost of Goods Sold .............................
490
Credit 200
860 490
EXERCISE C-4 (a) and (b) Account Debited Date Sept. 2 T. Lu 26 M. Gafney
Solutions Manual .
WONG COMPANY Sales Journal S1 Invoice Accounts Receivable Dr. No. Ref. Sales Cr. 321 2,720 322 890
C-8
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-4 (Continued) (a) and (c) (Continued)
Date
Purchases Journal Accounts Payable Purchases Account Credited Terms Ref. Cr. Dr
Sept. 3 Berko Co. 10 Leonard Co. 12 Wells Co.
n/30
Solutions Manual
175 800 7,700
Supplies Dr.
Other Accounts Account Debited
Ref. Amount
Equipment
7,700
175 800
C-9 .
P1
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-5 (a) and (b) WONG COMPANY Cash Receipts Journal Account Credited
Date
Sept. 16 L. Maille 25 T. Lu
Ref.
Cash Dr.
860 2,720
(a) and (c) Ch. No.
Date Sept. 11 18 24 26 30 30 30
Solutions Manual .
Payee
Accounts Receivable Cr.
CR1 Sales Cr.
Other Accounts Cr.
860 2,720
WONG COMPANY Cash Payments Journal Pur- Accounts Cash chases Payable Account Cr. Dr. Dr. Debited
A&F Shippers Leonard Co. Leonard Co. Freight Co. Employees names
90 450 800 75 2,360
V. Wong Berko Co.
1,250 175
CP1 Other Accounts Ref. Dr.
Freight In
90
Freight Out Salaries Expense V. Wong, Drawings
75
450 800 2,360 1,250
175
C-10
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-11 (Continued) (a) and (d) WONG COMPANY General Journal Date
Account Titles and Explanations
J1 Ref.
Debit
Sept. 11 Accounts Payable—Leonard Co. ............... Purchase Returns and Allowances ....
200
20 Sales Returns and Allowances................... Cash......................................................
860
Credit 200 860
EXERCISE C-6 (a) Oct.
5 Accounts Payable—Lyden Company ........ Merchandise Inventory .......................
720
7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........
600
Merchandise Inventory ............................... Cost of Goods Sold ............................
375
720 600 375
Note: The purchase of the equipment from Lifelong Inc. on Oct. 2, for $13,200 would be recorded in the purchases journal.
Solutions Manual .
C-11
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-12 (Continued) (b) Oct. 5 Accounts Payable—Lyden Company ........ Purchase Returns and Allowances ... 7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........
720 720 600 600
Note: The purchase of the equipment from Lifelong Inc. on Oct. 2, for $13,200 would be recorded in the purchases journal. (c) To:
President, Lee Ltd.
From:
Student
Subject:
Posting to Control and Subsidiary Accounts
The posting to the control and subsidiary ledger accounts varies with the journals used in recording the transactions. Sales and purchases journals—the totals for the month are posted to the control accounts. The individual entries are posted daily to the subsidiary accounts receivable and accounts payable accounts (also to the subsidiary inventory accounts, if maintained). Cash receipts and cash payments journals—the totals for the month are posted to the control account. The individual entries are posted daily to the subsidiary accounts receivable and accounts payable accounts (also to the subsidiary inventory accounts, if maintained). General journal—the individual entries are posted daily. Each entry that pertains to a control and a subsidiary account is dualposted. That is, it is posted to both the control account and the subsidiary account. I hope this memo answers your questions about posting.
Solutions Manual .
C-12
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C13 (a) Debit balance of $156,790. Beginning balance of $137,800 plus $98,670 debit from sales journal less $79,680 credit from cash receipts journal. (b) Credit balance of $141,600. Beginning balance of $144,200 plus $39,700 credit from purchases journal less $42,300 debit from cash payments journal. (c) The column total of $98,670 in the sales journal would be posted to the credit side of the Sales account and the debit side of the Accounts Receivable account in the general ledger. The column total of $56,440 in the sales journal would be posted to the debit side of the Cost of Goods Sold account and the credit side of the Merchandise Inventory account in the general ledger. (d) The accounts receivable column total of $79,680 in the cash receipts journal would be posted to the credit side of the Accounts Receivable account in the general ledger.
Solutions Manual .
C-13
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-8 (a) and (b) General Ledger Accounts Receivable Date Sept.
1 30 30 30
Explanation
Ref.
Balance
S1 CR1 J1
Debit
Credit
Balance
7,030 190
10,960 15,150 8,120 7,930
4,190
Accounts Receivable Subsidiary Ledger Zhang Date Sept.
1 30 30 30
Explanation
Ref.
Balance
S1 CR1 J1
Debit
Credit
800 2,300 190
Balance 3,820 4,620 2,320 2,130
Cavanaugh Date Sept.
1 30 30
Explanation
Ref.
Balance
S1 CR1
Debit
Credit
1,100 1,310
Balance 2,060 3,160 1,850
Iman Date
Explanation
Ref.
Sept. 30 30
Solutions Manual .
S1 CR1
C-14
Debit
Credit
1,030 380
Balance 1,030 650
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
EXERCISE C-8 (Continued) (a) and (b) (continued) Accounts Receivable Subsidiary Ledger Jana Date Sept.
1 30 30
Explanation
Ref.
Balance
S1 CR1
Debit
Credit
Balance 2,440 3,700 2,460
1,260 1,240
London Date
Explanation
Ref.
Sept. 1 30
Balance
CR1
Debit
Credit
Balance 2,640 840
1,800
(c) MAC COMPANY Schedule of Customers September 30 Zhang................................................................................. Cavanaugh ........................................................................ Iman ................................................................................... Jana ................................................................................... London .............................................................................. Total ...........................................................................
$2,130 1,850 650 2,460 840 $7,930
Accounts Receivable (per general ledger account) .......
$7,930
Solutions Manual .
C-15
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM C-1 (a), (b), and (c) Sales Journal
Date
Account Debited
Jan. 4 Wong 9 Tops Corp. 17 NFQ Co. 31 Wong
Invoice No. Ref. 371 372 373 374
Accounts Receivable Dr. Sales Cr.
S1 Cost of Goods Sold Dr. Merchandise Inventory Cr.
6,500 2,600 7,500 7,380 23,980 (112)/(401)
3,900 1,560 4,500 4,428 14,388 (505)/(120)
General Journal Date Jan.
Account Titles and Explanations
J1 Ref.
5 Accounts Payable—Sun Distributors....... 201/ Merchandise Inventory ...................... 120
Solutions Manual .
C-16
Debit
Credit
1,450 1,450
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-1 (Continued) (a), (b) and (c) (Continued) Cash Receipts Journal
Account Credited
Date
Ref.
Jan. 6 13 15 Tops Corp. 17 Wong 20 27 30 NFQ Co.
Cash Dr.
2,650 5,290 2,600 6,500 1,400 4,370 7,500 30,310 (101)
Accounts Receivable Sales Cr. Cr.
CR1 COGS Dr. Merch. Other Inventory Accounts Cr. Cr.
2,650 5,290 2,600 6,500
7,500 16,600 (112)
1,400 840 4,370 2,622 _ _ 13,710 8,226 (401) (505)/(120)
Cash Payments Journal
Date
Ch. No.
Jan. 13 15 20 31
Solutions Manual .
Payee Sun Dist.
Merch. Accounts Cash Inv. Payable Cr. Dr. Dr.
6,350 11,300 Irvine Co. 5,400 11,000 34,050 (101)
1,590 3,174
Account Debited
CP1 Other Accounts Ref. Dr.
6,350 Sun Dist. Salaries Exp. 729 11,300 5,400 Irvine Co. Salaries Exp. 729 11,000 11,750 22,300 (201) (X)
C-17
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-1 (Continued) (a), (b) and (c) (Continued)
Date
Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.
P1 Other Accounts Account Debited
Jan. 4 4 8 11 19 23 24
Sun Distributors Moon Inc. Irvine Co. Lewis Co. Mark Corp Sun Distributors Levine Corp.
Solutions Manual
7,800 480 5,400 4,300 6,600 4,800 4,690 34,070 (201)
7,800 480 5,400 4,300 Equipment 157 4,800 4,690 26,990 (120)
C-18 .
Ref. Amount
480 (126)
6,600
6,600 X
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-2 (a) , (b), and (c)
Sales Journal
Account Debited
Date Oct.
4 Petro Corp. 17 Trudeau Co. 25 Golden Corp. 30 Trudeau Co.
Invoice Ref. No. 204 205 206 207
S1 Cost of Goods Accounts Sold Dr. Receivable Dr. Merchandise Sales Cr. Inventory Cr.
8,600 5,530 5,520 5,200 24,850 (112)/(401)
5,590 3,595 3,588 3,380 16,153 (505)/(120)
General Journal Date
Account Titles and Explanations
J1 Ref.
Oct. 13 Accounts Payable—Chen Corp. ............ 201/ Merchandise Inventory ................... 120
Solutions Manual .
C-19
Debit
Credit
260 260
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-2 (Continued) (a), (b), and (c) (Continued) Cash Receipts Journal
Date
Account Credited
Oct. 7 12 Petro Corp. 14 16 Land 21 25 Trudeau Co. 28
Date
Payee
Ref.
Cash Dr.
Sales Cr.
9,610 8,600 8,600 8,810 45,000 140 8,640 5,530 5,530 9,320 95,510 14,130 (101) (112)
COGS Dr. Other Merch. Inventory Accounts Cr. Cr.
9,610
6,247
8,810
5,727 45,000
8,640
5,616
9,320 6,058 36,380 23,648 (401) (505)/(120)
45,000 (X)
Cash Payments Journal
CP1
Merch. Accts. Cash Invent. Payable Cr. Dr. Dr.
Other Accts. Ref Dr.
Oct. 9 Madison Co. 5,800 18 2,215 23 Chen Corp. 4,640 26 45,000 26 30 The Gazette 600 58,255 (101)
Solutions Manual .
A/R Cr.
CR1
Account Debited
5,800 Madison Co.
2,215 4,640 Chen Corp. 140 26,000 Land 145 19,000 Buildings Advertising 610 600 2,215 10,440 45,600 (120) (201) (X)
C-20
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-2 (Continued) (a), (b) and (c) (Continued)
Account Credited
Date
Terms Ref.
Purchases Journal Merchandise Accounts Inventory Supplies Payable Cr. Dr Dr.
P1 Other Accounts Account Debited Ref. Amount
Oct. 2 5 10 25 27 30
Madison Co. Frey Co. Chen Corp. Frey Co. Schmid Co. Madison Co.
Solutions Manual
5,800 315 4,900 260 9,000 16,200 36,475 (201)
C-21 .
5,800 315 4,900 260 9,000 16,200 35,900 (120)
575 (126)
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (b) Sales Journal
Date
Account Debited
Jan. 3 24
B. Rohl B. Lu
S1
Cost of Goods Sold Dr. Accounts Invoice Receivable Dr. Merchandise No. Ref. Sales Cr. Inventory Cr.
3,000 7,800 10,800 (112)/(401)
1,250 3,300 4,550 (505)/(120)
Cash Receipts Journal
Date
Account Credited
Other Accounts COGS Dr. Cash Receivable Sales Merch. Accounts Ref. Dr. Cr. Cr. Inv. Cr. Cr.
Jan. 7 S. Armstrong 4,000 3,000 13 B. Rohl 23 7,700 115 35,000 29 Notes Rec. 49,700 (101)
Solutions Manual .
CR1
4,000 3,000 7,700 7,000 (112)
C-22
4,840
7,700 4,840 (401) (505)/(120)
35,000 35,000 (X)
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (b) (Continued)
Date
Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.
P1 Other Accounts Account Debited
Jan. 5 Warren Parts 17 Voyer Co.
Solutions Manual
2,900 4,900 7,800 (201)
2,900 4,900 7,800 (120)
C-23 .
Ref. Amount
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
ROBLEM C-3 (Continued) (b) (Continued) Cash Payments Journal
Date
Payee
Cash Cr.
Jan. 11 15 18 27
Lindon Co. Harms Dist. Employees Warren Parts
350 16,000 3,900 1,150
M. Perrault
1,300 22,700 (101)
31
Merc. Inv. Dr.
Accts. Payable Dr.
CP1 Account Debited
Other Accts. Ref Dr.
350 16,000 Harms Dist. Salaries Exp. 1,150 Warren Parts M. Perrault, Drawings 350 17,150 (120) (201)
725 3,900 310
General Journal Date
Account Titles and Explanations
J1 Ref.
Debit
Jan. 14 Sales Returns and Allowances.................... 410 Accounts Receivable—R. Goge........... /112
6,000
20 Accounts Payable—Watson & Co. .............. /201 Notes Payable ....................................... 200
14,000
30 Accounts Payable—Voyer Co. .................... /201 Merchandise Inventory......................... 120
400
Solutions Manual .
C-24
1,300 5,200 (X)
Credit
6,000
14,000 400
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (a) and (c)
General Ledger Cash
Date Jan.
1 31 31
No. 101
Explanation
Ref.
Balance
CR1 CP1
Debit
Credit
Balance
22,700
17,900 67,600 44,900
49,700
Accounts Receivable Date Jan.
1 14 31 31
Explanation
Ref.
Balance
J1 S1 CR1
No. 112 Debit
Credit 6,000
10,800 7,000
Notes Receivable Date Jan.
1 31
Explanation
Ref.
Balance
CR1
Jan.
1 30 31 31 31 31
Solutions Manual .
Explanation
Ref.
Balance
J1 S1 P1 CR1 CP1
C-25
38,000 32,000 42,800 35,800
No. 115 Debit
Credit
Balance
35,000
45,000 10,000
Merchandise Inventory Date
Balance
No. 120 Debit
Credit 400 4,550
7,800 4,840 350
Balance 22,600 22,200 17,650 25,450 20,610 20,960
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (a) and (c) (Continued) Land Date Jan.
1
No. 140
Explanation
Ref.
Balance
Debit
Credit
25,000
Building Date Jan.
1
No. 145
Explanation
Ref.
Balance
Debit
Credit
Jan.
1
Explanation
Ref.
Balance
Debit
No. 146 Credit
Jan.
1
No. 157
Explanation
Ref.
Balance
Debit
Credit
Jan.
1
Explanation
Ref.
Balance
Debit
No. 158 Credit
No. 200
Explanation
Ref.
Jan. 20
Solutions Manual .
Balance 1,950
Notes Payable Date
Balance 6,450
Accumulated Depreciation—Equipment Date
Balance 38,800
Equipment Date
Balance 75,000
Accumulated Depreciation—Building Date
Balance
J1
C-26
Debit
Credit
Balance
14,000
14,000
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Payable Date Jan.
1 20 30 31 31
Explanation
Ref.
Balance
J1 J1 P1 CP1
No. 201 Debit
Credit
14,000 400 7,800 17,150
Mortgage Payable Date Jan.
1
Explanation
Ref.
Balance
Jan.
1
Date
Debit
Credit
67,400 No. 301
Ref.
Balance
87,600
M. Perrault, Drawings
No. 310
Explanation
Debit
Ref.
Debit
CP1
1,300
Credit
Credit
Ref.
Debit
S1 CR1
Credit
Balance
10,800 7,700
10,800 18,500
Sales Returns and Allowances Explanation
Jan. 14
Solutions Manual .
Balance
No. 401
Explanation
Jan. 31 31
Balance
1,300
Sales
Date
Balance
Explanation
Jan. 31
Date
34,200 20,200 19,800 27,600 10,450 No. 275
M. Perrault, Capital Date
Balance
C-27
Ref.
Debit
J1
6,000
No. 410 Credit
Balance 6,000
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (a) and (c) (Continued) Cost of Goods Sold Date
Explanation
Jan. 31 31
No. 505
Ref.
Debit
S1 CR1
4,550 4,840
Credit
4,550 9,390
Salaries Expense Date
Explanation
Jan. 31
Solutions Manual .
C-28
Balance
No. 725
Ref.
Debit
CP1
3,900
Credit
Balance 3,900
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Receivable Subsidiary Ledger S. Armstrong Date Jan.
1 7
Explanation
Ref.
Balance
CR1
Debit
Credit
Balance
4,000
6,500 2,500
Credit
Balance
6,000
30,000 24,000
Credit
Balance
R. Goge Date Jan.
1 14
Explanation
Ref.
Balance
J1
Debit
B. Lu Date Jan.
1 24
Explanation
Ref.
Debit
Balance
S1
7,800
Ref.
Debit
S1 CR1
3,000
1,500 9,300
B. Rohl Date Jan.
Explanation 3 13
Solutions Manual .
C-29
Credit
Balance
3,000
3,000 0
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (a) and (c) (Continued) Accounts Payable Subsidiary Ledger Denomme Corp. Date Jan.
1
Explanation
Ref.
Balance
Debit
Credit
Balance 4,000
Harms Distributors Date Jan.
1 15
Explanation
Ref.
Debit
Balance
CP1
16,000
Ref.
Debit
Credit
Balance 16,000 0
Voyer Co. Date
Explanation
Jan. 17 30
P1 J1
400
Ref.
Debit
Credit
Balance
4,900
4,900 4,500
Credit
Balance
2,900
2,900 1,750
Credit
Balance
Warren Parts Date Jan.
Explanation 5 27
P1 CP1
1,150
Explanation
Ref.
Debit
Balance
J1
Watson & Co. Date Jan.
1 20
Solutions Manual .
C-30
14,000
14,200 200
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (d) PERRAULT MUSIC CO. Trial Balance January 31, 2017 Debit Cash ..................................................................... Accounts receivable ........................................... Notes receivable .................................................. Merchandise inventory ....................................... Land ..................................................................... Building................................................................ Accumulated depreciation—building ................ Equipment............................................................ Accumulated depreciation—equipment ............ Notes payable ...................................................... Accounts payable................................................ Mortgage payable ................................................ M. Perrault, capital .............................................. M. Perrault, drawings .......................................... Sales..................................................................... Sales returns and allowances ............................ Cost of goods sold .............................................. Salaries expense .................................................
Solutions Manual .
C-31
Credit
$ 44,900 35,800 10,000 20,960 25,000 75,000 $ 38,800 6,450 1,950 14,000 10,450 67,400 87,600 1,300 18,500 6,000 9,390 3,900 $238,700
$238,700
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-3 (Continued) (e) Accounts Receivable Subsidiary Ledger S. Armstrong .................................................................... $ 2,500 R. Goge ............................................................................. 24,000 B. Lu ..................................................................................... 9,300 $35,800 Accounts Receivable control account balance ......................... $35,800
Accounts Payable Subsidiary Ledger Denomme Corp ................................................................ Voyer Co. ......................................................................... Warren Parts..................................................................... Watson & Co.....................................................................
$ 4,000 4,500 1,750 200 $10,450
Accounts Payable control account balance .............................. $10,450
Solutions Manual .
C-32
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (b)
Date
Account Debited
May 3
B. Simone
Sales Journal Accounts Receivable Dr. Invoice Ref. Sales Cr. No.
S1 COGS Dr. Merch. Inv. Cr
2,400 (112)/(401)
1,050 (505)/(120)
General Journal
J1
Date
Account Titles and Explanations
Ref.
Debit
May 14
Sales Returns and Allowances ................... 410 Accounts Receivable—W. Karasch .... /112
750
Merchandise Inventory ................................ Cost of Goods Sold .............................
120 505
325
20 Accounts Payable—Cobalt Sports. ............ /201 Notes Payable ...................................... 200
15,500
20 Accounts Payable—Lancio Co. .................. /201 Merchandise Inventory ........................ 120
510
Solutions Manual .
C-33
Credit
750
325
15,500 510
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (b) (Continued)
Date
Purchases Journal Accounts Merchandise Payable Inventory Supplies Account Credited Terms Ref. Cr. Dr Dr.
P1 Other Accounts Account Debited
May 5 WN Shaw 17 Lancio Co. 30 Summers Corp.
Solutions Manual
2,600 2,100 4,000 8,700 (201)
2,600 2,100 _ 4,700 (120)
C-34 .
Ref. Amount
Equipment 157
4,000 4,000 X
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (b) (Continued)
Cash Receipts Journal
Date
Account Credited
May 7 G. Parrish 13 B. Simone 23 29 Notes Rec.
Cash Dr.
Ref.
2,800 2,400 9,500 115 40,000 54,700 (101)
CR1
Accounts Other COGS Dr. Receivable Sales Merch. Inv. Accounts Cr. Cr. Cr. Cr. 2,800 2,400 9,500 5,200 (112)
4,450
9,500 4,450 (401) (505)/(120)
Cash Payments Journal
Date
Payee
Cash Cr.
May 11 12 15 Buttercup 18 27 WN Shaw
318 1,500 17,400 4,700 1,000
31 C. Lee
1,000 25,918 (101)
Solutions Manual .
Merch. Accts. Payable Inv. Dr. Dr.
40,000 40,000 (X)
CP1 Account Debited
Other Accts. Ref. Dr.
318 Rent Expense 730 17,400 Buttercup Salaries Exp. 725 1,000 WN Shaw C. Lee, 310 Drawings 18,400 (201)
318 (120)
C-35
1,500 4,700
1,000 7,200 (X)
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (a) and (c)
General Ledger Cash
Date May
1 31 31
No. 101
Explanation
Ref.
Balance
CR1 CP1
Debit
Credit
54,700 25,918
Accounts Receivable Date May
1 14 31 31
May
1 31
Explanation
Ref.
Balance
J1 CR1 S1
Debit
Credit 750 5,200
2,400
Explanation
Ref.
Balance
CR1
May
1 14 20 31 31 31 31
Solutions Manual .
Explanation
Ref.
Balance
J1 J1 P1 S1 CR1 CP1
C-36
Balance 15,400 14,650 9,450 11,850 No. 115
Debit
Credit 40,000
Merchandise Inventory Date
36,700 91,400 65,482
No. 112
Notes Receivable—Cole Company Date
Balance
Balance 48,000 8,000
No. 120 Debit
Credit
325 510 4,700 1,050 4,450 318
Balance 22,000 22,325 21,815 26,515 25,465 21,015 21,333
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (a) and (c) (Continued) Equipment Date May
1 30
No. 157
Explanation
Ref.
Balance
P1
Debit
Credit
8,200 12,200
4,000
Accumulated Depreciation—Equipment Date May
1
Explanation
Ref.
Balance
Debit
No. 158 Credit
Explanation
No. 200 Ref.
May 20
Debit
J1
Credit 15,500
Accounts Payable Date May
1 20 20 31 31
May
1
Explanation
Ref.
Balance
J1 J1 P1 CP1
Debit
Credit
15,500 510 8,700 18,400
Explanation
Ref.
Balance
Explanation
Ref.
May 31 Solutions Manual .
CP1 C-37
15,500
Balance 43,400 27,900 27,390 36,090 17,690
No. 301 Debit
Credit
Balance 85,100
C. Lee, Drawings Date
Balance
No. 201
C. Lee, Capital Date
Balance 1,800
Notes Payable Date
Balance
No. 310 Debit 1,000
Credit
Balance 1,000 Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (a) and (c) (Continued) Sales Date
No. 401
Explanation
Ref.
May 31 31
Debit
CR1 S1
Credit 9,500 2,400
Sales Returns and Allowances Date
Explanation
Ref.
May 14
J1
Explanation
Debit
Credit
750
750
J1 S1 CR1
Debit
Credit 325
1,050 4,450
Salaries Expense Date
Explanation
Ref.
May 31
CP1
Explanation
Solutions Manual .
CP1
C-38
(325) 725 5,175
Debit
Credit
4,700
Balance 4,700 No. 730
Ref.
May 31
Balance
No. 725
Rent Expense Date
Balance
No. 505 Ref.
May 14 31 31
9,500 11,900 No. 410
Cost of Goods Sold Date
Balance
Debit 1,500
Credit
Balance 1,500
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (a) and (c) (Continued) Accounts Receivable Subsidiary Ledger L. Cellars Date May
1
Explanation
Ref.
Balance
Explanation
Ref.
Balance
J1
Debit
Credit
Balance 7,400
W. Karasch Date May
1 14
Debit
Credit 750
Balance 3,250 2,500
G. Parrish Date May
1 7
Explanation
Ref.
Balance
CR1
Debit
Credit 2,800
Balance 4,750 1,950
B. Simone Date May
Explanation
Ref.
3 13
Solutions Manual .
S1 CR1
C-39
Debit
Credit
2,400 2,400
Balance 2,400 0
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (a) and (c) (Continued) Accounts Payable Subsidiary Ledger Buttercup Distributors Date May
1 15
Explanation
Ref.
Debit
Balance
CP1
17,400
Explanation
Ref.
Debit
Balance
J1
15,500
Ref.
Debit
Credit
Balance 17,400 0
Cobalt Sports Date May
1 20
Credit
Balance 15,500 0
Lancio Co. Date
Explanation
May 17 20
P1 J1
Credit 2,100
510
Balance 2,100 1,590
WN Shaw Date May
Explanation
Ref.
5 27
P1 CP1
Debit
Credit 2,600
1,000
Balance 2,600 1,600
Summers Corp. Date May
1 30
Solutions Manual .
Explanation
Ref.
Balance
P1
C-40
Debit
Credit 4,000
Balance 10,500 14,500
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-4 (Continued) (d) LEE CO. Trial Balance May 31, 2017 Debit Cash ..................................................................... Accounts receivable ........................................... Notes receivable.................................................. Merchandise inventory ....................................... Equipment............................................................ Accumulated depreciation—equipment ............ Notes payable ...................................................... Accounts payable................................................ C. Lee, capital ...................................................... C. Lee, drawings.................................................. Sales..................................................................... Sales returns and allowances ............................ Cost of goods sold .............................................. Salaries expense ................................................. Rent expense .......................................................
(e)
Credit
$ 65,482 11,850 8,000 21,333 12,200 $ 1,800 15,500 17,690 85,100 1,000 11,900 750 5,175 4,700 1,500 $131,990
Accounts Receivable control account balance ..............
$131,990 $11,850
Accounts Receivable Subsidiary Ledger account balances: L. Cellars .................................................................... $ 7,400 W. Karasch ................................................................ 2,500 G. Parrish ................................................................... 1,950 $11,850 Accounts Payable control account balance ................... Accounts Payable Subsidiary Ledger account balances: Lancio Co................................................................... WN Shaw.................................................................... Summers Corp. .........................................................
Solutions Manual .
C-41
$13,690 $ 1,590 1,600 14,500 $17,690
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-5 (a), (b) and (c) Sales Journal Date
Account Debited
Feb. 4 9 17 28
Gilles Co. Earlton Corp. Lumber Co. Gilles Co.
Invoice No.
Ref.
371 372 373 374
S1 Accounts Receivable Dr. Sales Cr. 5,220 2,050 1,800 9,810 18,880 (112)/(401)
GENERAL JOURNAL Date Feb.
Account Titles and Explanations
J1 Ref.
Debit
5 Accounts Payable—Zears Co ..................... 201/ Purchase Returns and Allowances..... 512
450
Solutions Manual .
C-42
Credit 450
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-5 (Continued) (a), (b) and (c) (Continued)
Cash Receipts Journal
Date
Accounts Other Cash Receivable Sales Accounts Ref. Dr. Cr. Cr. Cr.
Account Credited
Feb. 6 13 15 Earlton Corp. 17 Gilles Co. 20 27 28 Lumber Co.
Ch. Date No. Feb. 13 15 20 28
Solutions Manual .
Payee Zears Co. Fell Elect.
CR1
1,950 3,850 2,050 5,220 4,900 4,560 1,800 24,330 (101)
1,950 3,850 2,050 5,220 4,900 4,560 1,800 9,070 15,260 (112) (401)
Cash Payments Journal
CP1
Accounts Payable Dr.
Other Accounts Dr.
Cash Cr. 3,750 14,100 7,200 14,900 39,950 (101)
Account Debited
3,750 Zears Co. Salaries 7,200 Fell Elect. Salaries 10,950 (201)
C-43
Ref. 726 726
14,100 14,900 29,000 (X)
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
PROBLEM C-5 (Continued) a), (b) and (c) (Continued)
Date
Purchases Journal Accounts Payable Purchases Account Credited Terms Ref. Cr. Dr
P1 Supplies Dr.
Other Accounts Account Debited
Feb 3 4 8 11 19 23 24
Zears Co. Green Deer Inc. Fell Electronics Thomas Co. Brown Corp. Zears Co. Lewis Co.
Solutions Manual
4,200 290 7,200 9,100 16,400 4,800 5,130 47,120 (201)
4,200 290 7,200 9,100 Equipment 157 4,800 _5,130 30,430 (510)
C-44 .
Ref. Amount
290 (126)
16,400
16,400 X
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE: Chapters 2 to 6 and Appendix C (a) Sales Journal
Date Jan. 3 3 11 11 22 22 25 25
Account Debited B. Soto J. Ebel R. Draves S. Tang B. Soto R. Draves B. Jacovetti J. Ebel
Solutions Manual .
Invoice No. Ref. 510 511 512 513 514 515 516 517
C-45
S1 Accounts Cost of Goods Receivable Sold Dr. Dr. Merch. Inventory Sales Cr. Cr. 3,100 1,240 1,800 720 1,900 760 900 360 1,700 680 800 320 3,500 1,400 6,100 2,440 19,800 7,920 (112)/(401) (505)/(120)
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (a) (Continued) Cash Receipts Journal CR1 Accounts COGS Dr. Other Account Cash Receivable Sales Merch. Inv. Accounts Date Credited Ref. Dr. Cr. Cr. Cr. Dr. Jan. 7 S. Tang 5,000 5,000 7 B. Jacovetti 2,000 2,000 10 16,500 16,500 6,600 20 17,500 17,500 7,000 21 S. Tang 900 900 31 19,920 19,920 7,968 31 B. Soto 4,800 4,800 31 J. Ebel 7,500 7,500 74,120 20,200 53,920 21,568 (101) (112) (401) (505)/(120)
Date Jan. 8 9 9 15 23 23 31
Payee
Cash Payments Journal Merch. Accts. Cash Invent. Payable Cr. Dr. Dr.
Freight Co. 180 Liazuk Co. 10,000 Nguyen & Son 11,000 A. Winters 2,000 Nguyen & Son 15,000 Liazuk Co. 13,400 6,900 58,480 (101)
Solutions Manual .
Account Debited
CP1 Other Accts. Ref. Dr.
180
180 (120)
C-46
10,000 Liazuk Co. 11,000 Nguyen & Son A. Winters, Drawings 15,000 Nguyen & Son 13,400 Liazuk Co. Salaries Exp. 49,400 (201)
310 725
2,000
6,900 8,900 (X)
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (a) (Continued)
Date
Account Credited
Terms Ref.
Purchases Journal Merchandise Accounts Inventory Supplies Payable Cr. Dr Dr.
P1 Other Accounts Account Debited Ref. Amount
Jan. 5 Welz Wares 5 Laux Supplies 16 Nguyen & Son 16 Liazuk Co. 16 Welz Wares 17 Laux Supplies 27 Nguyen & Son 27 Laux Supplies 27 Welz Wares 28 Laux Supplies
Solutions Manual
3,000 2,700 15,000 13,900 1,500 400 14,500 1,200 2,800 800 55,800 (201)
C-47 .
3,000 2,700 15,000 13,900 1,500 400 14,500 1,200 2,800 54,600 (120)
800 1,200 (125)
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (a), (d), and (f)
Date Jan.9
18
21
General Journal Account Titles and Explanations
Ref.
Sales Returns and Allowances ...... Accounts Receivable—J. Ebel
410 112/
400
Merchandise Inventory ................... Cost of Goods Sold .................
120 505
160
Accounts Payable—Liazuk Co....... Merchandise Inventory ...........
201/ 120
500
Accounts Payable—Mikush Bros. . Notes Payable..........................
201/ 200
15,000
Supplies Expense ........................... Supplies ................................... ($1,000 + $400 + $800 − $700)
728 125
1,500
Insurance Expense (1/9 × $2,000) Prepaid Insurance ...................
722 130
222
Depreciation Expense .................... Accumulated Depreciation— Building (1/12 × $6,000) ... Accumulated Depreciation— Equipment (1/12 × $1,500)
711
625
Debit
J1 Credit
400 160
500 15,000
Adjusting Journal Entries 31
31
31
Solutions Manual .
C-48
1,500
222
146
500
158
125
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (a) , (d), and (f) (Continued)
Date Jan. 31 31
General Journal Account Titles and Explanations Interest Expense ............................. Interest Payable.......................
Ref. 718 230
Debit 45
505 120
102
Sales ................................................ Income Summary ....................
401 300
73,720
Income Summary............................ Sales Returns and Allowances Cost of Goods Sold .................. Depreciation Expense .............. Interest Expense ....................... Insurance Expense ................... Salaries Expense ...................... Supplies Expense .....................
300 410 505 711 718 722 725 728
39,122
Income Summary............................ A. Winters, Capital ..................
300 301
34,598
A. Winters, Capital .......................... A. Winters, Drawings ..............
301 310
2,000
Cost of Goods Sold ........................ Merchandise Inventory ........... ($44,850 − $44,952)
J2 Credit 45 102
Closing Journal Entries 31 31
31 31
Solutions Manual .
C-49
73,720 400 29,430 625 45 222 6,900 1,500 34,598 2,000
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued)
(b) and (f)
General Ledger Cash
Date Jan. 1 31 31
Explanation Balance
Ref. CR1 CP1
Date Jan. 1 9 31 31
Accounts Receivable Explanation Ref. Balance J1 S1 CR1
Date Jan. 1
Notes Receivable Explanation Ref. Balance
Debit
Credit
74,120 58,480
Debit
Credit 400
19,800 20,200
Debit
Credit
Merchandise Inventory Date Jan. 1 9 18 31 31 31 31 31
Solutions Manual .
Explanation Balance
Adjusting entry
Ref. J1 J1 S1 P1 CR1 CP1 J2
C-50
No. 101 Balance 35,050 109,170 50,690 No. 112 Balance 14,000 13,600 33,400 13,200 No. 115 Balance 39,000 No. 120
Debit
Credit
160 500 7,920 54,600 21,568 180 102
Balance 20,000 20,160 19,660 11,740 66,340 44,772 44,952 44,850
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Supplies Date Jan. 1 31 31
Date Jan. 1 31
Explanation Balance Adjusting entry
Ref. P1 J1
Prepaid Insurance Explanation Ref. Balance Adjusting entry J1
Debit
Credit
1,200 1,500
Debit
Credit 222
Land Date Jan. 1
Explanation Balance
Ref.
Debit
Explanation Balance
Date Jan. 1 31
Accumulated Depreciation—Building Explanation Ref. Debit Balance Adjusting entry J1
Solutions Manual .
Ref.
C-51
Debit
No. 130 Balance 2,000 1,778
Credit
No. 140 Balance 50,000
Credit
No. 145 Balance 100,000
Credit
No. 146 Balance 25,000 25,500
Building Date Jan. 1
No. 125 Balance 1,000 2,200 700
500
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Equipment Date Jan. 1
Explanation Balance
No. 157 Ref.
Debit
Accumulated Depreciation—Equipment Date Explanation Ref. Debit Jan. 1 Balance 31 Adjusting entry J1
Date Jan. 21
Notes Payable Explanation Ref. J1
Date Jan. 1 18 21 31 31
Accounts Payable Explanation Ref. Balance J1 J1 P1 CP1
Date Jan. 31
Interest Payable Explanation Ref. Adjusting entry J2
Date Jan. 1
Mortgage Payable Explanation Ref. Balance
Solutions Manual .
C-52
Debit
Debit
Credit
125
No. 158 Balance 1,500 1,625
Credit 15,000
No. 200 Balance 15,000
Credit
Credit
500 15,000 55,800 49,400
Debit
Debit
Balance 6,450
Credit 45
Credit
No. 201 Balance 36,000 35,500 20,500 76,300 26,900 No. 230 Balance 45 No. 275 Balance 125,000
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Income Summary Date Jan. 31 31 31
Explanation Closing entry Closing entry Closing entry
Ref. J2 J2 J2
Date Jan. 1 31 31
A. Winters, Capital Explanation Ref. Balance Closing entry J2 Closing entry J2
Date Jan. 31 31
A. Winters, Drawings Explanation Ref. CP1 Closing entry J2
No. 300 Debit
Credit 73,720
39,122 34,598
Debit
Credit 34,598
2,000
Debit 2,000
Credit 2,000
Sales Date Jan. 31 31 31
Date Jan. 9 31
Solutions Manual .
Balance 73,720 34,598 0 No. 301 Balance 80,000 114,598 112,598 No. 310 Balance 2,000 0
Credit 19,800 53,920
73,720
No. 401 Balance 19,800 73,720 0
Sales Returns and Allowances Explanation Ref. Debit J1 400 Closing entry J2
Credit
No. 410 Balance 400 0
Explanation
Closing entry
Ref. S1 CR1 J2
C-53
Debit
400
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Cost of Goods Sold Date Jan. 9 31 31 31 31
Explanation
Adjusting entry Closing entry
Ref. J1 S1 CR1 J2 J2
Date Jan. 31 31
Depreciation Expense Explanation Ref. Adjusting entry J1 Closing entry J2
Date Jan. 31 31
Interest Expense Explanation Ref. Adjusting entry J2 Closing entry J2
Date Jan. 31 31
Insurance Expense Explanation Ref. Adjusting entry J1 Closing entry J2
Date Jan. 31 31
Salaries Expense Explanation Ref. CP1 Closing entry J2
Date Jan. 31 31
Supplies Expense Explanation Ref. Adjusting entry J1 Closing entry J2
Solutions Manual .
C-54
No. 505 Debit
Credit 160
7,920 21,568 102 29,430
Debit 625
Credit 625
Debit 45
Credit 45
Debit 222
Credit 222
Debit 6,900
Credit 6,900
Debit 1,500
Credit 1,500
Balance (160) 7,760 29,328 29,430 0 No. 711 Balance 625 0 No. 718 Balance 45 0 No. 722 Balance 222 0 No. 725 Balance 6,900 0 No. 728 Balance 1,500 0
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Receivable Subsidiary Ledger R. Draves Date Jan. 1 11 22
Ref. S1 S1
Debit
Ref. S1 J1 S1 CR1
Debit 1,800
B. Jacovetti Date Explanation Jan. 1 Balance 7 25
Ref. CR1 S1
Debit
S. Tang Date Jan. 1 7 11 21
Ref. CR1 S1 CR1
Debit
Ref. S1 S1 CR1
Debit 3,100 1,700
J. Ebel Date Jan. 3 9 25 31
Explanation Balance
Explanation
Explanation Balance
Credit
Balance 1,500 3,400 4,200
Credit
Balance 1,800 1,400 7,500 0
1,900 800
400 6,100 7,500
Credit 2,000
3,500
Credit 5,000
900 900
Balance 7,500 5,500 9,000
Balance 5,000 0 900 0
B. Soto Date Jan. 3 22 31
Solutions Manual .
Explanation
C-55
Credit
4,800
Balance 3,100 4,800 0
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Payable Subsidiary Ledger Laux Supplies Date Jan. 5 17 27 28
Explanation
Ref. P1 P1 P1 P1
Debit
Credit 2,700 400 1,200 800
Balance 2,700 3,100 4,300 5,100
Explanation Balance
Ref. CP1 P1 J1 CP1
Debit
Credit
Balance 10,000 0 13,900 13,400 0
Liazuk Co. Date Jan. 1 9 16 18 23
10,000 13,900 500 13,400
Mikush Bros. Date Jan. 1 21
Explanation Balance
Nguyen & Son Date Explanation Jan. 1 Balance 9 16 23 27
Ref. J1
Ref. CP1 P1 CP1 P1
Debit
Credit
Balance 15,000 0
Credit
14,500
Balance 11,000 0 15,000 0 14,500
Credit 3,000 1,500 2,800
Balance 3,000 4,500 7,300
15,000
Debit 11,000
15,000 15,000
Welz Wares Date Jan. 5 16 27
Solutions Manual .
Explanation
Ref. P1 P1 P1
C-56
Debit
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (c) and (d)
WINTERS COMPANY Trial Balance January 31, 2017 Unadjusted Debit Credit $ 50,690 13,200 39,000 44,952 2,200 2,000 50,000 100,000
Cash ........................................ Accounts receivable............... Notes receivable ..................... Merchandise inventory........... Supplies .................................. Prepaid insurance .................. Land......................................... Building ................................... Accumulated depreciation— building............................... Equipment ............................... 6,450 Accumulated depreciation— equipment........................... Notes payable ......................... Accounts payable ................... Interest payable ...................... Mortgage payable ................... A. Winters, capital .................. A. Winters, drawings .............. 2,000 Sales ........................................ Sales returns & allowances 400 Cost of goods sold ................. 29,328 Depreciation expense............. Interest expense ..................... Salaries expense .................... 6,900 Insurance expense ................. Supplies expense ................... Totals .................................. $347,120
Solutions Manual .
C-57
Adjusted Debit Credit $ 50,690 13,200 39,000 44,850 700 1,778 50,000 100,000
$ 25,000
$ 25,500 6,450
1,500 15,000 26,900
1,625 15,000 26,900 45 125,000 80,000
125,000 80,000 2,000 73,720
73,720
400 29,430 625 45 6,900 222 1,500 $347,120 $347,790 $347,790
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (c) (Continued) Accounts Receivable control account balance Subsidiary ledger account balances R. Draves .................................................. B. Jacovetti ...............................................
$13,200 $4,200 9,000 $13,200
Accounts Payable control account balance .. Subsidiary ledger account balances Laux Supplies........................................... Nguyen & Son........................................... Welz Wares ...............................................
$25,700 $ 5,100 14,500 7,300 $26,900
Solutions Manual .
C-58
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (e) WINTERS COMPANY Income Statement Month Ended January 31, 2017 Sales revenues Sales ................................................................. Less: Sales returns and allowances.............. Net sales ....................................................
$73,720 400 $73,320
Cost of goods sold ................................................ Gross profit ............................................................ Operating expenses Salaries expense.............................................. Supplies expense ............................................ Insurance expense .......................................... Depreciation expense...................................... Total operating expenses.......................... Profit from operations ...........................................
29,430 43,890 $6,900 1,500 222 625
Other expenses Interest expense .............................................. Profit .......................................................................
9,247 34,643 45 $34,598
WINTERS COMPANY Statement of Owner’s Equity Month Ended January 31, 2017 A. Winters, capital, January 1 ................................................ Add: Profit ............................................................................. Less: Drawings ...................................................................... A. Winters, capital, January 31 ..............................................
Solutions Manual .
C-59
$ 80,000 34,598 114,598 2,000 $112,598
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (e) (Continued) WINTERS COMPANY Balance Sheet January 31, 2017 Assets Current assets Cash ............................................................ Notes receivable......................................... Accounts receivable .................................. Merchandise inventory .............................. Supplies ...................................................... Prepaid insurance ...................................... Total current assets............................ Property, plant, and equipment Land ................................................. Building .......................................... $100,000 Less: Accumulated depreciation ... 25,500 Equipment ....................................... 6,450 Less: Accumulated depreciation .. 1,625 Total assets..............................
$ 50,690 39,000 13,200 44,850 700 1,778 150,218
$50,000 74,500 4,825
129,325 $279,543
Liabilities and Owner’s Equity Current liabilities Notes payable............................................. Accounts payable ...................................... Interest payable .......................................... Total current liabilities .......................
$ 15,000 26,900 45 41,945
Long-term liabilities Mortgage payable....................................... Total liabilities.....................................
125,000 166,945
Owner’s equity A. Winters, capital ...................................... Total liabilities and owner’s equity....
112,598 $279,543
Solutions Manual .
C-60
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
CUMULATIVE COVERAGE (Continued) (g) WINTERS COMPANY Post-Closing Trial Balance January 31, 2017 Cash ................................................................ Accounts receivable ...................................... Notes receivable ............................................ Merchandise inventory .................................. Supplies.......................................................... Prepaid insurance .......................................... Land ................................................................ Building .......................................................... Accumulated depreciation—building ........... Equipment ...................................................... Accumulated depreciation—equipment ....... Notes payable................................................. Accounts payable .......................................... Interest payable.............................................. Mortgage payable .......................................... A. Winters, capital .......................................... Totals .........................................................
Solutions Manual .
C-61
Debit $ 50,690 13,200 39,000 44,850 700 1,778 50,000 100,000
Credit
$ 25,500 6,450
$306,668
1,625 15,000 26,900 45 125,000 112,598 $306,668
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
Present Value Concepts Solutions to Brief Exercises BEPV–1 (a)
$50.00
($1,000 × 5%)
(b)
$40.00
($500 × 4% × 2 periods)
(c)
$40.80
($500 × 4%) + ($520 × 4%)
Solutions Manual .
PV-1
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–2 Using tables: Discount rate from Table PV-1 is 0.82193 (5 periods at 4%). The present value of $600,000 to be received in 5 years discounted at 4% is therefore $493,158 ($600,000 × 0.82193). Wong Ltd. should therefore invest $493,158 to have $600,000 in five years. Using a financial calculator: Enter: 4 5 Press:
I/Y
N
0
600000
PMT
FV
CPT
PV
Result: PV = $ (493,156.26) Using Excel: =PV(rate,nper,pmt,fv,type) RATE .04 NPER
5
PMT
$0
FV Type
$600,000 0
Result: PV = $(493,156.26)
Solutions Manual .
PV-2
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–3 Using tables: Present value factor of 1, for 10 periods at 4% is 0.67556. PV = $10,000 x 0.67556 PV = $6,755.60 Using a financial calculator: 10000 Enter: 4 10 0 Press:
I/Y
N
PMT
FV
CPT
PV
Result = $6,755.64
Solutions Manual .
PV-3
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–4
Using tables: Present value = Future amount × Present value of 1 Factor OR Present value of 1 Factor = Present value ÷ Future amount 0.44401= $44,401 ÷ $100,000 The 0.44401 at 7% is found in the 12 years column. Xin Su therefore must wait 12 years to receive $100,000. Using a financial calculator: Enter: 7 –44401 Press:
I/Y
PV
0
100000
PMT
FV
CPT
N
Result: N = 12 Using Excel functions: the formula is: =NPER(rate,pmt,pv,fv,type) RATE .07 PMT
$0
PV
$ (44,401.00)
FV
$ 100,000.00
Type
0
Result: NPER = 12
Solutions Manual .
PV-4
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–5
Using tables: Present value = Future amount × Present value of 1 Factor $3,152 = $10,000 × Present value of 1 Factor Present value of 1 Factor = $3,152 ÷ $10,000 Present value of 1 Factor = 0.31520 The closest PV factor for 15 periods is 0.31524, which is found in the 8% column. As this factor is almost exactly equal to 0.31520, this means Jin Fei will earn an 8% return. Using a financial calculator: 10000 Enter: 15 0 –3152 Press:
N
PMT
PV
FV
CPT
I/Y
Result: I = 8.001% Using Excel functions: the formula is: =RATE(nper,pmt,pv,fv,type) NPER
15
PMT
$0
PV
$ (3,152.00)
FV
$ 100,000.00
Type
0
Result: Rate = 8.001%
Solutions Manual .
PV-5
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV-6 Using a financial calculator: (a) Enter:
10
9
0
25000
Press:
I/Y
N
PMT
FV
CPT
PV
CPT
PV
Result: PV = $(10,602.44) (b) Enter:
9
6
25000
0
Press:
I/Y
N
PMT
FV
Result: PV = $(112,147.96)
Solutions Manual .
PV-6
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–8 Annual Number Interest of Frequency Rate Years of Payment 1. 6% 2 Quarterly Semi2. 5% 8 annually 3. 7% 5 Annually 4. 4% 3 Quarterly Semi5. 2% 6 annually 6. 6% 9 Monthly
Solutions Manual .
PV-8
(n) Number of (i) Discount Periods Rate 2×4=8 6% ÷ 4 = 1.5% 8 × 2 = 16 5 3 × 4 = 12
5% ÷ 2 = 2.5% 7% 4% ÷ 4 = 1%
6 × 2 = 12 9 × 12 = 108
2% ÷ 2 = 1% 6% ÷ 12 = 0.5%
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–9 Using tables: Present value of principal to be received at maturity: $100,000 × 0.61027 (PV of $1 due in 20 periods at 2.5% from Table PV-1) ............................................. $61,027.00 Present value of interest to be received periodically over the term of the bonds: $2,750* × 15.58916 (PV of $1 due each period for 20 periods at 2.5% from Table PV-2) .............................................................. 42,870.19 Present value of bonds ................................................... $103,897.19 * $100,000 × 5.5% ÷ 2 = $2,750 Using a financial calculator: Enter: 2.5 20
2750
100000
Press:
PMT
FV
I/Y
N
CPT
PV
Result: PV = $(103,897.29) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE
.025
NPER
20
PMT
$2,750
FV
$100,000
Type
0
Result: PV = $(103,897.29)
Solutions Manual .
PV-9
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–10 Using tables: Present value of principal to be received at maturity: $100,000 × 0.55368 (PV of $1 due in 20 periods at 3% from Table PV-1) ..................................................... Present value of interest to be received periodically over the term of the bonds: $2,750* × 14.87747 (PV of $1 due each period for 20 periods at 3% from Table PV-2)............................................................ Present value of bonds................................................. *$100,000 x 5.5% / 2 = $2,570 Using a financial calculator: 100000 Enter: 3 20 2750 Press:
I/Y
N
PMT
FV
$55,368.00
40,913.04 $96,281.04
CPT
PV
Result: PV = $(96,280.63) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE
.03
NPER
20
PMT
$2,750
FV
$100,000
Type
0
Result: PV = $(96,280.63)
Solutions Manual .
PV-10
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV-11 Using a financial calculator: (a) Enter: 7.35 7
-16000
0
Press:
PMT
FV
I/Y
N
CPT
PV
CPT
PV
Result: PV = $85,186.34 (b) Enter:
10.65
10
16000*
200000
Press:
I/Y
N
PMT
FV
Result: PV = $(168,323.64)
*PMT is face value x 8% contractual (coupon) rate of 8% = ($1,000 x 200) x 8% = $16,000
Solutions Manual .
PV-11
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–12 Using tables: From Table PV-2, n = 6, i = 8%, the present value for a $1 payment annually is $4.62288. In this problem, we want to determine the payment that would result in a present value of $50,000. The required payment would be $10,815.77 ($50,000 ÷ 4.62288). Using a financial calculator: 0 Enter: 8 6 –50000 Press:
I/Y
N
PV
FV
CPT
PMT
Result: PMT = $10,815.77 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE
.08
NPER
6
PV
$(50,000.00)
FV
$0
Type
0
Result: PMT = $10,815.77
Solutions Manual .
PV-12
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–13 Using tables: From Table PV-2, n = 6, i = 9%, the present value for a $1 payment annually is $4.48592. In this problem, we want to determine the payment that would result in a present value of $50,000. The required payment would be $11,145.99 ($50,000 ÷ 4.48592). Using a financial calculator: 0 Enter: 9 6 –50000 Press:
I/Y
N
PV
FV
CPT
PMT
Result: PMT = $11,145.99 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE
.09
NPER
6
PV
$(50,000.00)
FV
$0
Type
0
Result: PMT = $11,145.99
Solutions Manual .
PV-13
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–14 Using tables: Using present value tables, for an annuity, find the rate for 12 periods that will give the factor arrived at by dividing the present value (PV) by the amount of the payment (PMT). $1,058,871 ÷ $112,825 = 9.38507 The factor will be found in the column for 4% interest*. Using a financial calculator: Enter: 12 –112825 Press:
N
PMT
1058871
0
PV
FV
CPT
I/Y
Result: I = 4%* Using Excel functions: the formula is: =RATE(nper,pmt,pv,fv,type) NPER
12
PMT
$(112,825.00)
PV
$1,058,871.00
FV
$0
Type
0
Result: Rate = 4%* *Semi-annual rate of 4% × 2 = annual rate of 8%
Solutions Manual .
PV-14
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–15 Using a financial calculator: Enter: 1.25* 12** 185000
0
Press:
FV
I/Y
N
PV
CPT
PMT
Result: PMT = $(16,697.79) * 5 ÷ 4 = 1.25 ** 3 × 4 = 12 Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE
.0125
NPER
12
PV
$185,000
FV
$0
Type
0
Result: PMT = $(16,697.79)
Solutions Manual .
PV-15
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–16 Using tables: First divide the present value with the amount of the payment: $18,000 ÷ $1,702 = 10.57579 Look in the Present Value Table PV-2 for an annuity under the column for 2% and locate the number of periods which is close to the factor 10.57579. You will find the factor 10.57534 under 12 periods. **(within rounding) Using a financial calculator: 0 Enter: 2* 18000 –1702 Press:
I/Y
PV
PMT
FV
CPT
N
Result: N = 12 periods** *4 ÷ 2 = 2 Using Excel functions: the formula is: =NPER(rate,pmt,pv,fv,type) RATE .02 PMT
$(1,702.00)
PV
$18,000.00
FV
$0
Type
0
Result: NPER = 12 periods **12 semi-annual periods will equal 6 years
Solutions Manual .
PV-16
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–17 Using tables: From Table PV-2, n = 5, i = 3%, the present value for a $1 payment annually is $4.57971. In this problem, we want to determine the payment that would result in a present value of $32,000. The required payment would be $6,987.34 ($32,000 ÷ 4.57971). Using a financial calculator: 0 Enter: 3 5 32000 Press:
I/Y
N
PV
FV
CPT
PMT
Result: PMT = $(6,987.35) Using Excel functions: the formula is: =PMT(rate,nper,pv,fv,type) RATE
.03
NPER
5
PV
$32,000
FV
$0
Type
0
Result: PMT = $(6,987.35)
Solutions Manual .
PV-17
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–18 Using a financial calculator: (a) Enter: 0.65* 96** Press:
I/Y
N
42000
0
PV
FV
CPT
PMT
CPT
PMT
Result: PMT = $(589.48) *I is 7.8% ÷ 12 for monthly payments = 0.65% ** N is 8 years x 12 = 96 (b) Enter:
7.25
5
8000
0
Press:
I/Y
N
PV
FV
Result: PMT = $(1,964.20)
Solutions Manual .
PV-18
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–19
The better option for repayment of this piece of equipment is the single payment of $46,000 in 2 years.
Using a financial calculator: Option 1:
Enter:
8
5
–10000
0
Press:
I/Y
N
PMT
FV
CPT
PV
CPT
PV
Result: PV = $39,927.10 Option 2:
Enter:
8
2
0
–46000
Press:
I/Y
N
PMT
FV
Result: PV = $39,437.59
Solutions Manual .
PV-19
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–19 (Continued) Using Excel functions the formula is: =PV(rate,nper,pmt,fv,type) Option 1
Option 2
RATE
.08
RATE
.08
NPER
5
NPER
2
PMT
$(10,000)
PMT
$0
FV
$0
FV
Type
0
Type
Result PV = $39,927.10
Solutions Manual .
$(46,000) 0
Result PV = $39,437.59
PV-20
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–20 Using tables:
The same option would not be chosen; the better choice now is 5 payments of $10,000 each. As market (or discount) rates rise, the effect of the timing of repayments becomes more significant. Using a financial calculator: Option 1:
Enter:
10
5
–10000
0
Press:
I/Y
N
PMT
FV
CPT
PV
CPT
PV
Result: PV = $37,907.87 Option 2:
Enter:
10
2
0
–46000
Press:
I/Y
N
PMT
FV
Result: PV = $38,016.53
Solutions Manual .
PV-21
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–20 (Continued) Using Excel functions the formula is: =PV(rate,nper,pmt,fv,type) Option 1
Option 2
RATE
.10
RATE
.10
NPER
5
NPER
2
PMT
$(10,000)
PMT
$0
FV
$0
FV
Type
0
Type
Result PV = $37,907.87
Solutions Manual .
$(46,000) 0
Result PV = $38,016.53
PV-22
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak
Accounting Principles, Seventh Canadian Edition
BEPV–21 The present value of an annuity collected of $21,000 for 12 years at 4% is calculated as follows: Using tables: $21,000 × 9.38507 = $197,086.47 (discount rate from Table PV-2) Using a financial calculator: Enter: 4 12
21000
0
Press:
PMT
FV
I/Y
N
CPT
PV
Result: PV = $(197,086.55) The value in use is $197,086.55. Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE
.04
NPER
12
PMT
$21,000
FV
$0
Type
0
Result: PV = $(197,086.55) The value in use is $197,086.55.
Solutions Manual .
PV-23
Appendix PV