ACCOUNTING PRINCIPLES 6TH CANADIAN EDITION BY WEYGANDT,KIESO, KIMMEL, TRENHOLM SOLUTIONS MANUAL CHAPTER 1 Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Brief Exercises
Exercises
Problems Set A
Problems Set B
1, 2, 3, 4, 5
1, 2
1
1
1
2. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations.
6, 7, 8, 9
3, 4, 10
2, 3, 7
2, 5,
2, 5, 11
3. Describe the components of the financial statements and explain the accounting equation.
10, 11, 12, 13, 14
5, 6, 7, 8, 9, 13, 14
3, 4, 5, 6
3, 4, 6, 7, 11
3, 4, 6, 7, 11
4. Determine what events 15, 16 are recognized in the financial statements and how the events are measured.
10
7, 8
5, 7, 8, 11
5, 7, 8, 11
5. Analyze the effects of business transactions on the accounting equation.
11, 12, 13
9, 10, 11, 12
6, 7, 8,11
6, 7, 8,11
Study Objectives
Questions
1. Identify the use and users of accounting and the objective of financial reporting.
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17, 18
1-1
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6. Prepare financial statements.
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19, 20
14, 15, 16 17, 18
1-2
13, 14, 15, 16
7, 8, 9, 10, 11
7, 8, 9, 10, 11
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
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, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material
Study Objective 1. Identify the use and users of accounting and the objective of financial reporting.
Knowledge Q1-4 BE1-1 E1-3
Comprehension Q1-1 Q1-2 Q1-3 Q1-5 E1-1
Application
2. Compare different forms of business organizations and explain how Canadian accounting standards apply to these organizations.
Q1-8
P1-2A P1-2B P1-11B
3. Describe the components of the financial statements and explain the accounting equation.
Q1-10 Q1-11 Q1-12 Q1-13 Q1-14 E1-3
Q1-6 Q1-7 Q1-9 BE1-3 BE1-4 BE1-10 E1-2 E1-7 P1-5A P1-5B BE1-5 E1-6
4. Determine what events are recognized in the financial statements and how the events are measured.
Q1-16
Q1-15 BE1-10 E1-7 E1-8 P1-5A P1-5B
P1-7A P1-7B P1-8A P1-8B P1-11A P1-11B
Q1-17 E1-9
Q1-18 E1-10 E1-11 E1-12 BE1-11 BE1-12 BE1-13 P1-6A P1-6B P1-7A P1-7B P1-8A P1-8B
5. Analyze the effects of business transactions on the accounting equation.
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Analysis BE1-2
Synthesis P1-1A P1-1B
Evaluat ion
BE1-6 BE1-7 BE1-8 BE1-9 BE1-13 BE1-14 E1-4 E1-5 P1-3A P1-3B P1-4A P1-4B P1-6A P1-6B P1-11A P1-11B
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BLOOM’S TAXONOMY TABLE (Continued) Study Objective
Knowledge
6. Prepare financial statements.
Broadening Your Perspective
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Comprehension
Q1-19 Q1-20
BYP1-1
Continuing Cookie Chronicle
1-5
Application P1-11A P1-11B BE1-14 BE1-15 BE1-16 BE1-17 BE1-18 E1-13 E1-14 E1-15 E1-16 P1-7A P1-7B P1-8A P1-8B P1-9A P1-9B BYP1-3
Analysis
Synthesis
Evaluat ion
P1-10A P1-10B
BYP1-4
BYP1-2 BYP1-5 BYP1-6
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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.
Understanding the basics of accounting is helpful for everyone. Studying accounting allows you to learn how the world of business actually works. Learning how to read and interpret financial information will provide you with a valuable set of skills.
3.
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 answer 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.
4.
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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QUESTIONS (Continued) 5.
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.
6.
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. Proprietorships do not pay tax, the owner does.
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. Public corporations issue publicly traded shares. That is, their shares are listed on Canadian or other stock exchanges.
d)
Private corporations have essentially the same characteristics as public corporations except that they do not issue publicly traded shares.
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QUESTIONS (Continued) 7.
The users of financial information on public companies have different needs than the users of financial information on private companies. Public corporations need the opportunity to present financial information using accounting rules that are consistent with those used globally. To do this, public 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). Companies are required to disclose which Generally Accepted Accounting Principles (GAAP) they are following in the notes to their financial statements. Thus users should read the notes in order to determine which generally accepted accounting principles a business has followed.
8.
The economic 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.
9.
The going concern assumption is that the business will continue to operate in the foreseeable future. Consequently, the historical cost of assets acquired for use is more useful information than the market value of those assets.
10.
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.
11.
(a) Assets are economic resources, owned by a business, that are capable of providing future services or benefits. Liabilities are current obligations, arising from past events, to make future payments of assets or services. Put more simply, liabilities are existing debts and obligations. Owner's equity is the ownership claim on the assets. (b)
Revenues and investments by the owner increase owner's equity. Drawings and expenses decrease owner’s equity.
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QUESTIONS (Continued) 12. Accounts Receivable represent amounts owed to the business by its customers for services performed, but for which collection has not yet been received. Accounts Payable represent amounts owed by the business for services or goods received, but for which payment has not yet been made. 13. Revenues occur from providing services, selling merchandise inventory, renting property and lending money. Revenues increase profit. The result of a business realizing revenue is an increase in the business’s assets or decrease in its liabilities. Revenues increase owner’s equity. Expenses are costs incurred to earn revenue. Expenses are the cost of assets that are consumed and services that are used by a business in its activities. Expenses decrease profit. Expenses decrease a business’s assets or increase its liabilities. Revenues minus expenses equals profit. 14. The balance sheet depicts the accounting equation and so it reports the assets, liabilities and owner’s equity of a business at a point in time. The income statement is a summary of the results of the business’s operating activities aimed to increase profit. The income statement reports the revenues and the expenses for a period in time. 15. Wayne is incorrect. Not all events are transactions recognized in the accounting records. Only events that cause changes in assets, liabilities, or owner’s equity and can be reliably measured in monetary terms should be recorded. For example, a business might sign a lease for a store. Although this event obligates the business for the payment of rent in the future, it is not yet a transaction as no assets have been exchanged by the business and its landlord. Another example is when an employee is hired. No transaction has occurred, and nothing will be recorded until the employee has started working and earning wages. 16. The monetary unit assumption requires that only transaction data capable of being expressed in terms of money can be included in the accounting records of the economic entity. As a result, information that cannot be objectively measured in dollars cannot be included. For example, a skilled manager may add value to a company, but since that skill cannot be objectively measured in dollars, it is not included as an asset of the company. Another important part of the monetary unit assumption is that the unit of measure remains sufficiently constant over time. In other words, inflation is ignored.
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QUESTIONS (Continued) 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 account which is offset by a decrease in the cash account). 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. Yes. Profit does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, profit appears in the statement of owner's equity—it is shown as an addition to the beginningof-period capital. Indirectly, the profit of a company is also included in the balance sheet, as it is included in the capital account, which appears in the owner's equity section of 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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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 1. 2.
3. 4. 5.
The student is provided with the opportunity to cheat on an exam. 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. A salesperson might be provided with the opportunity to not report cash sales and pocket the cash instead. A banker is able to approve a loan for an unqualified family member. The prime minister of Canada interferes in a political inquiry of a political friend.
BRIEF EXERCISE 1-3 (a) (b) (c)
P C PP
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BRIEF EXERCISE 1-4 (a) (b) (c) (d) (e)
F F F T T
BRIEF EXERCISE 1-5
(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 1-6 (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 1-7 (a)
$600,000 − ($600,000 × ⅓) = $400,000 (Liabilities)
(b) $280,000 + $130,000 − $40,000 + $440,000 − $330,000 = $480,000 (Total assets) (c)
$90,000 − ($35,000 − $7,000 + $55,000 − $45,000) = $52,000 (Total liabilities)
BRIEF EXERCISE 1-8 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 + $100,000) − ($300,000 + $185,000 − $50,000) = $515,000 (Liabilities)
(d) ($850,000 + $45,000) − ($550,000 − $50,000) = $395,000 ending balance Owner’s equity $395,000 + $40,000 − $300,000 = $135,000 Profit
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BRIEF EXERCISE 1-9 (a) A L OE A OE OE OE A L A A OE
1. Accounts receivable 2. Salaries payable 3. Salaries expense 4. Supplies 5. Supplies expense 6. S. Knoler, capital 7. Service revenue 8. Equiment 9. Notes payable 10. Cash 11. Prepaid expense 12. S. Knoler, drawings
(b) BS BS IS BS IS OE & BS IS BS BS BS BS OE
BRIEF EXERCISE 1-10 (a) (b) (c) (d) (e)
5. 1. 4. 2. 3.
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Monetary unit assumption Cost principle Economic entity assumption Generally accepted accounting principles Going concern assumption
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BRIEF EXERCISE 1-11 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
Expenses NE NE –$300 NE NE NE NE
NE
NE
NE
NE
NE
+450
NE
NE
NE
NE
BRIEF EXERCISE 1-12 (a) (b) (c) (d) (e) (f)
Description Transaction Analysis Cash collected on account. 6 Owner invests cash in the business. 1 Supplies are purchased on account. 3 Company provides service on account. 4 Payment on account made to supplier. 5 Company purchases an insurance policy. 2
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BRIEF EXERCISE 1-13 E R I E NE R R E D NE NE
(a) Cost incurred for advertising (b) Commission earnings (c) Equipment received from company owner (d) Amounts paid to employees (e) Cash paid to purchase equipment (f) Services performed on account (g) Rent received (h) Utilities incurred (i) Cash distributed to company owner (j) Collection of an account receivable (k) Cash collected in advance of providing service
BRIEF EXERCISE 1-14 (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
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BRIEF EXERCISE 1-15 Beginning capital + Investments + Profit (or − Loss) − Drawings = Ending capital (a)
Ending capital balance Beginning capital balance Profit
$260,000 225,000 $ 35,000
(b)
Ending capital balance Beginning capital balance Increase in capital Deduct: Portion of increase arising from investment Profit
$260,000 225,000 35,000
Ending capital balance Beginning capital balance Increase in capital Deduct: Portion of increase arising from investment Add: Portion of decrease arising from withdrawal Profit
$260,000 225,000 35,000
(c)
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(10,000) $ 25,000
(5,000) 7,000 $ 37,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 1-16 PRAIRIE COMPANY Income Statement Month Ended October 31, 2014 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, 2014 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, Sixth Canadian Edition
BRIEF EXERCISE 1-18 PRAIRIE COMPANY Balance Sheet October 31, 2014 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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SOLUTIONS TO EXERCISES EXERCISE 1-1 (a)
Chief Financial Officer — Does Roots Canada Ltd. generate enough cash to expand its product line? Human Resource Manager — What is Roots Canada Ltd.’s annual salary expense?
(b) Creditor — Does Roots Canada have enough cash available to make its monthly debt payments? Investor — How much did Roots Canada pay in dividends last year?
EXERCISE 1-2 Publicly Traded Partnership Corporation
Proprietorship (a) (b) (c) (d) (e) (f) (g) (h)
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F F F F F F T F
F F F F F T T F
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T F T T T T F T
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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)
8 10 1 11 12 5 3 7 4 6 2 9
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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
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EXERCISE 1-4 (a)
Total assets (beginning of year)............................. Total liabilities (beginning of year)......................... Total owner's equity (beginning of year) ...............
$95,000 72,000 $23,000
(b)
Total assets (end of year) ....................................... $110,000 Total owner's equity (end of year).......................... 37,000 Total liabilities (end of year) ................................... $ 73,000
(c)
Total owner's equity (end of year).......................... Total owner's equity (beginning of year) ............... Increase in owner's equity ......................................
$37,000 23,000 $14,000
Total revenues ......................................................... $179,000 Total expenses......................................................... 150,000 Profit ......................................................................... $ 29,000 Increase in owner's equity ...................................... Less: Profit.............................................. ................ Add: Drawings......................................................... Investments by owner ............................................. Alternatively: Owner’s equity (beginning of year) Add: Profit Investments by owner 1 Deduct: drawings Owner’s equity (end of year)
$14,000 (29,000) 22,000 $ 7,000
$23,000 29,000 7,000 59,000 (22,000) $37,000
1
$23,000 + $29,000 + x – $22,000 = $37,000 = x + $30,000 = $37,000 = $37,000 – $30,000 = $7,000 (d) Total assets (beginning of year) ............................... $162,000 Total owner's equity (beginning of year) ................... 85,000 Total liabilities (beginning of year) ............................ $ 77,000 Solutions Manual .
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EXERCISE 1-4 (Continued) (e)
Total liabilities (end of year) ................................. Total owner's equity (end of year) ........................ Total assets (end of year)......................................
$61,000 98,000 $159,000
(f)
Total owner's equity (end of year).......................... Total owner's equity (beginning of year) ............... Increase in owner's equity......................................
$ 98,000 85,000 $ 13,000
Total revenues ......................................................... Total expenses ........................................................ Profit.........................................................................
$ 99,000 48,000 $ 51,000
Add: Profit............................................................... Investments................................................... ........................................................................ Deduct: Increase in owner’s equity ...................... Drawings..................................................................
$ 51,000 0 51,000 (13,000) $ 38,000
Alternatively: Owner’s equity(beginning of year) Add: profit Investments by owner Deduct: drawings1 Owner’s equity (end of year)
$ 85,000 51,000 0 136,000 (38,000) $ 98,000
1
$85,000 + $51,000 + $0 – x = $98,000 = $136,000 – $98,000 = $38,000 (g)
Total liabilities (beginning of year) ....................... Total owner's equity (beginning of year) .............. Total assets (beginning of year)............................
$ 30,000 33,000 $ 63,000
(h)
Total assets (end of year) ...................................... Total liabilities (end of year) .................................. Total owner's equity (end of year).........................
$ 79,000 42,000 $ 37,000
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EXERCISE 1-4 (Continued) (i)
Total owner's equity (end of year) ............................. $ 37,000 Total owner's equity (beginning of year) .................. 33,000 Increase in owner's equity..................................... $ 4,000 Increase in owner's equity..................................... Less: Investments ..................................... $(5,000) Plus: Drawings ...................................... 25,000 Profit........................................................................
$ 4,000
Total revenues ........................................................ Less: Profit ............................................................. Total expenses .......................................................
$85,000 24,000 $61,000
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20,000 $24,000
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EXERCISE 1-5 (a)
Owner's equity—12/31/2012 ($370,000−$210,000) $160,000 Owner's equity—1/1/2012 .......................................... 0 Increase in owner's equity .......................................... 160,000 Less: Owner’s investment ........................................ 100,000 60,000 Add: Drawings .......................................................... 50,000 Profit for 2012 ............................................................ $110,000
(b) Owner's equity—12/31/2013 ($440,000−$290,000) $150,000 Owner's equity—12/31/2012—see (a) ....................... 160,000 Decrease in owner’s equity ................................... (10,000) Less: Owner’s investment ......................................... 40,000 Loss for 2013 .............................................................. $(50,000) (c)
Owner's equity—12/31/2014 ($525,000−$355,000) $170,000 Owner's equity—12/31/2013—see (b) ........................ 150,000 Increase in owner's equity...................................... 20,000 Less: Owner’s investment ...................................... (10,000) Add: Drawings ............................................................ 60,000 Profit for 2014 ............................................................. $ 70,000
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EXERCISE 1-6 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 OE OE OE OE A
(b) BS BS BS BS BS IS IS OE IS BS
OE OE OE A OE L
OE OE IS BS IS BS
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 1-7 (a) and (b) 1. This accounting treatment is incorrect, as it violates the 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 economic 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, as it violates the monetary unit assumption. An important part of the monetary unit assumption is the stability of the monetary unit (the dollar) over time. Inflation is considered a nonissue for accounting purposes in Canada and is ignored. 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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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-8 (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 in 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 assumption, 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 revenue has been earned from providing services and accounts receivable have been increased. The amount of $4,000 should be used in 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 to deliver 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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Chapter 1
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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-9 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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Chapter 1
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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-10 Assets
Trans.
Cash
1 2 3 4 5 6 7 8 9 10
+$25,000 –2,000
Total
$26,150
+ Accounts Rec.
=
Liabilities
+
+
+
+
+
+
Prepaid
Equip-
Accounts
Unearned
Note
Ins.
ment
Payable
Revenue
Payable
Owner's Equity
+
-
+
-
H.Sevigny H.Sevigny
Reve-
Expenses
Capital
nues
Drawings
+$25,000 +$7,000
+$5,000 –$250
+$250 +$3,200 -2,000 +2,100 +3,000 +1,000 –250 –700
+$3,200 –$2,000
-2,100 +$3,000 +1,000 –250 +$700 +$1,100
+$700
+$7,000
$0
+$3,000
+$5,000
+$25,000
–$2,000
+$4,200
$34,950 = $34,950
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–$250
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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-11 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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Chapter 1
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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-12 (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. Paid 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. 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)
Investment ................................................................. $24,000 Profit........................................................................... 4,380 Drawings .................................................................... (3,300) Increase in owner’s equity........................................ $25,080
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$8,300 (800) (2,700) (420) $4,380
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 1-13 STAR & CO. Income Statement Month Ended July 31, 2014 Revenues Service revenue ............................................... Expenses Salaries expense .............................................. $2,700 Rent expense ................................................... 800 Utilities expense .............................................. 420 Total expenses ............................................ Profit......................................................................
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$8,300
3,920 $4,380
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 1-13 (Continued) STAR & CO. Statement of Owner's Equity Month Ended July 31, 2014 B. Star, Capital, July 1.......................................... Add: Investments .............................................. $24,000 Profit .......................................................... 4,380 Less: Drawings.................................................... B. Star, Capital, July 31........................................
$
0
28,380 28,380 3,300 $25,080
STAR & CO. Balance Sheet July 31, 2014 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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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-14 ATLANTIC CRUISE CO. Income Statement Year Ended May 31, 2014 Revenues Ticket revenue ............................................ $355,000 Expenses Salaries expense ........................................ $128,000 Maintenance expense................................. 83,000 Food, fuel and other expenses .................. 65,500 Interest expense ......................................... 20,000 Advertising expense................................... 3,500 Insurance expense ..................................... 2,400 Total expenses ....................................... 302,400 Profit................................................................. $ 52,600
ATLANTIC CRUISE CO. Statement of Owner's Equity Year Ended May 31, 2014 I. Temelkova, Capital, June 1, 2013................ Add: Investments.......................................... Profit ..................................................... Less: Drawings............................................... I. Temelkova, Capital, May 31, 2014 ...............
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$275,000 $6,000 52,600
58,600 333,600 35,000 $298,600
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 1-15 ATLANTIC CRUISE CO. Balance Sheet May 31, 2014 Assets Cash ....................................................................... Accounts receivable ............................................. Supplies ................................................................. Prepaid insurance ................................................. Equipment.............................................................. Ships ...................................................................... Total assets.......................................................
$ 19,400 42,000 15,000 1,200 120,000 550,000 $747,600
Liabilities and Owner's Equity Liabilities Notes payable........................................................ $400,000 Accounts payable ................................................. 49,000 Total liabilities .............................................. 449,000 Owner's equity I. Temelkova, Capital............................................. 298,600 Total liabilities and owner's equity ................. $747,600
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Accounting Principles, Sixth Canadian Edition
EXERCISE 1-16 (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, 2013 .............................. Add: Profit .............................................................. Less: J. Cumby, Drawings...................................... J. Cumby, Capital, March 31, 2014 ..........................
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$17,000 40,000 57,000 5,000 $52,000
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 1-16 (Continued) (c) DEER PARK Balance Sheet March 31, 2014 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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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 1-1A 1. (a) In deciding to extend credit to a new customer, Pearson Industries is an external user of the accounting information of its customers. (b) Pearson Industries would focus its attention on the information about the customer’s economic resources and claims to those resources. The terms of credit they are extending require collection in a short period of time. Funds used to pay Pearson 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 Pearson Industries. 2. (a) The investor is the external user of the accounting information of Organic Food Solutions Ltd. (b) When purchasing a business, the information that will be most relevant to the investor will be on 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. This is the best indicator of the company’s future potential and return on the investment. 3. (a) The president of Hi-tech Adventure Limited is an internal user of the accounting information. (b) In order to determine if Hi-tech Adventure Limited is holding enough cash to increase the amount of dividends paid to shareholders and still have 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 dividend and equipment purchase plans.
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Accounting Principles, Sixth Canadian Edition
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 accuracy 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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Accounting Principles, Sixth Canadian Edition
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 standards followed as they are simplest 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 standards followed as they are simplest 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 standards followed as they are simplest to follow. The business would not be a publicly traded corporation requiring the use of IFRS.
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Accounting Principles, Sixth Canadian Edition
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 standards followed as they are simplest to follow. The business would not be a publicly traded corporation requiring the use of IFRS. 5. (a) A partnership would be the most likely form of business for Evelyn, Amaan and Brenda to choose. A partnership is simpler to form than a corporation and less costly. (b) ASPE will likely be the accounting standards followed as they are simplest to follow.
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-3A (a)
Total assets (Jan. 1, 2013) ...................................... Total liabilities (Jan. 1, 2013) .................................. Total owner's equity (Jan. 1, 2013) .........................
$40,000 0 $40,000
(b)
Total liabilities (Dec. 31, 2013) ............................... $50,000 Total owner's equity (Dec. 31, 2013) (c) below...... 75,000 Total assets (Dec. 31, 2013).................................... $125,000
(c)
Total owner's equity (Dec. 31, 2013) ...................... Equal to owner's equity (Jan. 1, 2014) given
$75,000
(d)
Total owner's equity (Dec. 31, 2013) ...................... Total owner's equity (Jan. 1, 2013) ........................ 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, 2014) .................................. $50,000 Total owner's equity (Jan. 1, 2014) ........................ 75,000 Total assets (Jan. 1, 2014) ...................................... $125,000 Also same as (b) above
(g)
Total assets (Dec. 31, 2014)................................... Total owner's equity (Dec. 31, 2014) ..................... Total liabilities (Dec. 31, 2014) ...............................
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$140,000 97,000 $ 43,000
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 1-3A (Continued) (h)
Total owner's equity (Dec. 31, 2014) ...................... Total owner's equity (Jan. 1, 2014) (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, 2015) ........................................ $140,000 Equal to total assets (Dec. 31, 2014) given
(k)
Total liabilities (Jan. 1, 2015) .................................... Equal to total liabilities (Dec. 31, 2014) (g) above
$43,000
(l)
Total owner's equity (Jan. 1, 2015) .......................... Equal to total owner's equity (Dec. 31, 2014) given
$97,000
(m)
Total assets (Dec. 31, 2015)................................... Total liabilities (Dec. 31, 2015) .............................. Total owner's equity (Dec. 31, 2015) .....................
$172,000 65,000 $107,000
(n) Total owner's equity (Dec. 31, 2015) ..................... Total owner's equity (Jan. 1, 2015) (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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40,000 $18,000
5,000 $15,000
Chapter 1
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
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 his capital account is sufficiently high to cover the drawings charge. He also needs to know that there is sufficient cash available in business to make the withdrawal and still have enough cash to meet the obligations of the business.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-4A
(a) and (b) ($ in thousands) 1. L 2. A 3. A 4. A 5. R 6. E 7. C 8. D 9. E 10. E 11. L 12. A 13. E 14. L 15. R 16. R 17. E 18. E 19. A 20. L
(c)
BS BS BS BS IS IS OE OE IS IS BS BS IS BS IS IS IS IS BS BS
Accounts payable Accounts receivable Cash Equipment Food service revenues Fuel expense G. Hirsch, capital, January 1 G. Hirsch, drawings Interest expense Maintenance expense Notes payable Other assets Other expenses Other liabilities Other revenue Passenger revenues Port fee expenses Salaries expense Supplies Unearned passenger revenues
$ 2,598 869 1,700 26,785 5,500 1,750 2,738 2,500 675 1,578 13,500 905 4,650 1,735 230 19,765 429 5,675 550 2,000
($ in thousands) Assets = Liabilities + Owner’s Equity ($869 + $1,700 + $26,785 + $905 + $550) = ($2,598 + $13,500 + $1,735 + $2,000) + ($2,738 + $230 + $19,765 + $5,500 − $1,750 − $2,500 − $675 − $1,578 − $4,650 − $429 − $5,675) $30,809 = $19,833 + $10,976
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PROBLEM 1-4A (Continued) Taking It Further: It is important for Sunrise Cruise Ltd. to keep track of its different types of revenues 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 revenues can be compared with their related expenses to determine the amount of profit from the different sources of revenue activity for Sunrise Cruise Ltd.
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Accounting Principles, Sixth Canadian Edition
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. (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 cost principle. The land and building should be recorded at the amount paid on purchase of $350,000. (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 economic entity assumption. 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 accounting records. 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 2014 financial statements must be prepared in accordance with the International Financial Reporting Standards (IFRS). 5. (a) The accountant’s treatment is correct as the business can no longer be assumed to be a going concern. (b) No change required.
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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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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-6A (a)
LEANNE’S TRAVEL AGENCY Acc. Rec.
Sup+ plies
Prepaid Ins.
Equip+ ment
Cash + June 1 +$23,000 2 −3,000 3 −2,500 7 −675 +$675 8 15 +3,500 +$7,500 22 −1,500 25 −300 30 −5,750 30 30 +6,000 −6,000 30 –2,400 +$2,400 $16,375 + $ 1,500 + $675 + $2,400 +
Accounts Note L. Aiken, L. Aiken, = Payable + Payable + Capital – Drawings + +$23,000 +$6,800 +$3,800
Revenues
−$2,500 –300
+$300 +$11,000 −$1,500 –300
−5,750 −300
+300
$6,800 =
$300 +
$3,800 +
$23,000 –
$1,500 + $11,000 – $8,850
$27,750 = $27,750
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-6A (Continued) (b) Capital Investment ....................................................... $23,000 Less: Drawings ............................................................ 1,500 21,500 Add: Revenue .............................................................. 11,000 Less: Expenses ........................................................... (8,850) L. Aiken, Capital, June 30 ........................................... $23,650 Taking It Further: $300 should be reported as an asset, Supplies, on the June 30 balance sheet. This is the amount of supplies on hand. $375 should be reported as an expense. This is the amount of supplies that were actually used in the month of June.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-7A (a)
ANITA LETOURNEAU, LAWYER 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
12
–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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Accounting Principles, Sixth Canadian Edition
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 20) 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) ANITA LETOURNEAU, LAWYER Balance Sheet March 31, 2014 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: A good rule of thumb to determine whether or not a transaction should be recorded, is to test if an exchange has taken place. Only when the event represents an exchange should a transaction be recorded. As well, personal transactions must be excluded, to comply with the economic entity assumption.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-8A (a)
Bal Sept. 4 5 7 12 15 15 15 18 20 26 29 30
LISE ANDERSON, MD L. L. Accounts SupEquipNotes Accounts Anderson, Anderson, Cash + Receivable + plies + ment = Payable + Payable + Capital – Drawings + Revenues –Expenses $3,000 + $1,500 + $600 + $7,500 = $3,000 $5,500 + $4,100 +800 −800 +7,700 +2,800 +$10,500 −2,900 −2,900 −800 +2,300 +1,500 –2,800 –$2,800 –1,900 –1,900 –275 –275 +700 –700 −1,000 –$1,000 +3,000 +3,000 +325 –325 +10,000 +10,000 $5,525 + $12,800 + $600 + $9,800 = $6,000 + $4,425 + $20,500 – $4,100 – $1,000 + $5,300
$28,725 = $28,725 Note that the September 28 transaction is not recorded, because the work will not commence until September.
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PROBLEM 1-8A (Continued) (b) LISE ANDERSON MD Income Statement Month Ended September 30, 2014 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
LISE ANDERSON MD Statement of Owner's Equity Month Ended September 30, 2014 L. Anderson, Capital, September 1............................... $4,100 Add: Profit.................................................................. 15,200 19,300 Less: Drawings .......................................................... 1,000 L. Anderson, Capital, September 30 ........................... $18,300
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PROBLEM 1-8A (Continued) (b) (Continued) LISE ANDERSON MD Balance Sheet September 30, 2014 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 Notes payable........................................................... $ 6,000 Accounts payable .................................................... 4,425 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 BENNETT’S HOME RENOVATIONS Income Statement Year Ended December 31, 2014 Revenues Service revenue ............................................................ $153,750 Expenses Interest expense .......................................... Insurance expense ...................................... Supplies expense ........................................ Salaries expense ......................................... Vehicle operating expenses........................ Total expenses ........................................
$ 1,195 3,375 20,095 88,230 3,545 116,440
Profit .................................................................................... $ 37,310
BENNETT’S HOME RENOVATIONS Statement of Owner's Equity Year Ended December 31, 2014 J. Bennett, Capital, January 1 .......................................... Add: Profit ....................................................................... Less: J. Bennett, Drawings ............................................. J. Bennett, Capital, December 31.....................................
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$45,850 37,310 83,160 44,800 $38,360
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PROBLEM 1-9A (Continued) BENNETT’S HOME RENOVATIONS Balance Sheet December 31, 2014
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. Bennett, 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 1-10A $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 point in time, at the end of a 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 at 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. (cost principle) 2.
The accounts receivable should be recorded in Canadian dollars not in Chinese yuan (monetary unit assumption). Accounts receivable are assets and not liabilities. The entry in the liabilities for accounts receivable of $37,000 must be removed and appear instead under assets at 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 and 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. Cai, capital is an equity account, and not an asset. His investment in the company is an asset to him, but for the company it is equity (economic entity assumption). The entry in the assets for C. Cai, capital should be removed and instead appear under owner’s equity section of the balance sheet.
6.
There is an asset omitted on the balance sheet. An amount of $15,000 should be included for merchandise inventory.
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PROBLEM 1-11A (Continued) (a) (Continued) 7.
The ‘plug’ figure needs to be removed. The accounting equation states that Assets = Liabilities + Owner’s Equity. Cai needs to make the corrections above in order to determine the Owner’s Equity balance.
(b) CONFUCIUS BOOK SHOP Balance Sheet April 30, 2014 Assets Cash ................................................................................ Accounts receivable ($5,000 + $2,000) .......................... Supplies ........................................................................... Merchandise inventory ................................................... Land ................................................................................. Equipment........................................................................ Building............................................................................ Total assets.................................................................
$ 10,000 7,000 1,000 15,000 36,000 58,000 110,000 $237,000
Liabilities and Owner's Equity Liabilities Notes payable................................................................ $120,000 Accounts payable ......................................................... 15,000 Total liabilities ............................................................ 135,000 Owner's equity: C. Cai, capital ................................................................ 102,000 Total liabilities and owner's equity ......................... $237,000
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PROBLEM 1-11A (Continued) Taking It Further: All transactions affect a minimum of two financial statement items because all transactions involve exchanges. 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 investor is the external user of the accounting information of Organics To You. (b) When purchasing a business, the information that will be most relevant to A.B.C., the investor will be on 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. This is the best indicator of the company’s future potential and return on the investment 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 the customer’s economic resources and claims to those resources. The terms of credit they are extending require 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) 4. (a) Shields 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, Shields Bank is interested in two things—the ability of the company to make interest payments on an annual basis for the next three years and the ability to repay the principal amount at the end of three 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, Shields 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 accuracy of the financial statements. To ensure this reliability, 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 simplest 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 simplest 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 simplest 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 simplest to follow.
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PROBLEM 1-2B (Continued)
5. (a) Leisha might consider a proprietorship as it is easy to set up. However, a corporation may provide benefits that a proprietorship does not. She wants to raise substantial funds to purchase strollers, pay employees and rent. It can be easier to raise funds through a corporation rather than a proprietorship or partnership. (b) ASPE will likely be the accounting standards followed as they are simplest 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 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, 2013) ........................ Total liabilities (Jan. 1, 2013) .................................. Total assets (Jan. 1, 2013) ......................................
$60,000 0 $60,000
(b)
Total assets (Dec. 31, 2013).................................... Total owner's equity (Dec. 31, 2013) ...................... Total liabilities (Dec. 31, 2013) ...............................
$75,000 45,000 $30,000
(c)
Total owner's equity (Dec. 31, 2013) ...................... Total owner's equity (Jan. 1, 2013) ........................ 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, 2014) .................................... Equal to total liabilities (Dec. 31, 2013) (b) above
$30,000
(f)
Total owner's equity (Jan. 1, 2014) .......................... Equal to total owner's equity (Dec. 31, 2013) given
$45,000
(g)
Total assets (Dec. 31, 2014)................................... Equal to total assets (Jan. 1, 2015) given
$127,000
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PROBLEM 1-3B (Continued) (h) Total assets (Dec. 31, 2014) (g) above .................. Total liabilities (Dec. 31, 2014) .............................. Total owner's equity (Dec. 31, 2014) .....................
$127,000 45,000 $ 82,000
(i)
Total owner's equity (Dec. 31, 2014) ...................... Total owner's equity (Jan. 1, 2014) (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
(j)
Profit......................................................................... Add: Total expenses ............................................... Total revenues .........................................................
$ 35,000 95,000 $130,000
(k)
Total liabilities (Jan. 1, 2015) ...................................... $45,000 Equal to total liabilities (Dec. 31, 2014) given
(l)
Total owner's equity (Jan. 1, 2015) ............................. $82,000 Equal to total owner's equity (Dec. 31, 2014) (h) above
(25,000) $12,000
(m) Total assets (Dec. 31, 2015) ...................................... $170,000 Total owner's equity (Dec. 31, 2015)......................... 100,000 Total liabilities (Dec. 31, 2015) ................................... $ 70,000 (n) Total owner's equity (Dec. 31, 2015)......................... $100,000 Total owner's equity (Jan. 1, 2015) (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
Assets = Liabilities + Owner’s Equity ($160 + $120 + $600 + $1,495 + $30 + $615) = ($195 + $950 + $396 + $125 + $24) + ($934 + $52 + $1,295 − $45 − $15 − $871 − $20) $3,020 = $1,690 + $1,330
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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 economic entity assumption. The boat is a personal asset which is being used occasionally for business. (b) The entry to record the purchase of the boat should be removed from the accounting records or charged to Dave Power’s drawings account if the business is a proprietorship or partnership. 3. (a) The accounting treatment is incorrect as it violates the cost principle. 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. 4. (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.
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PROBLEM 1-5B (Continued) 5. (a) Adopting IFRS is appropriate in this case, but the omitting a note to that effect is not appropriate. The readers of the financial statements are not aware of the basis under which the financial statements have been prepared and cannot interpret the information appropriately. (b) Add a note to the financial statements stating that the partnership uses the International Financial Reporting Standards. 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 1-6B (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 2 −3,000 +$9,000 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 $200 +
+$2,100 $2,100 + $6,000 + $21,000 −
$1,300 + $6,850 − $2,940
$31,910 = $31,910
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PROBLEM 1-6B (Continued) (b)
Capital investment .................................................... Less: Drawings ........................................................ Add: Revenue.......................................................... Less: Expenses ........................................................ L. Depres, Capital, April 30 .......................................
$21,000 1,300 19,700 6,850 (2,940) $23,610
Taking It Further: $500 should be reported as an asset, Supplies, on the April 30 balance; the unused supplies on hand as of that date. $475 should be reported as an expense representing supplies that were actually used in the month of June.
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PROBLEM 1-7B (a)
BARRY CONSULTING
Trans- Cash + Acc. + Sup- + Equip. = Notes + action Rec. plies Payable June 1 +$6,000 2 –900 3 +$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
Acc. Pay.
+$545 –95 +$3,275 –$600 +5,000 –1,800
–3,000 –545 +$5,500 +$2,150 –150 +$2,500 $2,000 +
$545 + $2,150 =
$5,500 +
$
0 + $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 earned 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, 2014 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: A good rule of thumb is to test whether or not an exchange has taken place. Only when the event represents an exchange should a transaction be recorded. As well, personal transactions must be excluded to comply with the economic entity assumption.
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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. SupRec. plies $2,100 $350
+
=
Equipment $7,600
+
+ Unearned
Acc. Pay. Revenue $4,300 -3,800
+
+
Notes Payable
+ – + F. F. Baker, Baker, RevCapital Drawings enues $11,450
-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 transaction and the October 26 transaction are not recorded because these transactions are not yet completed. 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, 2014 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, 2014 F. Baker, Capital, October 1 ..................................... Add: Profit .............................................................. Less: Drawings ...................................................... F. Baker, Capital, October 31 ...................................
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PROBLEM 1-8B (Continued) (b) (Continued) BAKER’S ACCOUNTING SERVICE Balance Sheet October 31, 2014 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 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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-9B JOHANSEN DESIGNS Income Statement Year Ended December 31, 2014 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, 2014 J. Johansen, Capital, January 1 ....................................... Add: Profit ....................................................................... Less: Drawings ................................................................ J. Johansen, Capital, December 31 .................................
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$35,800 33,625 69,425 40,000 $29,425
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-9B (Continued) JOHANSEN DESIGNS Balance Sheet December 31, 2014 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, 2014, 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 the statement of owner’s equity.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-10B (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 point in time, at the end of a 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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Accounting Principles, Sixth Canadian Edition
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 economic entity assumption of GAAP. 2.
The supplies should be recorded at cost of $15,000 until they are used. (cost principle)
3.
The $5,000 should be returned to cash as this transaction has not yet occurred. (recognition criteria)
4.
G. Gélinas’ Capital should be reported at its ending balance at December 31, 2014 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.
Accounts and Notes Payable should be shown separately. (disclosure policy)
6.
The prepaid insurance of $1,200 needs to be added to the assets of the business.
7.
The profit should not appear on the balance sheet but included in the ending balance of the Capital account.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 1-11B (Continued) (b) GG Company Balance Sheet December 31, 2014 Assets Liabilities and Owner’s Equity Cash $20,000 Accounts payable $30,000 Accounts receivable 55,000 Notes payable 15,000 Supplies 15,000 G. Gélinas, Capital 46,200 Prepaid insurance 1,200 Total liabilities and Total assets $91,200 owner’s equity $91,200 G. Gélinas, Capital = $91,200 – $30,000 – $15,000 = $46,200. Taking It Further: If G. Gélinas did not make any withdrawals or further investments from GG Company during 2014, the change in his capital account will correspond to the profit for the year ending December 31, 2014. In this case the G. Gélinas, Capital account increased from $25,000 to $46,200 and so the profit was $21,200.
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (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 could limit her liability to her investment in the business. 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 1 could be more costly than a proprietorship. The corporation would pay income taxes on its profits, instead of Natalie personally paying taxes on the income of the proprietorship. The amount of taxes that would be paid 1
could be higher with the corporation.
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. 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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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (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 services so she can establish what to charge for her services. 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 pay a interest and pay back a loan. 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 some financial information to obtain credit and to demonstrate her ability to repay loans, plus any interest. The Canada Revenue Agency (CRA) is another user of the financial information Natalie will present in reporting the profit of her business on her personal income tax return. CRA will want to make sure that Natalie is reporting all of the profits properly and that the expenses of the business are in fact deductible.
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CONTINUING COOKIE CHRONICLE (Continued) (d) Natalie will have a choice of adopting IFRS or Accounting Standards for Private Enterprises (ASPE) because Cookie Creations is a private company. Natalie will likely use ASPE as this set of standards will meet her company’s needs. As a very small private company it will not need the extra disclosure that is required by IFRS. (e)
Assets: Cash, Accounts Receivable, Supplies, Equipment Liabilities: Accounts Payable, Unearned Revenue, Notes Payable Owner’s Equity: N. Koebel, Capital, N. Koebel, Drawings Revenue: Fees Earned Expenses: Advertising Expense, Interest Supplies Expense, Telephone Expense
(f)
Expense,
Natalie should have a separate bank account used solely by Cookie Creations. 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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Accounting Principles, Sixth Canadian Edition
BYP 1-1 FINANCIAL REPORTING PROBLEM
(a) There are 29 notes to the financial statements, which occupy 30 pages. The financial statements themselves take up 5 pages. (b) Reitmans’ fiscal year follows the retail calendar which does not correspond exactly to a calendar year. Retail businesses generally use fiscal years made up of 52 weeks typically ending on a Saturday. Reitmans’ 2012 fiscal year end was January 28, 2012; it’s 2011 fiscal year end was January 29, 2011. (c) As mentioned in note 2 (a) to the financial statements, Reitman’s confirms that has reported under IFRS. (d) The five financial statements presented for the year ended January 28, 2012 include: 1. Statements of Earnings 2. Statements of Comprehensive Income 3. Balance Sheets 4. Statements of Changes in Shareholders’ Equity 5. Statements of Cash Flows (e) 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 earnings, the further clarification is given that this presentation excludes the amounts reported for earnings per share (except per share amounts). Note 2 (c) also indicates that financial amounts have been reported in thousands of Canadian dollars.
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BYP 1-1 (Continued) (f)
Total assets as at January 28, 2012: January 29, 2011:
$633,861,000 $659,357,000
(g) Total liabilities as at January 28, 2012: $141,009,000 ($89,132,000 + $51,877,000 = $141,009,000) January 29, 2011: $146,557,000 ($91,309,000 + $55,248,000 = $146,557,000) (h) Net earnings (profit) for January 28, 2012: January 29, 2011: Decline in profit
$47,539,000 88,985,000 $41,446,000
Or 46.6% decline in profit ($41,446,000 ÷ $88,985,000)
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Accounting Principles, Sixth Canadian Edition
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 services and economic benefit to the business. The value of Apple’s employees are not shown on the balance sheet as the “value” is not reliably quantifiable in monetary terms (as per the monetary unit assumption).
(b) 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. So “unrecorded economic resources” such as these are not included on the balance sheet. In addition, many assets on the balance sheet are recorded at cost, rather than fair value. 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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Accounting Principles, Sixth Canadian Edition
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, 2014 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, 2014. Rather, it should be dated "December 31, 2014."
2.
Assets on the balance sheet are normally ordered 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. Liabilities 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 at 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 capital for the balance sheet, you need to prepare the statement of owner’s equity second, before preparing the balance sheet.
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BYP 1-4 (Continued) (c)
A correct balance sheet follows: PEAK COMPANY Balance Sheet December 31, 2014
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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Accounting Principles, Sixth Canadian Edition
BYP 1-5 ETHICS CASE (a)
The stakeholders in this situation are the new CEO and CFO, and the creditors and investors who rely on the financial statements to make business decisions.
(b)
The CEO and CFO should not sign the certification until they have taken steps to assure themselves that the most recent reports accurately reflect the activities of the business. However, as the current management of the company, they cannot refuse to sign the certification just because they are new. They are the management team now and must accept the responsibility that goes with these positions. When they were hired or appointed to their positions, they were aware of this requirement. Consequently, they must dedicate the necessary effort and time to become aware and familiar with the information, to allow them to sign the certification.
(c)
The CEO and CFO have no alternative other than to take the steps necessary to assure themselves of the accuracy of the financial information, and, if accurate, sign the certification. If the information is not accurate, they need to make the required corrections to the financial information.
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Accounting Principles, Sixth Canadian Edition
BYP 1-6 ALL ABOUT YOU
(a) 1. When deciding what kind of summer job I should apply for whether or not I need to work part time during the school year, I need to know exactly what amounts I will have to pay for tuition, books, living expenses, and spending money during college. The rate of pay I can expect to earn is also relevant in my decision, as well as the number of weeks of work I can expect over the summer months. Finally, I would like to assess the financial stability of my employer to ensure continued employment, particularly if I am expecting to continue part-time employment beyond the summer months. 2. In order to decide whether I can afford to buy a second hand car and pay for parking or if I will need to use public transit to get back and forth to college each day, I would need several pieces of financial information to make my comparisons of costs. The relevant information in the purchase and financing of a second hand car include: the actual cost of the car, the insurance costs, the maintenance costs, the price of gas, the value of the car at the end of the school term and the price of parking. Concerning the loan I would have to negotiate to purchase the car, I would need to know the maximum amount I could borrow compared to the cost of the car, the interest rate and the amount of the payments I would need to make after I had obtained the loan. I would also have to consider the financial demands of any other debt I owe when I applied for the car loan. As for the alternative, which is to use public transit, I would need to know the cost of a transit pass for the term I am at college.
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BYP 1-6 (Continued) (a) (Continued) 3. When looking for an employer that is financially stable and has growth potential, it will be useful to have financial information. If the two are public companies, audited financial statements would be a good source of information about the companies’ financial stability and growth potential. (b)
By understanding the financial statements of a business, I will be in a better position to reduce the risks involved in choosing between employers, whether this decision is for after graduation or for summer employment. By studying accounting, I will learn several skills that are relevant in making other financial decisions and making comparisons of costs for alternatives concerning my travel costs while at college.
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Accounting Principles, Sixth Canadian Edition
CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
Brief Exercises
1. Define debits and credits and illustrate how they are used to record transactions.
1, 2, 3, 4, 5, 6, 7
2. Explain the recording process and analyze, journalize, and post transactions. 3. Explain the purpose of a trial balance, and prepare one.
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Exercises
Problems Set A
Problems Set B
1, 2, 3, 4, 5, 6, 8
1, 2, 3, 4
1, 2
1, 2
8, 9, 10, 11, 12, 13, 14, 15
7, 8, 9, 10, 11, 12
1, 4, 5, 6, 7, 8, 9, 10, 11
2, 3, 4, 5, 6, 7, 9
2, 3, 4, 5, 6, 7, 9
16, 17, 18, 19, 20, 21
13, 14
1, 9, 10, 11, 12, 13, 14
4, 5, 6, 7, 8, 9, 10, 11, 12, 13
4, 5, 6, 7, 8, 9, 10, 11, 12, 13
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Difficulty Level
Time Allotted (min.)
Simple
15-20
2A
Identify type of account, financial statement, normal balances,and debits and credits. Perform transaction analysis and journalize transactions.
Simple
15-20
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
Prepare financial statements.
Simple
25-35
9A
Journalize transactions, post,and prepare trial balance.
Moderate
65-75
10A
Prepare financial statements.
Simple
25-35
11A
Prepare trial balance and financial statements.
Simple
35-45
12A
Analyze errors and effects on trial balance.
Moderate
25-35
13A
Prepare correct trial balance.
Complex
30-40
1B
Simple
15-20
2B
Identify type of account, financial statement, normal balances,and debits and credits. Perform transaction analysis and journalize transactions.
Simple
15-20
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
Prepare financial statements.
Simple
25-35
9B
Journalize transactions, post,and prepare trial balance.
Moderate
65-75
10B
Prepare financial statements.
Simple
25-35
Problem Number 1A
Description
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
11B
Prepare trial balance and financial statements.
Simple
35-45
12B
Analyze errors and effects on trial balance.
Moderate
25-35
13B
Prepare correct trial balance.
Complex
30-40
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Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study Objective 1. Define debits and credits and illustrate how they are used to record transactions.
Knowledge Q2-2 Q2-3 BE2-2 BE2-3 BE2-4 E2-1 P2-1A P2-1B
2. Explain the recording process and analyze, journalize, and post transactions.
Q2-10 Q2-11 E2-1
3. Explain the purpose of a trial balance, and prepare one.
Q2-16 E2-1
Broadening Your Perspective
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Comprehension Q2-1 Q2-4 Q2-5 Q2-6 Q2-7 BE2-5 BE2-6 E2-2 E2-3 Q2-8 Q2-9 Q2-12 Q2-13 Q2-14 Q2-15
Q2-17 Q2-18 Q2-19
BYP2-1 BYP2-4
2-4
Application BE2-1 BE2-8 E2-4 P2-2A P2-2B
BE2-7 BE2-9 BE2-11 E2-4 E2-6 E2-8 E2-10 P2-2A P2-3A P2-4A P2-5A P2-6A P2-7A P2-9A Q2-21 E2-9 E2-10 E2-14 P2-4A P2-5A P2-6A P2-7A P2-8A P2-9A P2-10A P2-11A BYP2-2 BYP2-3 BYP2-6
BE2-8 BE2-10 BE2-12 E2-5 E2-7 E2-9 E2-11 P2-2B P2-3B P2-4B P2-5B P2-6B P2-7B P2-9B BE2-13 BE2-14 E2-11 E2-12 P2-4B P2-5B P2-6B P2-7B P2-8B P2-9B P2-10B P2-11B
Analysis
Synthesis
Evaluation
Q2-20 E2-13 P2-12A P2-13A P2-12B P2-13B
BYP2-5
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Accounting Principles, Sixth 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.
Kim is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Whether a debit or credit balance is favourable or unfavourable depends on the type of account being considered. For example, a credit balance would be considered to be favourable for a revenue account and unfavourable for a Cash (asset) account.
5.
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. Thisway the accounting equation remains in balance.
6.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 7.
Jermyn 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.
8.
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.
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 total of the debit and credit amounts must be equal.
11.
The steps in the recording process are the same whether they are performed manually or by a computerized system. The first two steps, the analysis and entering of each transaction, must be done by a person even when a computerized system is used. The first step involves determining what accounts are affected by the transaction and for what amount – this step does not change whether the system is manual or computerized. The second step, entering or journalizing the transaction, must be done by a person. However, in some computerized systems, errors can be prevented by ensuring that both the debit and credit sides of the entry balance before the transaction is accepted by the system. The third step, posting to ledger accounts, can be done automatically by a computerized system. This substantially reduces the possibility of making mistakes, since the accounts identified in the second step are adjusted automatically by the computerized system and for the same amount as recorded. When done manually, this step can lead to errors in posting the amount, posting the amount to the wrong side of the account, posting the amount to the wrong account, or not posting part of a transaction.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 12.
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.
13.
Debits and credits could be recorded directly in the ledger; however, this is not the recommended practice. The advantages of using the journal are: 1. It discloses in one place the complete effect of a transaction. 2. It provides a chronological record of all transactions. 3. It helps to prevent or locate errors, because the debit and credit amounts for each entry can be readily compared. The advantage of the last step in the posting process is to indicate that the item has been posted, and to provide a cross-reference.
14.
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 include 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.
15.
The entire group of accounts 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 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.
16.
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.
Solutions Manual .
2-7
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 17.
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.
18.
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.
19.
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.
20.
(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 as a credit 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).
21.
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.
Solutions Manual .
2-8
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 (a) Type of Account Asset Liability Asset Owner’s Equity Owner’s Equity Asset Liability Asset Owner’s Equity Asset Owner’s Equity Liability
Account 1. Accounts Receivable 2. Accounts Payable 3. Equipment 4. Rent Expense 4. B. Damji, Drawings 6. Supplies 7. Unearned Revenue 8. Cash 9. Service Revenue 10. Prepaid Insurance 11. Utilities Expense 12. Notes Payable
Solutions Manual .
2-9
(b) Normal Balance Debit Credit Debit Debit Debit Debit Credit Debit Credit Debit Debit Credit
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-3
1. Accounts Payable 2. Accounts Receivable 3. Cash 4. Supplies 5. J. Takamoto, Capital 6. J. Takamoto, Drawings 7. Prepaid Rent 8. Rent Expense 9. Service Revenue 10. Unearned Revenue
Solutions Manual .
(a) Normal Balance Credit Debit Debit Debit Credit Debit Debit Debit Credit Credit
2-10
(b) Debit Effect Decrease Increase Increase Increase Decrease Increase Increase Increase Decrease Decrease
(c) Credit Effect Increase Decrease Decrease Decrease Increase Decrease Decrease Decrease Increase Increase
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-4 (a)
(b) Change with Credit
1. Increase in D. Parmelee, Capital
Account Owner’s Equity
2. Decrease in Cash
Asset
Credit
3. Decrease in Notes Payable
Liability
Debit
4. Increase in Rent Expense
Owner’s Equity
Debit
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
Solutions Manual .
2-11
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-5 Transaction 1: Basic Analysis Debit/Credit Analysis
The asset account Cash is decreased by $445. The asset account Supplies is increased by $445. Debits increase assets: debit Supplies $445. Credits decrease assets: credit Cash $445.
Transaction 2: Basic Analysis
Debit/Credit Analysis
The asset account Accounts Receivable is increased by $1,500. The revenue account Service Revenue is increased by $1,500. Debits increase assets: debit Accounts Receivable $1,500. Credits increase revenues: credit Service Revenue $1,500.
Transaction 3: Basic Analysis Debit/Credit Analysis
The asset account Equipment is increased by $2,500. The liability account Accounts Payable is increased by $2,500. Debits increase assets: debit Equipment $2,500. Credits increase liabilities: credit Accounts Payable $2,500.
Transaction 4: Basic Analysis Debit/Credit Analysis
Solutions Manual .
The expense account Utilities Expense is increased by $225. The asset account Cash is decreased by $225. Debits increase expenses: debit Utilities Expense $225. Credits decrease assets: credit Cash $225.
2-12
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-5 (Continued) Transaction 5: Basic Analysis Debit/Credit Analysis
The asset account Cash is increased by $500. The revenue account Service Revenue is increased by $500. Debits increase assets: debit Cash $500. Credits increase revenues: credit Service Revenue $500.
Transaction 6: Basic Analysis Debit/Credit Analysis
The owner’s equity account R. Levine, Drawings is increased by $800. The asset account Cash is decreased by $800. Debits increase drawings: debit R. Levine, Drawings $800. Credits decrease assets: credit Cash $800.
Transaction 7: Basic Analysis Debit/Credit Analysis
The expense account Salaries Expense is increased by $2,200. The asset account Cash is decreased by $2,200. Debits increase expenses: debit Salaries Expense $2,200. Credits decrease assets: credit Cash $2,200.
Transaction 8: Basic Analysis Debit/Credit Analysis
Solutions Manual .
The asset account Cash is increased by $750. The liability account Unearned Revenue is increased by $750. Debits increase assets: debit Cash $750. Credits increase liabilities: credit Unearned Revenue $750.
2-13
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-6 Account Debited (a) (b) Basic Specific Type Account Asset Cash
+ $16,750
4
Asset
+ $3,900
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
Solutions Manual ..
(c) Effect
Account Credited (a) (b) (c) Basic Specific Effect Type Account + $16,750 Owner’s B. Fleming, Equity Capital Asset Cash – $3,900
+ $645
Liability
+ $950
+ $875
Owner’s Equity Owner’s Equity Asset
Accounts Payable Service Revenue Service Revenue Cash
+ $700
Asset
Cash
+ $1,500
2-14
+ $645 + $950 + $1,500 – $875 – $700
Chapter 2 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-7 (1)
This transaction should be recorded. The asset account Accounts Receivable is increased and the revenue account Service Revenue is also increased. Revenue is recorded when the service is performed, regardless of when the cash is received.
(2)
This transaction should be recorded. The asset account Cash is increased and the asset account Accounts Receivable is decreased. This transaction represents an exchange of assets. Service Revenue is not recorded again since it was recorded when the service was performed.
(3)
This transaction is not recorded. No asset, liability, owner’s equity, revenue or expense account is affected. The balance owing by the customer, Accounts Receivable, was recorded when the service was performed.
Solutions Manual .
2-15
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-8 Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis
Solutions Manual .
The asset account Cash is increased by $9,500. The owner’s equity account T. Pridham, Capital is increased by $9,500. Debits increase assets: debit Cash 9,500. Credits increase owner’s equity: credit T. Pridham, Capital $9,500. June 1 Cash 9,500 T. Pridham, Capital 9,500 Invested cash in business. The asset account Equipment is increased by $3,000. The liability account Accounts Payable is increased by $3,000. Debits increase assets: debit Equipment $3,000. Credits increase liabilities: credit Accounts Payable $3,000. June 2 Equipment 3,000 Accounts Payable 3,000 Purchased equipment on account. June 5: 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, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-8 (Continued) Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
The asset account Accounts Receivable is increased by $1,975. The revenue account Service Revenue is increased by $1,975. Debits increase assets: debit Accounts Receivable $1,975. Credits increase revenues: credit Service Revenue $1,975. June 17 Accounts Receivable 1,975 Service Revenue 1,975 Performed services on account for R. Windl.
The asset account Cash is increased by $1,000. The asset account Accounts Receivable is decreased by $1,000. Debits increase assets: debit Cash $1,000. Credits decrease assets: credit Accounts Receivable $1,000. June 27 Cash 1,000 Accounts Receivable 1,000 Collected cash on account from R. Windl.
The liability account Accounts Payable is decreased by $3,000. The asset account Cash is decreased by $3,000. Debits decrease liabilities: debit Accounts Payable $3,000. Credits decrease assets: credit Cash $3,000. June 29 Accounts Payable 3,000 Cash 3,000 Paid for equipment purchased on June 2.
2-17
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
Accounting Principles, Sixth Canadian Edition
The expense account Salaries Expense is increased by $1,800. The asset account Cash is decreased by $1,800. Debits increase expenses: debit Salaries Expense $1,800. Credits decrease assets: credit Cash $1,800. June 30 Salaries Expense 1,800 Cash 1,800 Paid employee for one-half of a a month’s work
2-18
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-9 Aug 31
31
31
31
31
31
31
31
Solutions Manual .
Supplies ............................................... Cash ................................................
445 445
Accounts Receivable .......................... 1,500 Service Revenue .............................
1,500
Equipment ........................................... 2,500 Accounts Payable...........................
2,500
Utilities Expense ................................. Cash ................................................
225
Cash ..................................................... Service Revenue .............................
500
R. Levine, Drawings ............................ Cash ................................................
800
225
500
800
Salaries Expense................................. 2,200 Cash ................................................ Cash ..................................................... Unearned Revenue .........................
2-19
2,200
750 750
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-10 Aug
1
4
5
6
17
27
29
Solutions Manual .
Cash ..................................................... 16,750 B. Fleming, Capital .........................
16,750
Prepaid Rent........................................ 3,900 Cash ................................................
3,900
Supplies ............................................... Accounts Payable...........................
645
Cash ..................................................... Service Revenue .............................
950
645
950
Accounts Receivable .......................... 1,500 Service Revenue ............................. Salaries Expense................................. Cash ................................................
875
B. Fleming, Drawings.......................... Cash ................................................
700
2-20
1,500
875 700
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-11 Aug. 1 6 Bal.
Cash 16,750 Aug. 4 950 27 29 12,225
B. Fleming, Capital Aug. 1 16,750
3,900 875 700
Bal.
16,750
Accounts Receivable Aug. 17 1,500
B. Fleming, Drawings Aug. 29 700
Bal.
1,500
Bal.
Aug. 4
Prepaid Rent 3,900
Bal.
3,900
700 Service Revenue Aug. 6 17 Bal.
Aug. 5
Supplies 645
Salaries Expense Aug. 27 875
Bal.
645
Bal.
Accounts Payable Aug. 5 Bal.
Solutions Manual .
950 1,500 2,450
875
645 645
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-12
Sept.10 28
Cash 1,050 Sept.14 1,325 15 30
95 850 450
Accounts Payable Sept. 30 450 Sept. 4
750
Sept. 30 Bal. 300
Sept. 30 Bal. 980
Service Revenue Sept. 2 10
Accounts Receivable Sept. 2 2,275 Sept. 28 1,325
Sept.30
Sept.30 Bal. 950
Sept. 4
Supplies 750
Sept. 30 Bal. 750
2,275 1,050 Bal.3,325
Salaries Expense Sept. 15 850 Sept. 30 Bal. 850
Utilities Expense Sept. 14 95 Bal. 95
Solutions Manual .
2-22
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-13 PETTIPAS COMPANY Trial Balance April 30, 2014 Debit Cash ............................................................... Accounts receivable ..................................... Supplies ......................................................... Prepaid rent ................................................... Equipment ..................................................... Accounts payable.......................................... Unearned revenue ......................................... C. Pettipas, capital ........................................ C. Pettipas, drawings .................................... Service revenue............................................. Rent expense................................................. Salaries expense ...........................................
Solutions Manual .
2-23
Credit
$6,400 5,000 650 800 14,600 $ 3,300 250 22,500 1,100 8,000 4,500 1,000 $34,050
$34,050
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 2-14 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, 2014
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, Kinnear
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 2-1 (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, Kinnear
Accounting Principles, Sixth Canadian Edition
EXERCISE 2-2 (a) Account Cash M. Kobayashi, Capital
(1) Type of Account Asset Owner’s Capital
Accounts Payable Building Fees Earned Insurance Expense Interest Revenue M. Kobayashi, Drawings
Liability Asset Revenue Expense Revenue Drawings
Notes Receivable Prepaid Insurance Rent Expense Supplies
Asset Asset Expense Asset
(2) Financial Statement Balance Sheet Balance Sheet and Statement of Owner’s Equity Balance Sheet Balance Sheet Income Statement Income Statement Income Statement Statement of Owner’s Equity Balance Sheet Balance Sheet Income Statement Balance Sheet
(3) Normal Balance Debit Credit
Credit Debit Credit Debit Credit Debit Debit Debit Debit Debit
(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, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-3 (a) TransBasic action Type Mar. 3 Asset
Account Debited (c) (b) Specific Effect Account Cash + $10,000
Account Credited (c) (a) (b) Basic Specific Effect Type Account Owner’s J. MacKenzie, +$10,000 Equity Capital Liability +$10,000 Notes Payable Asset Cash – $9,500 Liability + $1,500 Accounts Payable + $2,100 Owner’s Service Equity Revenue Asset Cash – $525
4 Asset
Cash
+ $10,000
6 Asset 7 Asset
Vehicles Supplies
+ $9,500 + $1,500
12 Asset
Accounts Receivable Advertising Expense Cash
+ $2,100
+ $1,200
Asset
– $1,500
Asset
30 Asset
Accounts Payable Cash
+ $750
Liability
31 Owner’s Equity
J. MacKenzie, Drawings
+ $1,400
Asset
21 Owner’s Equity 25 Asset 28 Liability
Solutions Manual .
+ $525
2-27
Accounts Receivable Cash
– $1,200
Unearned Revenue Cash
+ $750
– $1,500
– $1,400
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-4 Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
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. 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 ofinsurance. 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.
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-4 (Continued) Basic Analysis
June 9: An accounting transaction has not occurred. A debit/credit analysis is not needed because there is no accounting entry.
Basic Analysis
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.
Debit/Credit Analysis Journal Entry
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.
2-29
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-4 (Continued) Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis Debit/Credit Analysis Journal Entry
Basic Analysis Debit/Credit Analysis Journal Entry
Solutions Manual .
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. 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. 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.
2-30
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-4 (Continued) 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.
2-31
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-5 GENERAL JOURNAL Date Mar.
Account Titles and Explanation
J1 Debit
Credit
3 Cash ......................................................... 10,000 J. MacKenzie, Capital ........................
10,000
4 Cash ......................................................... 10,000 Notes Payable ....................................
10,000
6
Vehicles................................................... 9,500 Cash....................................................
7 Supplies .................................................. Accounts Payable .............................. 12
25
1,500
525
1,500 750
31 J. MacKenzie, Drawings ......................... Cash....................................................
1,400
2-32
1,200
1,500
Cash ........................................................ Unearned Revenue ............................
Solutions Manual .
2,100
525
Cash ........................................................ 1,200 Accounts Receivable .........................
28 Accounts Payable .................................. Cash.................................................... 30
1,500
Accounts Receivable ............................. 2,100 Service Revenue ................................
21 Advertising Expense .............................. Cash....................................................
9,500
750 1,400
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-6 GENERAL JOURNAL Trans. Account Titles and Explanation Ref. (a) and (b) 1.
Debit
Credit
Cash ............................................................ 1,785 Service Revenue ................................
1,785
Revenues increase owner’s equity. 2.
Rent Expense ......................................... Cash....................................................
965 965
Expenses decrease owner’s equity. 3.
Supplies .................................................. Accounts Payable ..............................
480 480
Owner’s equity is not affected by this transaction. 4.
Accounts Receivable .................................. 2,160 Service Revenue ................................
2,160
Revenues increase owner’s equity. 5.
Cash ............................................................ 1,000 Accounts Receivable .........................
1,000
Owner’s equity is not affected by this transaction. 6.
Cash ............................................................ 5,000 Notes payable ...................................
5,000
Owner’s equity is not affected by this transaction.
Solutions Manual .
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-6 (Continued) (a) and (b) (Continued) 7.
Equipment ................................................... 5,000 Cash....................................................
5,000
Owner’s equity is not affected by this transaction. 8.
Cash ........................................................ Unearned Revenue ............................
800 800
Owner’s equity is not affected by this transaction. 9.
Prepaid Advertising .............................. Cash....................................................
850 850
Owner’s equity is not affected by this transaction. 10.
Accounts Payable .................................. Cash....................................................
480 480
Owner’s equity is not affected by this transaction. 11.
S. Beaulieu, Drawings ................................ 1,565 Cash....................................................
1,565
Drawings reduce owner’s equity. (c) Owner’s equity, beginning balance .................. $8,050 Transaction 1, revenue...................................... 1,785 Transaction 2, expenses ................................... (965) Transaction 4, revenue...................................... 2,160 Transaction 11, drawings.................................. (1,565) Owner’s equity, ending balance ....................... $9,465
Solutions Manual .
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-7 GENERAL JOURNAL Date Oct.
Account Titles and Explanation Ref. 1
Debit
Cash ........................................................ 14,000 Equipment............................................... 3,000 S. Polland, Capital ............................. 17,000
2 Prepaid Insurance .................................. Cash....................................................
1,200
3
Equipment............................................... Cash.................................................... Notes Payable ....................................
4,450
10 Cash ........................................................ Service Revenue ................................
350
16
1,200 850 3,600
350
Accounts Receivable ............................. Service Revenue ................................
7,500
27 Advertising Expense .............................. Cash....................................................
700
29
Telephone Expense................................ Accounts Payable ..............................
95
30 Salaries Expense.................................... Cash....................................................
2,000
31
7,500
Solutions Manual .
Credit
Cash ........................................................ Accounts Receivable .........................
2-35
7,500
700
95
2,000 7,500
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-8 Cash Oct. 1 14,000 Oct.2 1,200 10 350 3 850 31 7,500 27 700 30 2,000 Oct.31Bal.17,100
S.Polland, Capital Oct. 1 17,000
Accounts Receivable Oct. 16 7,500 Oct. 31 7,500
Service Revenue Oct. 10 350 16 7,500 Oct. 31 Bal. 7,850
Oct. 31 Bal.
0
Oct. 31Bal. 17,000
Prepaid Insurance Oct. 2 1,200 Oct.31Bal. 1,200
Equipment Oct. 1 3,000 3 4,450 Oct.31 Bal. 7,450
Notes Payable Oct. 3
Salaries Expense Oct. 30 2,000 Oct.31Bal.2,000
Advertising Expense 3,600 Oct. 27 700
Oct.31 Bal 3,600 Oct. 31 Bal. 700
Accounts Payable Oct. 29 Oct.31 Bal.
Solutions Manual .
Telephone Expense 95 Oct. 29 95 95 Oct. 31 Bal. 95
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-9 (a)
GENERAL JOURNAL
Date Oct.
Account Titles and Explanation
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 credit.
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 for credit.
940
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-9 (Continued) (a) (Continued) GENERAL JOURNAL Date
Account Titles and Explanation
J1 Debit
Credit
20 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 .................................. Cash...................................................... Withdrew cash for personal use.
600 600
31 Rent Expense ........................................... Cash...................................................... Paid rent.
250
31 Salaries Expense ......................................... 500 Cash...................................................... Paid salaries.
Solutions Manual .
2-38
250
500
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-9 (Continued)
(b) FORTIN CO. Trial Balance October 31, 2014
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
Solutions Manual .
2-39
Credit
$ 5,000 700 3,200 5,590
$14,490
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-10 (a) and (b) Cash Aug. 1 8,800 Aug. 1 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. 585
Aug.
Equipment 15,550
1
L. Meche, Drawings Aug. 1 5,125 31 4,770 Aug.31 Bal. 9,895
Supplies 585
1
15,000
Aug. 31 Bal. 15,000
Accounts Receivable Aug. 1 2,750 Aug. 12 2,400 31 2,550 Aug. 31 Bal.2,900
Aug.
L. Meche, Capital Aug. 1
Fees Earned Aug. 1 10,410 31 8,460 Aug.31Bal.18,870 Rent Expense Aug. 1 1,200 1 1,200 Aug.31 Bal. 2,400
Aug.31 Bal. 15,550
Notes Payable Aug. 30 500 Aug. 1 10,000
Salaries Expense Aug. 1 2,250 25 2,250 Aug. 31 Bal. 9,500 Aug.31 Bal.4,500
Accounts Payable Aug. 10 420 Aug. 1
Interest Expense 850 Aug.30 40
Aug. 31 Bal. 430 Aug.31
Solutions Manual .
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Bal. 40
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-10 (Continued) (c) LEE MECHE, MD Trial Balance August 31, 2014
Cash ............................................................ Accounts receivable .................................. Supplies ...................................................... Equipment................................................... Notes payable ............................................. Accounts payable....................................... L. Meche, capital......................................... L. Meche, drawings .................................... Fees earned ................................................ Interest expense ......................................... Rent expense.............................................. Salaries expense ........................................
Solutions Manual .
2-41
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, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-11 (a)
GENERAL JOURNAL Date May
Account Titles and Explanation 2
J1 Debit
Rent Expense ........................................... 1,200 Cash......................................................
4 Supplies .................................................... Accounts Payable ................................
700
15 Accounts Payable .................................... Cash......................................................
800
31
Credit
1,200
700
800
Salary expense ......................................... 1,800 Cash......................................................
1,800
31 Cash .......................................................... 9,500 Accounts Receivable ............................... 500 Service Revenue ..................................
10,000
(b) Cash Accounts Payable May 1 6,000 May 2 1,200 May 1 800 31 9,500 May 4 700 15 800 31 1,800 May 15 800 May31 Bal. 11,700 May 31 Bal.700 Notes Payable May 1 50,000 May 31Bal. 50,000
Accounts Receivable May 31 500 May 31 Bal. 500
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-11 (Continued) (b) (Continued) Supplies 1,000
S. Ahuja, Capital May 1 21,200
May 1 May 4700 May 31 Bal. 1,700
May
May31Bal. 21,200
Equipment 65,000
1
Service Revenue May 3110,000
May31Bal. 65,000
May 2
May 31Bal.10,000
Rent Expense 1,200
May31Bal.
Salaries Expense May 31 1,800 May31Bal.1,800
1,200
(c)
AHUJA DENTAL SERVICES Trial Balance May 31, 2014
Debit Cash ............................................................ $11,700 Accounts receivable .................................. 500 Supplies ...................................................... 1,700 Equipment................................................... 65,000 Notes payable ............................................. Accounts payable....................................... S. Ahuja, capital.......................................... Service revenue.......................................... Rent expense.............................................. 1,200 Salaries expense ........................................ 1,800 $81,900
Solutions Manual .
2-43
Credit
$50,000 700 21,200 10,000
$81,900
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-11 (Continued)
(d) AHUJA DENTAL SERVICES Income Statement Month Ended May 31, 2014 Revenues Service revenue ...................................................... $10,000 Expenses Rent expense...............................................$1,200 Salaries expense...................................... 1,800 Total expenses ................................................. 3,000 Profit ............................................................................... $7,000
AHUJA DENTAL SERVICES Statement of Owner's Equity Month Ended May 31, 2014 S. Ahuja, capital, May 1, 2014 ................................... Add: Profit .............................................................. S. Ahuja, capital, May 31, 2014 .................................
Solutions Manual .
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$21,200 7,000 $28,200
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-11 (Continued)
(d) (Continued) AHUJA DENTAL SERVICES Balance Sheet May 31, 2014 Assets Cash ........................................................................... $11,700 Accounts receivable ................................................. 500 Supplies ..................................................................... 1,700 Equipment.................................................................. 65,000 Total assets........................................................... $78,900 Liabilities and Owner's Equity Liabilities Notes payable.......................................................... $50,000 Accounts payable ................................................. 700 Total liabilities ........................................................... 50,700 Owner's Equity S. Ahuja, capital ...................................................... 28,200 Total liabilities and owner's equity .................... $78,900
Solutions Manual .
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-12 (a) O’NEILL’S PHYCHOLOGICAL SERVICES Trial Balance July 31, 2014
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 ....................................
Solutions Manual .
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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
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-12 (Continued)
(b) O’NEILL’S PSYCHOLOGICAL SERVICES Income Statement Year Ended July 31, 2014 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, 2014 T. O’Neill, capital, Aug. 1, 2013................................. Add: Profit .............................................................. Less: Drawings......................................................... T. O’Neill, capital, July 31, 2014................................
Solutions Manual .
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$64,340 33,800 98,140 57,980 $40,160
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-12 (Continued)
(b) (Continued) O’NEILL’S PSYCHOLOGICAL SERVICES Balance Sheet July 31, 2014 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
Solutions Manual .
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Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-13
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
Solutions Manual .
(b)
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(d) Incorrect Accounts Accounts Payable
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles,Sixth Canadian Edition
EXERCISE 2-14 ROYALMOUNTAIN TOURS Trial Balance March 31, 2014
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
Solutions Manual .
2-50
Credit
$ 2,900 24,000 7,520
$34,420
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 2-1A
Account Accounts Payable Accounts Receivable Building Cash Equipment Insurance Expense Interest Revenue Land Fees Earned M. Brock, Capital
(a) Type of Account Liability Asset Asset Asset Asset Expense Revenue Asset Revenue Owner’s Capital
M. Brock, Drawings
Drawings
Notes Receivable Prepaid Insurance Rent Expense
Asset Asset Expense
Solutions Manual ..
(b) Financial Statement Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Income Statement Income Statement Balance Sheet Income Statement Balance Sheet and Statement of Owner’s Equity Statement of Owner’s Equity Balance Sheet Balance Sheet Income Statement
2-51
(c) Normal Balance Credit Debit Debit Debit Debit Debit Credit Debit Credit Credit
(d)
(e)
Increase Credit Debit Debit Debit Debit Debit Credit Debit Credit Credit
Decrease Debit Credit Credit Credit Credit Credit Debit Credit Debit Debit
Debit
Debit
Credit
Debit Debit Debit
Debit Debit Debit
Credit Credit Credit
Chapter 2 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-1A (Continued)
Account Rent Revenue Salaries Expense Salaries Payable Supplies Supplies Expense Unearned Revenue
(a) Type of Account Revenue Expense Liability Asset Expense Liability
(b) Financial Statement Income Statement Income Statement Balance Sheet Balance Sheet Income Statement Balance Sheet
(c) Normal Balance Credit Debit Credit Debit Debit Credit
(d)
(e)
Increase Credit Debit Credit Debit Debit Credit
Decrease Debit Credit Debit Credit Credit Debit
Taking It Further The term debit indicates left and the term credit indicates right. The normal balance of the account represents its position in the accounting equation. Assets have a normal debit balance because they represent the left side of the accounting equation. Therefore transactions that increase assets are reflected by an increase (a debit) to an asset account. Conversely, liabilities and owner’s equity accounts have a normal credit balance because they represent the right side of the accounting equation. Revenues and expenses represent changes in the owner’s equity account. Revenues increase owner’s equity and therefore increase the right side of the accounting equation; revenues have a normal credit balance. Expenses reduce owner’s equity and increases in expenses reduce the right side of the accounting equation; expenses have a normal debit balance.
Solutions Manual ..
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Chapter 2 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-2A (a)
Basic Type Asset
Account Debited (2) Specific Account Cash
2
Owner’s Equity Asset
Insurance Expense Equipment
+ $5,000
Liability
3
Asset
Supplies
+ $435
7
Owner’s Equity
Advertising Expense
8
Asset
Cash
(1) Transaction Apr. 1 2
10
Solutions Manual ..
(3) Effect + $13,500 + $115
Account Credited (1) (2) (3) Specific Basic Type Effect Account + $13,500 Owner’s J. Barr, Equity Capital Asset Cash – $115 +$5,000
Asset
Accounts Payable Cash
+ $870
Asset
Cash
– $870
+ $750
Owner’s Equity
Service Revenue
+ $750
– $435
No transaction at this point in time (see Apr. 25).
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-2A (Continued) (a) (Continued)
Basic Type
Account Debited (2) Specific Account
Effect
25
Asset
Cash
+ $1,500
Owner’s Equity
Service Revenue
+ $1,500
28
Owner’s Equity
J. Barr, Drawings
+ $975
Asset
Cash
– $975
29
Asset
Cash
+ $1,250
Liability
+ $1,250
30
Liability
Accounts Payable
– $5,000
Asset
Unearned Revenue Cash
(1) Transaction
Solutions Manual ..
(3)
2-54
Account Credited (1) (2) Specific Basic Type Account
(3) Effect
– $5,000
Chapter 2 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-2A (Continued) (b)
GENERAL JOURNAL
Date Apr.
Account Titles and Explanation 1
Debit
Cash ....................................................... 13,500 J. Barr, Capital ..................................
2 Insurance Expense................................ Cash...................................................
115
2 Equipment.............................................. Accounts Payable .............................
5,000
3
Credit
13,500
115
5,000
Supplies ................................................. Cash...................................................
435
7 Advertising Expense ............................. Cash...................................................
870
8 Cash ....................................................... Service Revenue ...............................
750
435
870
750
10 No transaction at this time. 25 Cash ....................................................... Service Revenue ............................... 28
1,500 1,500
J. Barr, Drawings................................... Cash...................................................
975
Cash ....................................................... Unearned Revenue ...........................
1,250
30 Accounts Payable ................................. Cash...................................................
5,000
29
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975
1,250 5,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-2A (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, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-3A GENERAL JOURNAL Date May
Account Titles and Explanation 1
Debit
Cash ...................................................... 75,000 A. Mawani, Capital ...........................
Credit
75,000
2 Land ...................................................... 120,000 Building................................................. 80,000 Equipment............................................. 50,000 Cash.................................................. 60,000 Notes Payable ($250,000 – $60,000) 190,000 4
Equipment............................................. 16,000 Accounts Payable ............................
16,000
5 No entry required. 6 Prepaid Insurance ................................ Cash..................................................
2,760
15 Cash ...................................................... Fees Earned .....................................
2,000
19 Accounts Payable ................................ Cash..................................................
5,000
20 Cash ...................................................... Accounts Receivable ........................... Fees Earned .....................................
500 1,000
30
1,000
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Cash ...................................................... Accounts Receivable .......................
2-57
2,760
2,000
5,000
1,500 1,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-3A (Continued) Date
Account Titles and Explanation
Debit
May 31 Cash ...................................................... Fees Earned .....................................
4,000
31 Salaries Expense.................................. Cash..................................................
2,480
31 Interest Expense.................................. Cash..................................................
715
31 A. Mawani, Drawings............................ Cash..................................................
1,750
Credit
4,000
2,480
715 1,750
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. Amin 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 well as financial statements.
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PROBLEM 2-4A (a)
GENERAL JOURNAL
Date
Account Titles and Explanation Ref.
Sept. 1
Debit
Cash ............................................ 101 G. Rodewald, Capital ............. 301
9,000
1 Rent Expense ............................. 726 Cash........................................ 101
650
2 Prepaid Insurance ...................... 130 Cash........................................ 101
720
3
9,000
650
720
Equipment................................... 151 Accounts Payable .................. 201
2,500
6 Advertising Expense .................. 610 Cash........................................ 101
450
15
Cash ............................................ 101 Service Revenue .................... 400
500
19 Accounts Receivable ................. 112 Service Revenue .................... 400
700
24
Cash ............................................ 101 Accounts Receivable ............. 112
500
25 Utilities Expense......................... 737 Cash........................................ 101
175
26 Accounts Payable ...................... 201 Cash........................................ 101
1,500
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Credit
2,500
450
500
700
500
175 1,500
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4A (Continued) (a) (Continued) Date
Account Titles and Explanation Ref.
Sept. 29
Debit
Credit
Cash ............................................ 101 Unearned Revenue ................ 209
850
Cash ............................................ 101 Service Revenue .................... 400
975
30 G. Rodewald, Drawings.............. 306 Cash........................................ 101
1,350
30
850
975
1,350
(b) Cash Date
Explanation
Sept. 1 1 2 6 15 24 25 26 29 30 30
Date
Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1 J1 J1
Debit 9,000
J1 J1
1,350
9,000 8,350 7,630 7,180 7,680 8,180 8,005 6,505 7,355 8,330 6,980
Credit
No. 112 Balance
500
700 200
650 720 450 500 500 175 1,500 850 975
Accounts Receivable Explanation Ref. Debit
Sept. 19 24
Credit
No. 101 Balance
700
PROBLEM 2-4A (Continued) Solutions Manual .
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
(b) (Continued)
Date
Prepaid Insurance Explanation Ref.
Debit
J1
720
720
Ref.
Debit
No. 151 Balance
J1
2,500
2,500
Debit
No. 201 Balance
Sept. 2
Credit
Equipment Date Sept. 3
Date Sept. 3 26
Date Sept. 29
Date Sept. 1
Date Sept. 30
Solutions Manual .
Explanation
Accounts Payable Explanation Ref. J1 J1 Unearned Revenue Explanation Ref.
1,500
2,500 1,000
Debit
Credit
No. 209 Balance
850
850
Credit
No. 301 Balance
9,000
9,000
Credit
No. 306 Balance
G. Rodewald, Capital Explanation Ref. Debit J1 G. Rodewald, Drawings Explanation Ref. Debit
2-61
Credit 2,500
J1
J1
Credit
No. 130 Balance
1,350
1,350
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4A (Continued) (b) (Continued)
Date Sept. 15 20 30
Date Sept. 6
Date Sept. 1
Date Sept. 25
Solutions Manual .
Service Revenue Explanation Ref.
Debit
J1 J1 J1 Advertising Expense Explanation Ref. J1
Debit
Credit
No. 400 Balance
500 700 975
500 1,200 2,175
Credit
No. 610 Balance
450
450
Rent Expense Explanation Ref.
Debit
No. 726 Balance
J1
650
650
Utilities Expense Explanation Ref.
Debit
No. 737 Balance
J1
175
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Credit
Credit
175
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4A (Continued) (c) GRETE KANINES Trial Balance September 30, 2014 Debit Cash............................................................. Accounts receivable................................... Prepaid insurance....................................... Equipment ................................................... Accounts payable ....................................... Unearned revenue ...................................... G. Rodewald, capital................................... G. Rodewald, drawings .............................. Service revenue .......................................... Advertising expense................................... Rent expense .............................................. Utilities expense .........................................
Credit
$6,980 200 720 2,500 $1,000 850 9,000 1,350 2,175 450 650 175 $13,025
$13,025
Taking It Further While Grete is correct in making the connection that transactions recorded to the investments, drawings, revenue and expense accounts ultimately have a direct 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 detail information is relevant and necessary to the users of the financial statement.
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PROBLEM 2-5A (a)
GENERAL JOURNAL
Date May
Account Titles and Explanation 1 Cash .................................................... Equipment........................................... J. Abramson, Capital .....................
Debit
Credit
40,000 10,000 50,000
1 No entry—not a transaction. 2 Prepaid Insurance .............................. Cash................................................
3,300
5 Rent Expense ..................................... Prepaid Rent ....................................... Cash................................................
2,400 2,400
8
Equipment........................................... Cash................................................ Notes Payable ................................
17,000
Supplies .............................................. Cash................................................
500
Supplies .............................................. Accounts Payable ..........................
750
17 Accounts Receivable ......................... Service Revenue ............................
3,000
22 Telephone Expense............................ Cash................................................
250
25 Cash .................................................... Service Revenue ............................
1,100
9
15
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3,300
4,800 7,000 10,000
500
750
3,000
250 1,100
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-5A (Continued) (a) (Continued) Date
Account Titles and Explanation
May 26 J. Abramson, Drawings...................... Cash................................................ 28
Debit
Credit
1,600 1,600
Cash .................................................... Accounts Receivable .....................
2,500
30 Accounts Payable .............................. Cash................................................
750
30 Interest Expense................................. Cash................................................
50
31
Cash .................................................... Unearned Revenue ........................
500
31 Salaries Expense................................ Cash................................................
2,475
2,500
750
50
500
2,475
(b) Cash May 1 25 28 31
40,000 1,100 2,500 500
Bal.
23,375
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May 2 3,300 5 4,800 8 7,000 9 500 22 250 26 1,600 30 750 30 50 31 2,475
2-65
Accounts Receivable May 17 3,000 May 28 2,500
Bal.
500
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PROBLEM 2-5A (Continued) (b) (Continued)
May 9 15 Bal.
Supplies 500 750 1,250
J. Abramson, capital May 1 50,000 Bal.
Prepaid Insurance May 2 3,300 Bal. 3,300
May 5
Prepaid Rent 2,400
Bal.
2,400
May 1 8 Bal.
Notes payable May 8 Bal. Account Payable May 30 750 May 15 Bal.
Solutions Manual .
J. Abramson, drawings May 26 1,600 Bal. 1,600 Service Revenue May 17 3,000 25 1,100 Bal. 4,100
Equipment 10,000 17,000 27,000 Unearned revenue May 31 Bal.
50,000
Interest Expense May 30 50 Bal.
500 500
50
Rent Expense May 5 2,400 Bal. 2,400
10,000 10,000
Salaries Expense May 31 2,475 Bal. 2,475
750 0
Telephone Expense May 22 250 Bal. 250
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PROBLEM 2-5A (Continued) (c) ABRAMSON FINANCIAL SERVICES Trial Balance May 31, 2014 Debit Cash............................................................. $23,375 Accounts receivable................................... 500 Supplies ...................................................... 1,250 Prepaid insurance....................................... 3,300 Prepaid rent................................................. 2,400 Equipment ................................................... 27,000 Unearned revenue ...................................... Notes payable ............................................. J. Abramson, capital................................... J. Abramson, drawings .............................. 1,600 Service revenue .......................................... Interest expense ......................................... 50 Rent expense .............................................. 2,400 Salaries expense......................................... 2,475 Telephone expense .................................... 250 $64,600
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Credit
$ 500 10,000 50,000 4,100
$64,600
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-5A (Continued) Taking It Further This is not true. The cash account shows an increase of $23,375 during the month of May, whereas the company shows a loss of $1,075 for the month ($4,100 – $50 – $2,400 – $2,475 – $250). 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 $40,000. 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 revenue of $500) and performed services in advance of payment (accounts receivable of $500), as well as making non-expense payments for services in advance (prepaid rent and insurance), payments for equipment and for 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 2-6A (a) GENERAL JOURNAL Date July
Account Titles and Explanation 1
Film Rental Expense ......................... Cash............................................... Accounts Payable.........................
Debit
Credit
25,000 10,000 15,000
2 No entry—not a transaction. 3 Advertising Expense ......................... Cash...............................................
1,150
14
Cash ................................................... Admission Revenue .....................
35,600
15 Accounts Payable ............................. Cash...............................................
15,000
16 Film Rental Expense ......................... Cash............................................... Accounts Payable.........................
30,000
27 Accounts Payable ............................. Cash...............................................
5,000
30 Salaries Expense............................... Cash...............................................
6,200
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1,150
35,600
15,000 15,000 15,000
5,000 6,200
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PROBLEM 2-6A (Continued) (a) (Continued) Date
Account Titles and Explanation
Debit
July 31 Cash ................................................... Accounts Receivable ........................ Concession Revenue ................... 31
Credit
2,500 1,595 4,095
Cash ................................................... Admission Revenue .....................
42,400
31 Mortgage Payable ............................. Interest Expense ............................... Cash...............................................
1,250 475
42,400
1,725
(b) and (c) Cash Date July
Explanation 1 Balance 1 3 14 15 16 27 30 31 31 31
Date
Ref. Debit
Balance 17,000 10,000 7,000 1,150 5,850 35,600 41,450 15,000 26,450 15,000 11,450 5,000 6,450 6,200 250 2,500 2,750 42,400 45,150 1,725 43,425
Accounts Receivable Explanation Ref. Debit
July 31
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1,595
2-70
Credit
Credit
Balance 1,595
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6A (Continued) (b) and (c) (Continued) Land Date July
Explanation
Ref.
Debit
Credit
1 Balance
Balance 80,000
Buildings Date July
Explanation
Ref.
Debit
Credit
1 Balance
Balance 70,000
Equipment Date July
Explanation
Accounts Payable Explanation Ref.
July
July
Debit
15,000 5,000
Debit
Credit
1 Balance
2-71
Balance 5,000 20,000 5,000 20,000 15,000
Balance 118,000 116,750
1,250
N. Fedkovych, Capital Explanation Ref. Debit
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Credit
15,000
1 Balance 31
Balance 20,000
15,000
Mortgage Payable Explanation Ref.
Date
Credit
1 Balance 1 15 16 27
Date
Debit
1 Balance
Date July
Ref.
Credit
Balance 64,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6A (Continued) (b) and (c) (Continued) Admission Revenue Explanation Ref.
Date
Debit
July 14 31 Concession Revenue Explanation Ref. Debit
Date July 31
Advertising Expense Explanation Ref.
Date July
3
July
1 16
Date
Interest Expense Explanation Ref.
35,600 78,000
Credit
Balance
4,095
4,095
Credit
Balance
Debit
1,150
Credit
Debit
Salaries Expense Explanation Ref.
Debit 6,200
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Balance 25,000 55,000
Credit
475
July 30
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35,600 42,400
25,000 30,000
July 31
Date
Balance
1,150 Film Rental Expense Explanation Ref.
Date
Debit
Credit
Balance 475
Credit
Balance 6,200
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6A (Continued) (d) SEQUEL THEATRE Trial Balance July 31, 2014 Debit Cash ....................................................... Accounts receivable ............................. Land........................................................ Buildings ................................................ Equipment .............................................. Accounts payable .................................. Mortgage payable .................................. N. Fedkovych, capital ............................ Admission revenue................................ Concession revenue.............................. Advertising expense.............................. Film rental expense ............................... Interest expense .................................... Salaries expense ...................................
Credit
$43,425 1,595 80,000 70,000 20,000 $15,000 116,750 64,000 78,000 4,095 1,150 55,000 475 6,200 $277,845 $277,845
Taking It Further The revenues less the expense in the trial balance show a profit for the month of July of $19,270 ($78,000 + $4,095– $1,150 – $55,000 – $475 – $6,200). 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 2-7A (b)
GENERAL JOURNAL
Date Dec.
Account Titles and Explanation 1
1
Debit
Rent Expense .......................................... Cash.....................................................
Credit
475 475
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 ..........................
7 Insurance Expense.................................. Cash.....................................................
310
8
150
Supplies ................................................... Cash.....................................................
310
150
10 Accounts Payable ................................... 2,130 Cash..................................................... 15
20
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Unearned Revenue .................................. Fees Earned ........................................
2,130
825
Cash ......................................................... 3,300 Fees Earned ........................................
2-74
1,800
825 3,300
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PROBLEM 2-7A (Continued) (b) (Continued) Dec. 21 Telephone Expense................................. Cash..................................................... 22
135 135
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) Dec. 1 3 4 20 29
Bal.
Cash 2,965 Dec. 1 2,500 1 1,800 4 3,300 7 525 8 10 21 24 30 31 485
Dec. 1 22 Bal.
475 1,500 2,000 310 150 2,130 135 3,000 695 210
2,200 Dec. 4 2,250 2,650
1,800
Supplies Dec. 1 1,450 15 150 Bal. 1,600
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PROBLEM 2-7A (Continued) (a) and (c) (Continued) Fees Earned Dec. 1 15 20 22 Bal.
Equipment Dec. 1 17,500 1 3,500 Bal. 21,000 Notes Payable Dec. 31 200 Dec. 3 Bal.
Insurance Expense Dec. 1 3,410 7 310 Bal. 3,720
2,500 2,300
Accounts Payable Dec. 4 2,000 Dec. 1 4,235 10 2,130 1 2,000 Bal. 2,105 Unearned Revenue Dec. 15 825 Dec. 1 29 Bal.
47,075 825 3,300 2,250 53,450
Rent Expense Dec. 1 5,225 1 475 Bal. 5,700
825 525 525
Telephone Expense Dec. 1 1,485 21 135 Bal. 1,620
A. Zhawaki, Capital Dec. 1 19,500
Travel Expense Dec. 1 6,050 30 695 Bal. 6,745
A. Zhawaki, Drawings Dec. 1 31,350 24 3,000 Bal. 34,350
Interest Expense Dec. 31 10 Bal. 10
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PROBLEM 2-7A (Continued) (d) A TO Z MUSIC Trial Balance December 31, 2014 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 Taking It Further
Credit
$ 2,300 2,105 525 19,500 53,450
$77,880
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.
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PROBLEM 2-7A (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 2-8A (a) ABRAMSON FINANCIAL SERVICES Income Statement Month Ended May 31, 2014
Revenues Service revenue .................................................. Expenses Interest expense ................................. $ 50 Rent expense ...................................... 2,400 Salaries expense................................. 2,475 Telephone expense ................................. 250 Total expenses ............................................... Loss .........................................................................
$4,100
5,175 $(1,075)
(b) ABRAMSON FINANCIAL SERVICES Statement of Owner's Equity Month Ended May 31, 2014
J. Abramson, capital, May 1, 2014.......................... Add: Investment ...................................................... Less: Loss .............................................. $1,075 Drawings........................................ 1,600 J. Abramson, capital, May 31, 2014........................
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$
0 50,000 50,000
2,675 $47,325
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PROBLEM 2-8A (Continued) (c) ABRAMSON FINANCIAL SERVICES Balance Sheet May 31, 2014 Assets Cash ........................................................................... $23,375 Accounts receivable ................................................. 500 Supplies ..................................................................... 1,250 Prepaid insurance ..................................................... 3,300 Prepaid rent ............................................................... 2,400 Equipment ................................................................. 27,000 Total assets........................................................... $57,825 Liabilities and Owner's Equity Liabilities Notes payable ....................................................... $10,000 Unearned service revenue ................................... 500 10,500 Owner's Equity J. Abramson, Capital ............................................ 47,325 Total liabilities and owner's equity ................. $57,825 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 $1,075. 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 2-9A (a)
GENERAL JOURNAL
Date
Account Titles and Explanation
Feb. 1
Advertising Expense ............................. Cash...................................................
2
3
4
6
14
15
23
26
27
Solutions Manual .
Debit
Credit
430 430
Rent Expense ........................................ 1,050 Cash...................................................
1,050
Cash ....................................................... Fees Earned ......................................
4,240 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
Cash ....................................................... 2,830 Unearned Revenue ...........................
2-81
185 2,830
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PROBLEM 2-9A (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) Bal. Feb. 1 3 4
27
Bal.
Cash 2,100 Feb. 1 4,240 2 720 6 14 15 2,830 26 27 28 28 3,780
430 1,050 970 400 1,050 185 575 400 1,050
12,400
Accounts Payable Feb. 1 1,470 Feb. 6 970 Bal. 500 Unearned Revenue Feb. 27 2,830 Bal. 2,830 D. Scoffin, Capital Feb. 1 13,750
Accounts Receivable Feb. 1 720 Feb.3720 23 1,475 Bal. 1,475
Bal.
13,750
D. Scoffin, Drawings Feb. 27 575 Bal. 575
Prepaid Rent Feb.28 1,050 1,050 Bal. Equipment Feb. 1 12,400
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PROBLEM 2-9A (Continued) (d) YH CURLING SCHOOL Trial Balance February 28, 2014 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 future benefit.
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PROBLEM 2-10A (a) YH CURLING SCHOOL Income Statement Month Ended February 28, 2014 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 February28, 2014 D. Scoffin, capital, February 1, 2014 .............................. Add: Profit ...................................................................... Less: Drawings................................................................ D. Scoffin, capital, February28, 2014 .............................
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$13,750 2,200 15,950 575 $15,375
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PROBLEM 2-10A (Continued) (c) YH CURLING SCHOOL Balance Sheet February 28, 2014 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.............................$18,705 Taking It Further There is a difference between cash collected from customers and revenue in any specific month. Although the school has earned revenue, it has not necessarily collected all of the cash from providing the services. In addition, the school has received cash in advance of providing the services so this amount is not yet included in fees earned.
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PROBLEM 2-11A (a) SUPER DELIVERY SERVICE Trial Balance August 31, 2014
Debit Credit Cash (to balance debits = credits*) ............$ 6,765 Accounts receivable .................................. 4,275 Supplies ...................................................... 265 Prepaid insurance ...................................... 405 Equipment .................................................. 49,720 Notes payable............................................. $19,500 Accounts payable ...................................... 3,235 Salaries payable ......................................... 925 Unearned revenue ...................................... 675 J. Rowe, capital .......................................... 48,750 J. Rowe, drawings...................................... 24,400 37,780 Service revenue.......................................... Gas and oil expense................................... 12,145 Insurance expense..................................... 2,020 Interest expense......................................... 975 Repairs expense......................................... 1,580 Salaries expense ........................................ 5,665 Supplies expense ....................................... 2,650 $110,865 $110,865 * Total debits without cash = $104,100 $110,865 – $104,100 = $6,765
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PROBLEM 2-11A (Continued) (b) SUPER DELIVERY SERVICE Income Statement Year Ended August 31, 2014 Revenues Service revenue .......................................................$37,780 Expenses Gas and oil expense ................................. $12,145 Insurance expense .................................. 2,020 Interest expense ...................................... 975 Repairs expense ...................................... 1,580 Salaries expense ..................................... 5,665 Supplies expense .................................... 2,650 Total expenses ..................................................... 25,035 Profit..............................................................................$12,745
SUPER DELIVERY SERVICE Statement of Owner's Equity Year Ended August 31, 2014 J. Rowe, capital, August 31, 2013 ............................. $48,750 Plus: Profit ............................................................... 12,745 61,495 Less: Drawings ......................................................... 24,400 J. Rowe, capital, August 31, 2014 ............................. $37,095
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PROBLEM 2-11A (Continued) (b) (Continued) SUPER DELIVERY SERVICE Balance Sheet August 31, 2014 Assets Cash ............................................................................ $ 6,765 Accounts receivable .................................................. 4,275 Supplies ...................................................................... 265 Prepaid insurance ...................................................... 405 Equipment .................................................................. 49,720 Total assets............................................................ $61,430 Liabilities and Owner's Equity Liabilities Notes payable .......................................................... $19,500 Accounts payable .................................................. 3,235 Salaries payable .................................................... 925 Unearned revenue.................................................... 675 Total liabilities .......................................................24,335 Owner's Equity J. Rowe, capital ........................................................ 37,095 Total liabilities and owner's equity.....................$61,430
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PROBLEM 2-11A (Continued) Taking It Further Jan Rowe has withdrawn more cash than profit. This has resulted in a net decrease to the owner’s capital account. Jan’s drawings have left the company with a low level of liquid assets (Cash of $6,765 + Accounts receivable of $4,275 = $11,040) to pay off liabilities (Notes payable of $19,500 + Accounts payable of $3,235 + Salaries payable of $925 = $23,660). Jan’s drawings should be based on her 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 2-12A (a)
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Correct Correct Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect Incorrect
(b) 1
2
3
4
5
1
Yes
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Drawings
Understated $1,000
Service Revenue No
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Understated $325 Understated $1,540
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Salaries Payable
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Overstated $495
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PROBLEM 2-12A (Continued) (b) (Continued) 1
2
3
4
5
9
Understated Solutions Manual .
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Accounts Payable
$650
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 Salary 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 2-13A (a) WINTER CO. Trial Balance June 30, 2014
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-1B
Account Salaries Payable Salaries Expense W. Isaacson, Drawings
(a) Type of Account Liability Expense Drawings
W. Isaacson, Capital
Owner’s Capital
Unearned Revenue Rent Revenue Rent Expense Prepaid Rent Supplies Expense Supplies Equipment Notes Payable Fees Earned Interest Expense Insurance Expense
Liability Revenue Expense Asset Expense Asset Asset Liability Revenue Expense Expense
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(b) Financial Statement Balance Sheet Income Statement Statement of Owner’s Equity Balance Sheet and Statement of Owner’s Equity Balance Sheet Income Statement Income Statement Balance Sheet Income Statement Balance Sheet Balance Sheet Balance Sheet Income Statement Income Statement Income Statement
Chapter 2
(c) Normal Balance Credit Debit Debit
(d)
(e)
Increase Credit Debit Debit
Decrease Debit Credit Credit
Credit
Credit
Debit
Credit Credit Debit Debit Debit Debit Debit Credit Credit Debit Debit
Credit Credit Debit Debit Debit Debit Debit Credit Credit Debit Debit
Debit Debit Credit Credit Credit Credit Credit Debit Debit Credit Credit
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
PROBLEM 2-1B (Continued) (a) Type of Account Account Land Asset Building Asset Cash Asset Accounts Receivable Asset Accounts Payable Liability
Accounting Principles, Sixth Canadian Edition
(b) Financial Statement Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet
(c) Normal Balance Debit Debit Debit Debit Credit
(d)
(e)
Increase Debit Debit Debit Debit Credit
Decrease Credit Credit Credit Credit Debit
Taking It Further The term debit indicates left and the term credit indicates right. The normal balance of the account represents its position in the accounting equation. Assets have a normal debit balance because they represent the left side of the accounting equation. Therefore, transactions that increase assets are reflected by an increase (a debit) to an asset account. Conversely, liabilities and owner’s equity accounts have a normal credit balance because they represent the right side of the accounting equation. Revenues and expenses represent changes in the owner’s equity account. Revenues increase owner’s equity and therefore increase the right side of the accounting equation; revenues have a normal credit balance. Expenses reduce owner’s equity and increases in expenses reduce the right side of the accounting equation; expenses have a normal debit balance.
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Chapter 2
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-2B (a) (1) Transaction Jan.2 4
Basic Type Owner’s Equity Asset
5
Asset
7 10
Account Debited (2) Specific Account Rent Expense
Effect + $475
Cash
+ $975
Supplies
+ $250
(3)
No transaction at this point in time (see Jan. 18). Asset Cash + $500
Account Credited (1) (2) Specific Basic Type Account Asset Cash Service Revenue Accounts Payable
+ $975
Liability
+ $500
+ $700
Asset
+ $885
Service Revenue Cash
+ $885
– $250
Owner’s Equity Asset
+ $885
Asset
Accounts Receivable Notes Payable Cash
– $885
18 25
Liability
27
Asset
28
Asset
Cash
+ $2,000
Liability
29
Asset
Equipment
+ $1,950
Asset
2-99
+ $250
Unearned Revenue Cash
K. Battistella, Drawings Accounts Receivable Accounts Payable Cash
Solutions Manual .
Effect – $475
Owner’s Equity Liability
Owner’s Equity Asset
12
(3)
Chapter 2
– $700
– $250
+ $2,000 – $1,950
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-2B (Continued) (b) GENERAL JOURNAL Date Jan.
Account Titles and Explanation 2
Debit
Rent Expense ........................................ Cash...................................................
475
2 Cash ....................................................... Service Revenue ...............................
975
5 Supplies ................................................. Accounts Payable .............................
250
Credit
475
975
250
7 No transaction at this time. 10
Cash ....................................................... Unearned Revenue ...........................
500
12 K. Battistella, Drawings......................... Cash...................................................
700
18
Accounts Receivable ............................ Service Revenue ...............................
885
25 Accounts Payable ................................. Cash...................................................
250
27
Cash ....................................................... Accounts Receivable ........................
885
28 Cash ....................................................... Notes Payable ...................................
2,000
29
1,950
Solutions Manual .
Equipment.............................................. Cash...................................................
2-100
500
700
885
250
885
2,000 1,950
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-2B (Continued) Taking It Further From the perspective of the bank, their customer’s bank account represents a liability of the bank. The bank owes Battistella Couture & Design Co. the amount of cash that it holds in the bank account. Liabilities increase with credits. Consequently, when Karen deposits money in the business account, the bank credits the account, as the bank’s liability has increased. From the perspective of Battistella Couture & Design Co., the bank account (Cash) is an asset. Debits increase assets and credits decrease assets. Therefore when the cash account is decreased a credit is used by the company. The bank follows the same debit and credit rules, it just has the opposite perspective on what is an asset and what is a liability.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-3B GENERAL JOURNAL Date May
Account Titles and Explanation
Debit
Credit
1 Cash .......................................................... 50,000 D. Tanner, Capital ............................... 50,000 3 Land ......................................................... 225,000 Building................................................. 75,000 Equipment............................................. 55,000 Cash.................................................. 35,000 Notes Payable .................................. 320,000 3 Insurance Expense.................................. Cash.....................................................
458
8 Advertising Expense ............................... Cash.....................................................
1,950
15
458
1,950
Cash ......................................................... 2,200 Admissions Revenue..........................
16 Salaries Expense..................................... Cash.....................................................
2,200
1,800
20 Cash ......................................................... 500 Accounts Receivable .............................. 1,000 Admissions Revenue..........................
1,800
1,500
22 No entry required 29
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Cash ......................................................... 1,000 Accounts Receivable ..........................
2-102
1,000
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-3B (Continued) Date
Account Titles and Explanation Ref.
May 30
Debit
Credit
Cash ......................................................... 4,800 Admissions Revenue..........................
4,800
31 Interest Expense...................................... 1,300 Notes Payable.......................................... 2,500 Cash.....................................................
3,800
31 D. Tanner, Drawings................................ Cash.....................................................
800
31 Salaries Expense..................................... Cash.....................................................
1,800
800 1,800
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 well as financial statements.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4B (a) GENERAL JOURNAL Date Aug.
Account Titles and Explanation Ref. 1
Debit
Cash ............................................. 101 T. Nguyen, Capital .................. 301
25,000
Rent Expense .............................. 726 Cash......................................... 101
750
2 Utilities Expense.......................... 737 Cash......................................... 101
250
1
3
25,000
750
250
Equipment.................................... 151 Cash......................................... 101
5,250
Supplies ....................................... 126 Accounts Payable ................... 201
675
8 Accounts Receivable .................. 112 Service Revenue ..................... 400
1,270
12 Advertising Expense ................... 610 Cash......................................... 101
945
5
20
5,250
675
1,270
945
Cash ............................................. 101 Service Revenue ..................... 400
1,320
Cash ............................................. 101 Unearned Revenue ................. 209
2,500
25 Accounts Payable ....................... 201 Cash......................................... 101
675
24
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2-104
Credit
1,320
2,500 675
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4B (Continued) (a) (Continued) Aug. 28
Cash ............................................. 101 Accounts Receivable .............. 112
970
29 T. Nguyen, Drawings ................... 306 Cash......................................... 101
1,225
31
970
1,225
Utilities Expense.......................... 737 Accounts Payable ................... 201
225
CASH
No. 101 Credit Balance
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
8 28
Solutions Manual .
J1 J1
2-105
1,225
25,000 24,250 24,000 18,750 17,805 19,125 21,625 20,950 21,920 20,695
Credit
No. 112 Balance
970
1,270 300
750 250 5,250 945 1,320 2,500 675 970
ACCOUNTS RECEIVABLE Explanation Ref. Debit
Date Aug.
Ref.
1,270
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4B (Continued) (b) (Continued) SUPPLIES Date Aug.
5
3
Date Aug.
5 25 31
J1
675
675
EQUIPMENT Explanation Ref.
Debit
No. 151 Balance
J1
5,250
5,250
ACCOUNTS PAYABLE Explanation Ref. Debit
No. 201 Balance
J1 J1 J1
Aug. 24
1
J1
Solutions Manual .
J1
2-106
Credit
225
675 0 225
Credit
No. 209 Balance
2,500
2,500
Credit
No. 301 Balance
25,000
25,000
675
T. NGUYEN, CAPITAL Explanation Ref. Debit
Date
Credit
675
UNEARNED REVENUE Explanation Ref. Debit
Date
Aug.
Debit
Explanation
Date Aug.
Ref.
No. 126 Credit Balance
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4B (Continued) (b) (Continued)
T. NGUYEN, DRAWINGS Explanation Ref. Debit
Date Aug. 30
SERVICE REVENUE Explanation Ref.
Date Aug.
8 20
Aug. 12
Date 1
Date Aug.
1,225
1,225
Debit
Credit
No. 400 Balance
1,270 1,320
1,270 2,590
Credit
No. 610 Balance
J1 J1 ADVERTISING EXPENSE Explanation Ref. Debit
Date
Aug.
J1
2 31
Solutions Manual .
J1
Credit
No. 306 Balance
945
945
RENT EXPENSE Explanation Ref.
Debit
No. 726 Balance
J1
750
750
UTILITIES EXPENSE Explanation Ref.
Debit
No. 737 Balance
J1 J1
250 225
2-107
Credit
Credit
250 475
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-4B (Continued) (c) NGUYEN IMPORT SERVICES Trial Balance August 31, 2014
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 have a direct 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 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 statement.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-5B (a)
GENERAL JOURNAL
Date Nov.
Account Titles and Explanation 1 Cash .................................................... Equipment........................................... H. Kiersted, Capital ........................
Debit
Credit
35,000 12,000 47,000
2 No entry—not a transaction. 3 Rent Expense ..................................... Prepaid Rent ....................................... Cash................................................ 4
2,140 2,140 4,280
Insurance Expense............................. Cash ($4,740 ÷ 12)..........................
395
Equipment........................................... Cash................................................ Notes Payable ................................
18,000
Supplies .............................................. Accounts Payable ..........................
1,550
Supplies .............................................. Cash................................................
475
16 Cash .................................................... Service Revenue ............................
990
20 Accounts Receivable ......................... Service Revenue ............................
4,500
26 Accounts Payable .............................. Cash................................................
1,000
5
6
7
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2-109
395 6,000 12,000
1,550
475
990
4,500 1,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-5B (Continued) (a) (Continued) Date
Account Titles and Explanation
Nov. 27
Telephone Expense............................ Accounts Payable ..........................
220
Cash .................................................... Unearned Revenue ........................
750
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
27
29
Debit
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
2-110
Accounts Receivable Nov.20 4,500 Nov 29 2,800 Bal. 1,700
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-5B (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
Accounts Payable Nov26 1,000 Nov 6 Nov 27 Bal. Unearned Revenue Nov27 Bal. Notes Payable Nov.5 Bal.
H. Kiersted, Drawings Nov.30700 Nov. 30 1,150 Bal. 1,850 Service Revenue Nov.16 990 20 4,500 Bal. 5,490 Insurance Expense Nov. 4 395 Bal.
1,550 220 770
750 750
12,000 12,000
H. Kiersted, Capital Nov. 1 47,000 Bal. 47,000
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2-111
395
Interest Expense Nov. 30 60 Bal.
Nov. 3 Bal.
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-5B (Continued) (c)
KIERSTED FINANCIAL SERVICES Trial Balance November 30, 2014 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-5B (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), payments for equipment and for owner drawings. The statement of cash flows reconciles the changes in the cash account to its various uses and sources.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6B (a)
GENERAL JOURNAL
Date July
Account Titles and Explanation
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
29
Solutions Manual .
1,950
2,500
350
2,800
Film Rental Expense ........................... Accounts Payable ...........................
750
Cash ..................................................... Admissions Revenue......................
3,500
2-114
750 3,500
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6B (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 Explanation
Date July
1 Balance 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
2-115
Debit
Credit
800 620 1,950 2,500 350 2,800 3,500 1,200 700 1,900 260
Balance 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6B (Continued) (b) and (c) (Continued) Accounts Receivable Explanation
Date July 31
Ref.
Debit
J1
260
Credit
Balance 260
Prepaid Film Rentals Explanation
Date July 30
Ref.
Debit
J1
700
Ref.
Debit
Credit
Balance 700
Land Explanation
Date July
Credit
1 Balance
Balance 100,000
Buildings Explanation
Date July
Ref.
Debit
Credit
1 Balance
Balance 80,000
Equipment Explanation
Date July
1 Balance
Solutions Manual .
Ref.
2-116
Debit
Credit
Balance 25,000
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6B (Continued) (b) and (c) (Continued) Accounts Payable Explanation
Date July
Ref. J1 J1
1 Balance 16 19
Debit
Credit
Balance
750
5,000 2,200 2,950
Credit
Balance
2,800
Mortgage Payable Explanation
Date July
1 Balance 11
Ref. J1
Debit
125,000 123,000
2,000
F. Ferguson, Capital Explanation
Date July
1 Balance
Ref.
Debit
Credit
Balance 81,000
F. Ferguson, Drawings Date
Explanation
July 30
Ref.
Debit
J1
1,200
Credit
Balance 1,200
Admissions Revenue Date July 10 29
Solutions Manual .
Explanation
Ref. J1 J1
2-117
Debit
Credit
Balance
1,950 3,500
1,950 5,450
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6B (Continued) (b) and (c) (Continued) Concession Revenue Explanation
Date July 31
Ref.
Debit
J1
Credit
Balance
520
520
Credit
Balance
Advertising Expense Explanation
Date July
2
Ref.
Debit
J1
620
620
Film Rental Expense Explanation
Date July
2 19
Ref.
Debit
J1 J1
800 750
Credit
Balance 800 1,550
Interest Expense Date
Explanation
July 11
Ref.
Debit
J1
500
Credit
Balance 500
Repairs Expense Date July 12
Solutions Manual .
Explanation
Ref.
Debit
J1
350
2-118
Credit
Balance 350
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6B (Continued) (b) and (c) (Continued) Salaries Expense Explanation
Date July 31
Ref.
Debit
J1
1,900
Credit
Balance 1,900
(d) HIGHLAND THEATRE Trial Balance July 31, 2014
Debit Cash ....................................................... Accounts receivable ............................. Prepaid rentals ...................................... 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 2-6B (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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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-7B (b)
GENERAL JOURNAL
Date Dec.
Account Titles and Explanation 1
1
4
J1 Debit
Rent Expense .......................................... Cash.....................................................
750 750
Equipment................................................ 3,500 Cash..................................................... Notes Payable .....................................
1,500 2,000
Cash ......................................................... 2,850 Accounts Receivable ..........................
2,850
7 Insurance Expense.................................. Cash.....................................................
285
8 Supplies ................................................... Accounts Payable ...............................
315
285
315
10 Accounts Payable ................................... 5,660 Cash..................................................... 12
Credit
5,660
Unearned Revenue .................................. 1,370 Service Revenue .................................
1,370
20 Cash ......................................................... 3,055 Service Revenue .................................
3,055
21 Advertising Expense ............................... Cash.....................................................
325
24 L. Kuznetsova, Drawings ........................ 2,650 Cash.....................................................
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325 2,650
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-7B (Continued) (b) (Continued) Dec. 28
Accounts Receivable .............................. 2,250 Service Revenue .................................
29 Cash ......................................................... Unearned Revenue .............................
925
30 Salaries Expense..................................... Cash.....................................................
960
31 Notes Payable.......................................... Interest Expense...................................... Cash.....................................................
160 10
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2,250
925
960
170
Chapter 2
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-7B (Continued) (a) and (c)
Dec. 1 4
20 29
Bal.
Cash 7,315 Dec. 1 1 2,850 7 10 3,055 21 925 24 30 31 1,845
Accounts Payable Dec. 10 5,660 Dec. 1 8,660 8 315
750 1,500
Bal. 285 5,660 325 2,650 960 170
3,315
Unearned Revenue Dec. 12 1,370 Dec. 1 1,370 29 925 Bal. 925 L. Kuznetsova, Capital Dec. 1 29,130
Accounts Receivable Dec. 1 4,020 Dec. 4 2,850 28 2,250 Bal. 3,420
L. Kuznetsova, Drawings Dec. 1 34,200 24 2,650 Bal. 36,850
Supplies Dec. 1 1,805 8 315 Bal. 2,120 Equipment Dec. 1 21,500 3 3,500 Bal. 25,000 Notes Payable Dec.31 160 Dec. 1 Bal.
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2,000 1,840
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-7B (Continued) (a) and (c) (Continued) Service Revenue Dec. 1 55,175 12 1,370 20 3,055 28 2,250 Bal. 61,850 Advertising Expense Dec. 1 3,550 21 325 Bal. 3,875 Insurance Expense Dec. 1 3,135 7 285 Bal. 3,420 Rent Expense Dec. 1 8,250 2 750 Bal. 9,000 Salaries Expense Dec. 1 10,560 30 960 Bal. 11,520 Interest Expense Dec. 31 10
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Accounting Principles, Sixth Canadian Edition
PROBLEM 2-7B (Continued) (d) LVK COACHING SERVICES Trial Balance December 31, 2014 Debit Cash ............................................................ $ 1,845 Accounts receivable .................................. 3,420 Supplies ...................................................... 2,120 Equipment................................................... 25,000 Accounts payable....................................... Notes payable ............................................. Unearned revenue ...................................... L. Kuznetsova, capital................................ L. Kuznetsova, drawings ........................... 36,850 Service revenue.......................................... Advertising expense .................................. 3,875 Insurance expense ..................................... 3,420 Rent expense.............................................. 9,000 Salaries expense ........................................ 11,520 Interest expense......................................... 10 $97,060
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Credit
$ 3,315 1,840 925 29,130 61,850
$97,060
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PROBLEM 2-7B (Continued) Taking It Further The cash balance has decreased from $7,315 to $1,845 or $5,470 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 $3,515 ($1,845 + $1,500 + $170 payment on the note payable). This still represents a large 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 2-8B (a) KIERSTED FINANCIAL SERVICES Income Statement Month Ended November 30, 2014 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, 2014 H. Kiersted, capital, November 1, 2014 .................. $ 0 Add: Investment ........................................................ 47,000 47,000 Less: Loss ................................................. $ 150 Drawings ......................................... 1,850 2,000 H. Kiersted, capital, November 30, 2014..................... $45,000
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PROBLEM 2-8B (Continued) (c) KIERSTED FINANCIAL SERVICES Balance Sheet November 30, 2014 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 2-9B (a)
GENERAL JOURNAL Account Titles and Explanation
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
16
145
550
Cash ........................................................ 8,000 Accounts Receivable .........................
18 Accounts Payable .................................. Cash....................................................
5,000
30 Miscellaneous Expense ......................... Cash....................................................
580
8,000
5,000
580
31 Cash ........................................................ 2,000 Accounts Receivable ............................. 5,000 Service Revenue ................................
7,000
31 Salaries Expense.................................... Cash....................................................
1,650
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PROBLEM 2-9B (Continued) (a) (Continued) Mar. 31 Interest Expense..................................... Notes Payable......................................... Cash....................................................
55 500
31 Rent Expense ......................................... Prepaid Rent ........................................... Cash....................................................
950 950
31 H. Nolan, Drawings................................. Cash....................................................
1,000
555
1,900 1,000
(b) and (c)
Mar.1 1 16
31
Bal.
Cash 3,500 2 13,000 12,000 3 145 8,000 10 550 18 5,000 30 580 2,000 31 1,650 31 555 31 1,900 31 1,000 1,120
Mar. 1 14,450 16 31 Bal.
8,000
5,000 11,450
Prepaid Rent Mar.31 950
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PROBLEM 2-9B (Continued) (b) and (c) (Continued) Service Revenue Mar. 31 7,000
Equipment Mar.115,100
Advertising Expense Mar. 10 550
Accounts Payable Mar. 1 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 Mar. 1 12,000 Bal.
11,500
Rent Expense Mar. 31 950
H. Nolan, Capital Mar. 1 14,300
Insurance Expense Mar. 3145
H. Nolan, Drawings Mar. 31 1,000
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Salaries Expense Mar. 31 1,650
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PROBLEM 2-9B (Continued) (d) HN HR CONSULTING Trial Balance March 31, 2014
Cash ........................................................... Accounts receivable ................................... Prepaid rent ................................................. Equipment.................................................... Accounts payable........................................ Notes payable .............................................. H. Nolan, capital .......................................... H. Nolan, drawings ...................................... Service revenue........................................... Advertising expense ................................... Interest expense.......................................... Miscellaneous expense............................... Rent expense............................................... Insurance expense ...................................... Salaries expense .........................................
Debit $1,120 11,450 950 15,100
Credit
$750 11,500 14,300 1,000 7,000 550 55 580 950 145 1,650 $33,550
$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 2-10B (a) HN HR CONSULTING Income Statement Month Ended March 31, 2014 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, 2014 H. Nolan, capital, March 1, 2014.................................. $14,300 Add: Profit ..................................................................... 3,070 17,370 Less: Drawings ............................................................. 1,000 H. Nolan, capital, March 31, 2014................................ $16,370
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PROBLEM 2-10B (Continued) (c) HN HR CONSULTING Balance Sheet March 31, 2014 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 2-11B (a) LAZDOWSKI MARKETING SERVICES Trial Balance October 31, 2014
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 4,430 3,555 57,410 75,775 114,020 14,970 2,020 2,445 5,000 11,700 20,545 $228,265 $228,265
*Total credits without fees earned = $114,245 $228,265 – $114,245=$114,020
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PROBLEM 2-11B (Continued) (b) LAZDOWSKI MARKETING SERVICES Income Statement Year Ended October 31, 2014 Revenues Fees earned ........................................................... $114,020 Expenses Advertising expense ................................. $14,970 Insurance expense .................................. 2,020 Interest expense ...................................... 2,445 Supplies expense .................................... 5,000 Rent expense .............................................. 11,700 Salariesexpense .......................................... 20,545 Total expenses ............................................... 56,680 Profit ........................................................................ $57,340
LAZDOWSKI MARKETING SERVICES Statement of Owner's Equity Year Ended October 31, 2014 I. Lazdowski, capital, November 1, 2013 ................ Add: Profit ............................................................ Less: Drawings....................................................... I. Lazdowski, capital, October 31, 2014..................
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$57,410 57,340 114,750 75,775 $38,975
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PROBLEM 2-11B (Continued) (b) (Continued) LAZDOWSKI MARKETING SERVICES Balance Sheet October 31, 2014 Assets Cash ........................................................................... $ 4,930 Accounts receivable ................................................. 6,010 Supplies ..................................................................... 1,240 Prepaid rent ............................................................... 975 Furniture .................................................................... 56,685 Equipment.................................................................. 25,970 Total assets........................................................... $95,810 Liabilities and Owner's Equity Liabilities Notes payable ..........................................................$48,850 Accounts payable ................................................. 4,430 Unearned revenue ................................................... 3,555 Total liabilities ...................................................... 56,835 Owner's Equity I. Lazdowski, capital................................................ 38,975 Total liabilities and owner's equity .................... $95,810
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PROBLEM 2-11B (Continued) Taking It Further Inga Lazdowski has withdrawn more cash than 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 $4,430 = $53,280). Inga’s drawings should be based on her cash budget for the coming year and leave the company with sufficient cash to able to meet its liabilities and grow.
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PROBLEM 2-12B (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
2
3
4
5
2
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Understated $500 Accounts Payable 3 4
Understated $1,200 5
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6
Salaries Expense
Overstated $1,200
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PROBLEM 2-12B (Continued) (b) (Continued) Trans 7
1
2
Service Revenue
3
4
5
Overstated $400
8
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($375×2) 9
Cash Accounts Payable
Overstated $8,600 Understated $6,800 10
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Service Revenue
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PROBLEM 2-12B (Continued) Taking It Further 1.
Disagree. Even though the trial balance is balanced, uncorrected errors misstate the financial position of the company. 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. 9. This error shows lower liabilities by understating Accounts Payable and higher assets by overstating Equipment and Cash. It may lead to the supplier not being paid since the transaction shows the equipment as already paid. 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 2-13B SHAWNEE SLOPES COMPANY Trial Balance June 30, 2014 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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CONTINUING COOKIE CHRONICLE (a)
GENERAL JOURNAL Account Titles and Explanation
J1 Debit
Credit
Nov. 12 No entry required for cashing Canada Savings Bonds—this is a personal transaction. 12
Cash ....................................................... N. Koebel, Capital .............................
900
18 Advertising Expense ............................. Cash...................................................
325
20
Supplies ................................................. Cash...................................................
198
Equipment ............................................. N. Koebel, Capital .............................
550
Account Receivable .............................. Fees Earned ......................................
300
Telephone Expense............................... Accounts Payable.............................
98
29 Cash ....................................................... Notes Payable ...................................
3,000
2 Cash ....................................................... Fees Earned ......................................
250
25
26
27
Dec.
3
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325
198
550
300
98
3,000
Equipment ............................................. 1,000 Cash...................................................
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CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued) GENERAL JOURNAL
J1
Account Titles and Explanation Dec.
9
Debit
Cash ....................................................... Unearned Revenue ...........................
125
13 Accounts Payable ................................. Cash...................................................
98
16
Cash ....................................................... Accounts Receivable........................
300
Accounts Receivable ............................ Fees Earned ......................................
500
Telephone Expense............................... Accounts Payable.............................
76
17
30
Credit
125
98
300
500
76
(b) Nov.12 29 Dec. 2 9 16 Bal.
Cash 900 Nov.18 3,000 20 250 Dec. 3 125 13 300 2,954
Nov.20
Supplies 198
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325 198 1,000 98
Accounts Receivable Nov.26 300 Dec. 16 300 Dec. 17 500 Bal. 500
Nov.25 Dec. 3 Bal.
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CONTINUING COOKIE CHRONICLE (Continued) (b) (Continued) Accounts Payable Dec. 13 98 Nov.27 Dec. 30 Bal. Notes Payable Nov.28
98 76 76
3,000
Fees Earned Nov.26 300 Dec. 2 250 17 500 Bal. 1,050
Unearne d Revenue Dec. 9
125
N. Koebel, Capital Nov.12 900 25 550 Bal. 1,450 Advertising Expense Nov. 18 325
Telephone Expense Nov. 27 98 30 76 Bal. 174
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CONTINUING COOKIE CHRONICLE (Continued)
(c) COOKIE CREATIONS Trial Balance December 31, 2013
Debit
Cash ........................................................................ $2,954 Accounts receivable .............................................. 500 Supplies .................................................................. 198 Equipment............................................................... 1,550 Accounts payable................................................... Unearned revenue .................................................. Notes payable......................................................... N. Koebel, capital ................................................... Fees earned ............................................................ Advertising expense .............................................. 325 Telephone expense ................................................ 174 $5,701
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Credit
$
76 125 3,000 1,450 1,050
$5,701
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Accounting Principles, Sixth Canadian Edition
BYP 2-1 FINANCIAL REPORTING PROBLEM
(a) Account Administrative expenses Cash and cash equivalents Finance costs Inventories Long-term debt Prepaid expenses Sales Trade and other payables
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Income Statement Balance Sheet Income Statement Balance Sheet Balance Sheet Balance Sheet Income Statement Balance Sheet
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(2) Account
(3) Normal Balance
(3) Increase Side
(4) Decrease Side
Expense
Debit
Debit
Credit
Asset
Debit
Debit
Credit
Expense
Debit
Debit
Credit
Asset
Debit
Debit
Credit
Liability
Credit
Credit
Debit
Asset
Debit
Debit
Credit
Revenue
Credit
Credit
Debit
Liability
Credit
Credit
Debit
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BYP 2-1 (Continued) (b) 1. Cash is decreased. 2. Cash is increased. 3. Cash and/or Accounts Receivable are increased. 4. Accounts Payable is increased or Cash is decreased. 5. Cash is decreased.
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BYP 2-2 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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BYP 2-2 (Continued) (b)
WEST AIRLINES LTD. Trial Balance December 31, 2011
Cash ....................................................................... Accounts receivable ............................................. Inventory................................................................ Prepaid expenses and deposits........................... Property and equipment ....................................... Intangible and 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, 2011 Shareholders’ (owners) “drawings” .................... Guest revenues ..................................................... Other revenues...................................................... Aircraft fuel, leasing, and maintenance expense Airport operations expense.................................. Flight operations and navigational charges ....... Sales and distribution expense............................ Marketing, general, and administration expense Depreciation and amortization expense .............. Employee profit share expense ........................... Non-operating expenses ...................................... Income tax expense ..............................................
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$1,291,946 34,122 31,695 66,936 1,911,227 137,752 $ 307,279 432,186 43,485 151,645 13,698 326,456 828,712 1,304,233 82,718 2,790,299 281,241 1,227,709 421,561 483,920 273,364 209,880 174,751 23,804 48,545 59,304 $6,479,234 $6,479,234 Chapter 2
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BYP 2-2 (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 Sales Liability and Non-refundable Guest Credits Liability.
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BYP 2-3 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 2-4 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 accounts Service Revenue.
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BYP 2-4 (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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BYP 2-5 ETHICS CASE (a) The stakeholders in this situation are: Vu Hung, assistant chief accountant. Users of the company's financial statements internal – managers or company owner external – Lim Company’s bank or other creditors Vu’s supervisor (the chief accountant, who evaluates her). (b) By adding $1,000 to the Equipment account, the account total is intentionally misstated. By not locating the error causing the imbalance, some other account(s) may also be misstated. If the amount of $1,000 is determined to be immaterial, and the intent is not to commit fraud (cover up an embezzlement or other misappropriation of assets), Vu’s action might not be considered unethical in the preparation of interim financial statements. However, she should disclose what she has done. Otherwise, if Vu is violating a company accounting policy by her action, then she is acting unethically. Even if the $1,000 is considered immaterial, the source of the error should be determined, as it may be made up of more than one error, and the sum of the errors (net effect of the errors in total) may be immaterial, but each individual error could have a material effect on the financial statements. (c)
Vu's alternatives are: 1. Miss the deadline but find the error causing the imbalance. 2. Tell her supervisor of the imbalance and suffer the consequences. 3. Do as she did and locate the error adjustment (if any) in the next quarter.
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BYP 2-6 “All About You” Activity (a) On September 1, 2014, my personal equity would be as follows: Cash ($4,000 + $14,000) ......... Clothes.................................... Cell phone................................ Total assets ............................ Less Student loan .................. Personal equity, Sept. 1, 2014
$18,000 1,000 200 19,200 (14,000) $5,200
(b) Personal Trial Balance December 15, 2014
Cash ............................................................... Clothes ($1,000 + $1,500) .............................. Cell phone...................................................... Computer ....................................................... Damage deposit on apartment ..................... Unused bus pass........................................... Student loan .................................................. Personal equity ............................................. 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 expense ......................................... Airfare ............................................................
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Debit $6,000 2,500 200 1,000 400 250
Credit
$14,000 5,200 1,600 1,200 2,800 600 1,500 250 200 250 450 $19,200
$19,200
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BYP 2-6 (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 of 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
Chapter 2
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
BYP 2-6 (Continued) (d) Personal Balance Sheet December 15, 2014 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.
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BYP 2-6 (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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Accounting Principles, Sixth Canadian Edition
CHAPTER 3 Adjusting the Accounts ASSIGNMENT CLASSIFICATION TABLE Brief Exercises
Exercises
Problems Set A
Problems Set B
1, 2, 3, 4, 5
1
1, 2
1
1
2. Prepare adjusting entries for prepayments.
6, 7, 8, 9, 10, 11, 16, 17, 18
2, 3, 4, 5, 6, 12
3, 4, 5, 7, 8, 11, 12, *15
2, 4, 5, 6, 8, 9, 10, 11, *12
2, 4, 5, 6, 8, 9, 10, 11, *12
3. Prepare adjusting entries for accruals.
12, 13, 14, 15, 16, 17, 18
7, 8, 9, 10, 11, 12
3, 6, 7, 8, 9, 10,11, 12
4. Describe the nature and purpose of an adjusted trial balance, and prepare one.
19, 20, 21, 22
13
11, 12, 13
3, 4, 5, 6, 7, 8, 9, 10, 11, *13 8, 9, 10, 11, *13
3, 4, 5, 6, 7, 8, 9, 10, 11, *13 8, 9, 10, 11, *13
*5. Prepare adjusting entries for the alternative treatment of prepayments (Appendix 3A)
*23, *24
*14, *15
*14, *15
*12, *13
*12, *13
Study Objectives
Questions
1. Explain accrual basis of accounting, and when to recognize revenues and expenses.
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendix to each chapter.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 transaction and adjusting entries.
Moderate
25-35
5A
Prepare adjusting entries.
Moderate
25-35
6A
Prepare adjusting entries.
Moderate
25-35
7A
Prepare transaction and adjusting entries for notes and interest.
Moderate
25-35
8A
Prepare and post adjusting entries, and prepare adjusted trial balance.
Moderate
50-60
9A
Prepare and post adjusting entries, and prepare adjusted trial balance and financial statements.
Moderate
50-60
10A
Prepare adjusting entries and financial statements.
Moderate
45-55
11A
Prepare adjusting entries, adjusted trial balance and financial statements.
Moderate
50-60
*12A
Prepare and post transaction and adjusting entries for prepayments.
Moderate
20-25
*13A
Prepare adjusting entries and adjusted trial balance using the alternative treatment of prepayments.
Moderate
25-35
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
1B
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 transaction and adjusting entries.
Moderate
25-35
5B
Prepare adjusting entries.
Moderate
25-35
6B
Prepare adjusting entries.
Moderate
25-35
7B
Prepare transaction and adjusting entries for notes and interest.
Moderate
25-35
8B
Prepare and post adjusting entries and prepare adjusted trial balance.
Moderate
50-60
9B
Prepare and post adjusting entries, and prepare adjusted trial balance and financial statements.
Moderate
50-60
10B
Prepare adjusting entries and financial statements.
Moderate
45-55
11B
Prepare adjusting entries, adjusted trial balance and financial statements.
Moderate
50-60
*12B
Prepare and post transaction and adjusting entries for prepayments.
Moderate
20-25
*13B
Prepare adjusting entries and adjusted trial balance using the alternative treatment of prepayments.
Moderate
25-35
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 of accounting, and when to recognize revenues and expenses. 2. Prepare adjusting entries for prepayments.
Knowledge Q3-1
Comprehension Q3-2 Q3-3 Q3-4 Q3-5
Application BE3-1 P3-1B E3-1 E3-2 P3-1A
Analysis
Q3-9 Q3-17
Q3-6 Q3-7 Q3-8 Q3-10 Q3-11 Q3-16 Q3-18 BE3-12
BE3-2 BE3-3 BE3-4 BE3-5 BE3-6 E3-3 E3-4 E3-5 E3-7 E3-8 E3-12 *E3-15 P3-2A P3-4A P3-5A
P3-6A P3-8A P3-9A P3-10A P3-11A *P3-12A P3-2B P3-4B P3-5B P3-6B P3-8B P3-9B P3-10B P3-11B *P3-12B
E3-11
3. Prepare adjusting entries for accruals.
Q3-17
Q3-12 Q3-13 Q3-16 Q3-18 BE3-12
Q3-14 Q3-15 BE3-7 BE3-8 BE3-9 BE3-10 BE3-11 E3-3 E3-6 E3-7 E3-8 E3-9 E3-10 E3-12 P3-3A P3-4A P3-5A BE3-13 E3-12 E3-13 P3-8A P3-9A P3-10A
P3-6A P3-7A P3-8A P3-9A P3-10A P3-11A *P3-13A P3-3B P3-4B P3-5B P3-6B P3-7B P3-8B P3-9B P3-10B P3-11B *P3-13B P3-11A *P3-13A P3-8B P3-9B P3-10B P3-11B *P3-13B
E3-11
*BE3-14 *BE3-15 *E3-14 *E3-15
*P3-12A *P3-13A *P3-12B *P3-13B
4. Describe the nature and purpose of an adjusted trial balance, and prepare one.
Q3-19 Q3-20 Q3-21 Q3-22
*5 Prepare adjusting entries for the alternative treatment of prepayments (Appendix 3A)
*Q3-23 *Q3-24
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Synthesis
E3-11
Chapter 3
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Study Objectives Broadening Your Perspective
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Knowledge
Comprehension BYP3-1
3-5
Accounting Principles, Sixth Canadian Edition
Application Continuing Cookie Chronicle, Cumulative Coverage, BYP3-2 BYP3-3
Analysis
Synthesis
BYP3-4 BYP3-6
BYP3-5
Chapter 3
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 it one year long, but does not need to start and end on the same days as 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.
The college should recognize the revenue equally (1/4 each month) over the period September to December. This will result in the revenue being recognized in the period the service is provided.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 6.
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.
7.
Roger can determine his supply expense for the semester by adding the amount of supplies he had at the beginning of the semester to the amount of supplies he purchased during the semester (asset). At the end of the semester, the remaining supplies are counted. The difference between the remaining supplies and the total of supplies on hand at the beginning of the semester and supplies purchased, gives the supplies used during the semester. The amount used is his supplies expense.
8.
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.
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.
10. 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. The Accumulated Depreciation account is offset (deducted) against the related asset account on the balance sheet in order to show the asset`s carrying amount. 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.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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. If the company prepares monthly financial statements, it is necessary to prepare an adjusting entry dated January 31 to recognize the expense in the period that it was incurred (January) and to set up the corresponding liability (the company has a future obligation) at January 31. Utility expense is increased and accounts payable is increased. 14. Disagree. It is appropriate to make adjusting entries to accrue for revenue when revenues have been earned but not yet received in cash or recorded at the statement date. These adjusting entries do not overstate revenues but rather ensure that revenue is recognized in the period it is earned. 15. 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. 16. (a) Type of adjusting entry 1. Accrued revenue 2. Unearned revenue 3. Accrued expense 4. Prepaid expense 5. Prepaid expense 6. Accrued revenue
(b) Related account Revenue Revenue Interest expense Supplies Insurance expense Interest receivable
Balance understated understated understated overstated understated understated
17. 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. 18. Disagree. An adjusting entry affects only one balance sheet account and one income statement account. 19. 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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 20. Disagree, an adjustment can be in either direction. Sometimes an adjustment is required to increase an account, and sometimes to decrease an account. For example, the Supplies account will be lower after recording the adjusting entry which recognizes the amount of supplies used during the period. 21. Disagree. Accounts Payable must be included in the adjusted trial balance even though there have been no adjustments made to it. The account balance must be included for the adjusted trial balance to balance and for the financial statements to accurately portray the company’s financial position. 22. 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. *23. Disagree. While the statement is true prior to the preparation of adjusting journal entries, the balances are correctly stated after recording and posting the adjusting entries. Both approaches yield the same results after adjusting entries have been posted. *24. This is incorrect. When a revenue account is credited when cash is received in advance of providing a service, the revenue account is overstated and the liability account is understated. The adjusting entry will debit the revenue account to decrease it and credit the liability account to increase it. When a liability account is credited for cash received in advance of providing a service, the adjusting entry will debit the liability account to decrease it since it is overstated and credit the revenue account to increase it since it is understated.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 Transaction 1. Collected $500 cash from customers for services provided in May. 2. Billed customers $600 for services provided in May. 3. Received $100 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
+$500
+$500
0
+600
+100
0
0 $600
–250 $850
BRIEF EXERCISE 3-2 Red Co. Blue Co.
Solutions Manual .
Supplies used: $795 + $3,830 – $665 = $3,960 Supplies on hand, May 31, 2014: $985 + $3,070 – x = $2,750 x = $1,305
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-3 (a) , (b) and (e)
Supplies Jan. 1 825 May 31 3,165 Dec. 31 2,975 Dec. 31 Bal. 1,015 (b) May 31
Supplies Expense Jan. 1 0 Dec. 31 2,975 Dec. 31 Bal. 2,975
Supplies ............................................ 3,165 Cash ...........................................
3,165
(c)
Cleaning Supplies used = $825 + $3,165 − $1,015 = $2,975
(d)
The balance sheet will report $1,015 as Supplies as a current asset. The income statement will report $2,975 as Supplies Expense.
(e)
Dec. 31
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Supplies Expense ............................ 2,975 Supplies .....................................
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-4 (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 2014: 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
(d) 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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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-5 (a) Jan. 1/13
Equipment .................................... 18,000 Cash .........................................
(b) Dec. 31/13 Depreciation Expense ................... 3,000 Accumulated Depreciation —Equipment........................... ($18,000 ÷ 6 = $3,000 per year) Dec. 31/14 Depreciation Expense ................... 3,000 Accumulated Depreciation —Equipment...........................
18,000
3,000
3,000
(c) REED COMPANY Balance Sheet (partial) December 31 2014
2013
Property, plant, and equipment Equipment ............................................... $18,000 Less: Accumulated depreciation ........... 6,000 Carrying amount ..................................... $12,000
$18,000 3,000 $15,000
REED COMPANY Income Statement (partial) Year Ended December 31
Depreciation Expense .............................
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2014
2013
$3,000
$3,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-6 (a)
(b)
Mar. 1
Cash .................................................... 4,800 Unearned Revenue ......................
4,800
$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. 1,600
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Service Revenue Oct. 31 3,200
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-7 (a)
An adjusting entry will be needed because services have been provided in November but will not be invoiced until the first of December.
(b) Nov. 30 Accounts Receivable ....................... Service Revenue .......................... (c)
455 455
No, Ullmann will not have to make a journal entry on December 1 when they invoice Rackets Plus because the November 30th adjusting entry already recorded the amount.
(d) Dec. 9
Cash ....................................................... 455 Accounts Receivable...................
455
BRIEF EXERCISE 3-8 (a)
An adjusting entry will be needed because services have been obtained in November but have not been invoiced until the first of December. Nov. 30 Maintenance Expense...................... Accounts Payable........................
455 455
(b) No, Rackets Plus will not have to make a journal entry on December 1 when the invoice from Ullmann Maintenance is received because the November 30th adjusting entry already recorded the amount. (c)
Dec. 9
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Accounts Payable ............................ Cash .............................................
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455 455
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-9 (a)
(b)
(c)
July 28 Salaries Expense ............................. 6,000 Cash ............................................. July 31
Salaries Expense ............................. 4,000 Salaries Payable .......................... (Monday to Thursday at $1,000 each)
Aug. 4 Salaries Expense ................................ 2,000 Salaries Payable ................................. 4,000 Cash .............................................
6,000
4,000
6,000
BRIEF EXERCISE 3-10 (a)
Note 1: $40,000 × 5% × 5/12 = Note 2: $10,000 × 6% × 1/12 = Total accrued interest
$833 50 $883
(b) May 31/14 Interest Receivable ....................... Interest Revenue .....................
883 883
BRIEF EXERCISE 3-11 (a) July 31/13 Equipment ...................................... 50,000 Cash ......................................... Note Payable ........................... (b) Nov. 30/13 Interest Expense ........................... Interest Payable ...................... ($36,000 × 4.5% × 4/12)
540
(c) Jan. 31/14 Interest Expense* ......................... 270 Interest Payable ............................ 540 Note Payable ................................. 36,000 Cash ........................................ *($36,000 × 4.5% × 6/12) – $540
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14,000 36,000
540
36,810
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-12 (a) and (b) (1) Prepaid expenses: an adjustment is required to record the cost of the asset that has been used up as an expense, and to show the unexpired costs in the asset accounts. If the adjustment is not recorded, assets are overstated and expenses are understated. Profit and owner’s equity are overstated. (2) Unearned revenues: an adjusting entry is required to record the revenue that has been earned and to show the liability that remains at the end of the accounting period. If the adjustment is not recorded, liabilities are overstated and revenues are understated. Profit and owner’s equity are understated. (3) Accrued revenues: an adjusting entry is required to show the receivable that exists at the balance sheet date, and to record the revenue that has been earned during the period. If the adjustment is not recorded, assets and revenues are understated. Profit and owner’s equity are understated. (4) Accrued expenses: an adjusting entry is required to record the obligations that exist at the balance sheet date, and to recognize the expenses that apply to the current accounting period. If the adjustment is not recorded, liabilities and expenses are understated. Profit and owner’s equity are overstated.
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Chapter 3
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 3-13 WINTERHOLT COMPANY Adjusted Trial Balance September 30, 2014
Debit
Credit
Cash............................................................. $ 1,100 Accounts receivable ................................... 6,050 Prepaid rent................................................. 780 Equipment ................................................... 29,800 Accumulated depreciation—equipment.... $ 6,400 2,890 Accounts payable ....................................... 875 Salaries payable.......................................... 840 Unearned service revenue ......................... 16,150 C. Winterholt, capital .................................. C. Winterholt, drawings.............................. 21,000 48,450 Service revenue .......................................... 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 3-14 (a) , (b) and (d)
Supplies 825 190
Supplies Expense Jan. 1 0 May 31 3,165 Dec. 31 190 Dec. 31 2,975 Bal.
Jan. 1 Dec. 31 Dec. 31 1,015 Bal. (b) May 31
Supplies Expense ............................ 3,165 Cash ...........................................
3,165
(c)
The balance sheet will report $1,015 as Supplies as a current asset. The income statement will report $2,975 as Supplies Expense.
(d)
Dec. 31
(e)
Supplies.......................................... Supplies Expense .....................
190 190
The adjusted balances are the same. It does not matter whether the original entry is recorded to an asset or an expense account, as long as the adjustment is done correctly.
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Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 3-15 (a)
Oct. 31 Service Revenue................................. 1,600 Unearned Revenue ......................
1,600
$4,800 ÷ 12 = $400 per month Number of months remaining November to February—4 months Amount unearned at October 31: 4 × $400 = $1,600
Unearned Revenue Oct. 31 Oct. 31 Bal.
Service Revenue Mar. 1 4,800 Oct. 31 1,600 Oct. 31 Bal. 3,200
1,600 1,600
(b) The adjusted balances are the same. It does not matter whether the original entry is recorded to a liability or a revenue account as long as the adjustment is done correctly.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 expense purchased on account during the previous year. Total Expenses Profit (cash basis)
Solutions Manual .
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2013
2014
$50,000
$55,000
–
12,000
4,500
2,000
54,500
69,000
17,250
19,750
– 17,250
2,400 22,150
$37,250
$46,850
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 expense purchased on account during the year. Total Expenses Profit (accrual basis) (c)
2013
2014
$50,000
$55,000
12,000
18,000
– 62,000
4,500 77,500
17,250
19,750
2,400 19,650
3,100 22,850
$42,350
$54,650
The accrual basis provides more 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.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-2 (a)
When the flight takes place in December.
(b) When the home theatre is delivered. (c)
As the tickets are used over the season.
(d) Over the period of time the loan is outstanding. (e)
When the sweater is shipped in September.
(f)
As each magazine is delivered.
(g) When the gift card is redeemed in January.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-3 Adjustment 1: Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
The asset Prepaid Insurance is decreased by $350. The expense Insurance Expense is increased by $350. Debits increase expenses: debit Insurance Expense $350. Credits decrease assets: credit Prepaid Insurance $350. Dec. 31 Insurance Expense 350 Prepaid Insurance 350 To record insurance expired.
Adjustment 2: Basic Analysis Debit/Credit Analysis Adjusting Journal Entry
Solutions Manual .
The asset Supplies is decreased by $300. The expense Supplies Expense is increased by $300. Debits increase expenses: debit Supplies Expense $300. Credits decrease assets: credit Supplies $300. Dec. 31 Supplies Expense 300 Supplies 300 To record supplies used.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 $1,140. The expense Depreciation Expense is increased by $1,140. Debits increase expenses: debit Depreciation Expense $1,140. Credits increase contra assets: credit Accumulated Depreciation—Equipment $1,140. Dec. 31 Depreciation Expense 1,140 Accumulated Depreciation —Equipment 1,140 To record depreciation of equipment.
Adjustment 4: Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability Unearned Revenue is decreased by $260. The revenue account Service Revenue is increased by $260. Debits decrease liabilities: debit Unearned Revenue $260. Credits increase revenues: credit Service Revenue $260. Dec. 31 Unearned Revenue 260 Service Revenue 260 To record revenue for services provided.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-3 (Continued) Adjustment 5: Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
The liability account Salaries Payable is increased by $800. The expense Salaries Expense is increased by $800. Debits increase expenses: debit Salaries Expense $800. Credits increase liabilities: credit Salaries Payable $800. Dec. 31 Salaries Expense 800 Salaries Payable 800 To record accrued salaries.
Adjustment 6: Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability account Accounts Payable is increased by $225. The expense Utilities Expense is increased by $225. Debits increase expenses: debit Utilities Expense $225. Credits increase liabilities: credit Accounts Payable $225. Dec. 31 Utilities Expense 225 Accounts Payable 225 To record accrued expenses.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-3 (Continued) Adjustment 7: Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
The asset account Accounts Receivable is increased by $1,000. The revenue account Service Revenue is increased by $1,000. Debits increase assets: debit Accounts Receivable $1,000. Credits increase revenues: credit Service Revenue $1,000. Dec. 31 Accounts Receivable 1,000 Service Revenue 1,000 To accrued 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 $125. The expense Interest Expense is increased by $125. Debits increase expenses: debit Interest Expense $125. Credits increase liabilities: credit Interest Payable $125. Dec. 31 Interest Expense 125 Interest Payable 125 To record interest on note payable.
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-4 (a) Transaction 1: (1)
Apr. 1
(2) 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: (1) Aug. 31
(2) 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: (1) Sept. 27
(2) 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: (1) Nov. 30
(2) Dec. 31
Solutions Manual .
Prepaid Expenses ............................ 1,500 Cash ............................................. Office Expense ................................. Prepaid Expenses........................
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1,500
500 500
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-4 (Continued) Transaction 5: (1) Dec. 15
(2) Dec. 31
Cash .................................................. 935 Unearned Gift Certificate Revenue Unearned Gift Certificate Revenue . Admission Revenue .................... ($935 – $545 = $390)
935
390 390
(b) Prepaid Insurance Apr. 1 4,020 Dec. 31 3,015 Dec. 31 Bal. 1,005
Insurance Expense Dec. 31 3,015
Prepaid Rent Aug. 31 6,500 Dec. 31 5,200 Dec. 31 Bal. 1,300
Rent Expense Dec. 31 5,200
Unearned Revenue Sep. 27 3,600 Dec. 31 1,080 Dec. 31 Bal. 2,520
Fees Earned Dec. 31
Prepaid Expenses Nov. 30 1,500 Dec. 31 Dec. 31 1,000 Bal.
Solutions Manual .
1,080
Office Expense Dec. 31 500 500
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-4 (Continued) (b) (continued) Unearned Gift Certificate Revenue Dec. 15 935 Dec. 31 390 Dec. 31 545 Bal.
Solutions Manual .
Admission Revenue Dec. 31 390
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-5 (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 .................... 3,150 Accumulated Depreciation— Equipment .................................. ($12,600 ÷ 4 = $3,150 per year)
2,720
4,000
3,150
(b) Building $68,000
Cost Less: Accumulated Depreciation * 13,600 Carrying amount $54,400
Vehicles $28,000
Equipment $12,600
4,000 $24,000
**7,875 $ 4,725
* $2,720 × 5 = $13,600 **$3,150 × 2.5 = $7,875
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-6 (a)
Dec. 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)
(b)
Jan.
31 Accounts Receivable ....................... Commission Revenue .................
520
31
Utilities Expense .............................. Accounts Payable........................
425
31 Interest Receivable .......................... Interest Revenue ......................... ($6,000 × 6% × 3/12 = $90)
90
1 Interest Payable ............................... Cash .............................................
160
520
425
90
160
5 Salaries Payable............................... 1,500 Salaries Expense ............................. 2,000 Cash ............................................. 7
Feb.
Solutions Manual .
Cash.................................................. Accounts Receivable ..................
520
9 Accounts Payable ............................ Cash .............................................
425
1
3,500
520
Cash.................................................. 6,120 Interest Receivable ..................... Interest Revenue ($6,000 × 6% × 1/12) Note Receivable...........................
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1,500
425
90 30 6,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-7 (a)
July
2
10
14
20
Prepaid Rent..................................... Cash .............................................
750
Supplies............................................ Cash .............................................
200
Cash.................................................. Accounts Receivable ..................
850
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 .
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1,300
800
250
500
130
900
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-8 1.
Mar. 31 Depreciation Expense .................... Accumulated Depreciation —Equipment ............................... ($37,800 ÷ 4 × 3/12)
2.
3.
4.
5.
6.
Solutions Manual .
2,363 2,363
31 Unearned Rent Revenue................. 6,975 Rent Revenue ($9,300 × 3/4) ...... 31 Interest Expense ............................. Interest Payable .......................... ($30,000 × 6% × 3/12)
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
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6,975
13,550
900
700
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-9 July 1/14
Nov. 1/14
Dec. 1/14
Dec. 31/14
Dec. 31/14
Jan. 1/15
Feb. 1/15
Mar. 1/15
Solutions Manual .
Cash ................................................ 75,000 Note Payable ...........................
75,000
Cash ................................................ 42,000 Note 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 Note Payable ................................. 42,000 Cash ........................................ *($42,000 × 5% × 1/12) Interest Expense* ......................... 500 Interest Payable .............................. 1,500 Note Payable ................................. 75,000 Cash ........................................ *($75,000 × 4% × 8/12) – $1,500
3-35
1,500
175
42,175
77,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-10 July 1/14
Nov. 1/14
Nov. 30/14
Nov. 30/14
Dec. 1/14
Jan. 1/15
Feb. 1/15
Mar. 1/15
Solutions Manual .
Note Receivable ............................. 75,000 Cash .........................................
75,000
Note 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*.................... Note Receivable ...................... *($42,000 × 5% × 1/12)
175 42,000
Cash............................................... 77,000 Interest Revenue*.................... Interest Receivable ................. Note Receivable ...................... *($75,000 × 4% × 8/12) – $1,250
750 1,250 75,000
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-11 Answer
Calculation
(a)
Unearned revenue = $1,150
Service Revenue (01/31/14) $2,000 Unearned Revenue (01/31/14) 750 2,750 Cash received in Jan. 1,600 Unearned Revenue (12/31/13) $1,150
(b)
Purchase date = Jan. 1, 2009
On Jan. 31/14, there is $3,660 in Accumulated Depreciation: $3,660 ÷ $60/month = 61 months Purchase date: 61 months or 5 years and one month earlier than Jan. 31/14.
(c)
Total premium = $4,800
Total premium = Monthly premium × 12 $400 × 12 = $4,800
Purchase date = June. 1, 2013
Purchase date: On Jan. 31, there are 4 months coverage remaining ($400 × 4). Thus, the purchase date was 8 months earlier, on June. 1, 2013.
(d)
Supplies purchased = $850
Supplies Expense Add: Supplies (01/31/14) Less: Supplies (01/01/14) Supplies purchased
$950 700 (800) $850
(d)
Salaries paid = $2,200
Salaries Payable (12/31/13) Salaries Payable (01/31/14)
$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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-12 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 ................................. 1,250 Prepaid Insurance ..............................
1,250
Depreciation Expense ............................ Accumulated Depreciation —Equipment .......................................
2,275
2,275
Salaries Expense .................................... 1,125 Salaries Payable ................................. Interest Expense ..................................... Interest Payable ................................... Unearned Service Revenue ($1,600 – $900) ........................................ Service Revenue..................................
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1,125
500 500
700 700
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-13 LANE COMPANY Income Statement Year Ended October 31, 2014
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, 2014
E. Lane, capital, Beginning of Year ................................ Add: Profit .................................................................... Less: Drawings .............................................................. E. Lane, capital, End of Year...........................................
Solutions Manual .
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$ 5,600 5,840 11,440 10,000 $ 1,440
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 3-13 (Continued)
LANE COMPANY Balance Sheet October 31, 2014
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 3-14 (a) Transaction 1: (1)
Apr. 1
(2) Dec. 31
Insurance Expense .......................... 4,020 Cash ............................................. Prepaid Insurance ............................ 1,005 Insurance Expense ...................... ($4,020 × 3/12 = $1,005)
4,020
1,005
Transaction 2: (1) Aug. 31
(2) Dec. 31
Rent Expense ................................... 6,500 Cash ............................................. Prepaid Rent..................................... 1,300 Rent Expense............................... ($6,500 × 1/5 = $5,200)
6,500
1,300
Transaction 3: (1) Sept. 27
(2) Dec. 31
Cash .................................................. 3,600 Fees Earned ................................. Fees Earned...................................... 2,520 Unearned Revenue ...................... ($3,600 × 7/10 = $2,520)
3,600
2,520
Transaction 4: (1) Nov. 30
(2) Dec. 31
Solutions Manual .
Office Expense ................................. 1,500 Cash .............................................
1,500
Prepaid Expenses ............................ 1,000 Office Expense ............................
1,000
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 3-14 (Continued) (a) (continued) Transaction 5: (1) Dec. 15
(2) Dec. 31
Cash .................................................. Admission Revenue ....................
935
Admission Revenue ......................... 545 Unearned Gift Certificate Revenue
935
545
(b) Prepaid Insurance Dec. 31 1,005
Insurance Expense Apr. 1 4,020 Dec. 31 1,005 Dec. 31 Bal. 3,015
Prepaid Rent Dec. 31 1,300
Rent Expense Aug. 31 6,500 Dec. 31 Dec. 31 Bal. 5,200
Unearned Revenue Dec. 31 2,520
Fees Earned Sep. 27 3,600 Dec. 31 2,520 Dec. 31 Bal. 1,080
Prepaid Expenses Dec. 31 1,000
Solutions Manual .
1,300
Office Expense Nov. 30 1,500 Dec. 31 Dec. 31 Bal. 500
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1,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 3-14 (Continued) (b) (continued)
Unearned Gift Certificate Revenue Dec. 31 545
(c)
Admission Revenue Dec. 15 935 Dec. 31 545 Dec. 31 390 Bal.
Once the adjusting entries are posted, the ending account balances are the same, regardless of the method used.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 3-15 (a)
Jan.
1
Rent Expense .................................. 1,000 Cash ............................................
1, 000
2 Insurance Expense ......................... 1,920 Cash ............................................
1,920
5 Supplies Expense ........................... 1,700 Cash ............................................
1,700
19
31
(b)
Cash................................................. 6,100 Service Revenue.........................
6,100
Rent Expense .................................. 1,000 Cash ............................................
1, 000
31 Prepaid Insurance........................... 1,760 Insurance Expense..................... ($1,920 × 11/12) 31
Supplies........................................... Supplies Expense.......................
650
31 Service Revenue ............................. 3,600 Unearned Service Revenue ....... ($6,100 – $2,500) 31
Solutions Manual .
Prepaid Rent.................................... 1,000 Rent Expense..............................
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1,760
650
3,600
1,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 3-15 (Continued)
(a), (b) and (c) Prepaid Rent Jan. 31 1,000
Rent Expense Jan. 1 1,000 Jan. 31 1,000 Jan. 31 Jan. 31 Bal. 1,000
Prepaid Insurance Jan. 31 1,760
Jan. 31
Insurance Expense Jan. 2 1,920 Jan. 31 1,760 Jan. 31 Bal. 160
Supplies 650
Supplies Expense Jan. 5 1,700 Jan. 31 Jan. 31 1,050 Bal.
Unearned Revenue Jan. 31 3,600
Solutions Manual .
1,000
650
Service Revenue Jan. 19 6,100 Jan. 31 3,600 Jan. 31 Bal. 2,500
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 Unpaid Wages Owing at the end of 2013 would not be considered expenses until they are actually paid out in 2014; and Under the ACCRUAL BASIS of accounting, Unpaid Wages Owing at the end of 2013 would be considered expenses in 2013, because the cost was incurred or “used up” during 2013, even though the cash will not be paid out until 2014. Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-1A (Continued) (a) and (b) $37,100
Cash basis profit ($85,500 – $48,400)
–1,500 Accounts Payable owing at the end 2014 should be accrued; the related expense was incurred in 2014 and thus, reduces income. +2,250 Accounts Payable owing at year end 2013 represent expenses of 2013. Amounts have been deducted from cash and must be added back for accrual basis profit. +4,200 Accounts Receivable arise from sales that have been made in 2014, and thus, revenue must be recognized and recorded in 2014. –2,700 Accounts Receivable collected in 2014 from sales made (and revenue that was earned) in 2013. –1,300
Depreciation Expense is equal to the increase in accumulated depreciation from 2013 to 2014 ($11,300 – $10,000 = $1,300)
+1,500 Prepaid Insurance at year end 2014 is an asset rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit. –1,300 Prepaid Insurance at year end 2013 has been used up and must be recorded as an expense during 2014 under the accrual basis. +750
Supplies on hand at year end 2014 represent assets rather than an expense. Amount has been deducted from cash basis and must be added back for accrual basis profit.
–400 Supplies on hand at year end 2013 have been used up and must be recorded as an expense during 2014.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-1A (Continued) (a) and (b) (Continued) –1,200
Unearned Revenue was received in cash in 2014 but has not been earned and thus, must be deducted.
+1,500
Unearned Revenue received in cash in 2013 has now been earned and must be recorded in 2014.
$38,900
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-2A (a)
1. Jan. 10 Supplies ............................................. 3,400 Cash ............................................ 2. Feb. 1 Prepaid Insurance ............................. 3,780 Cash ............................................ 3. Mar. 31 Equipment ....................................... 21,240 Cash ............................................ 4. Sept. 1 Prepaid Rent ...................................... 6,000 Cash ............................................ 5. Oct. 15 Cash ................................................... 1,800 Unearned Revenue ..................... 6. Nov. 1 Cash ................................................... 1,725 Unearned Revenue .....................
3,400
3,780
21,240
6,000
1,800
1,725
(b) 1. Basic Analysis Debit/Credit Analysis Adjusting Journal Entry
Solutions Manual .
The asset Supplies is decreased by $2,475. The expense Supplies Expense is increased by $2,475. Debits increase expenses: debit Supplies Expense $2,475. Credits decrease assets: credit Supplies $2,475. Dec. 31 Supplies Expense 2,475 Supplies ($3,400 – $925) 2,475 To record supplies used.
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Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-2A (Continued) 2. Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
The asset Prepaid Insurance is decreased by $3,465. The expense Insurance Expense is increased by $3,465. Debits increase expenses: debit Insurance Expense $3,465. Credits decrease assets: credit Prepaid Insurance $3,465. Dec. 31 Insurance Expense 3,465 Prepaid Insurance 3,465 To record insurance expired. ($3,780 × 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 $2,655. The expense Depreciation Expense is increased by $2,655. Debits increase expenses: debit Depreciation Expense $2,655. Credits increase contra assets: credit Accumulated Depreciation—Equipment $2,655. Dec. 31 Depreciation Expense 2,655 Accumulated Depreciation —Equipment 2,655 To record depreciation of equipment. ($21,240 ÷ 6 × 9/12)
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-2A (Continued) 4. Basic Analysis Debit/Credit Analysis Adjusting Journal Entry
The asset Prepaid Rent is decreased by $2,000. The expense Rent Expense is increased by $2,000. Debits increase expenses: debit Rent Expense $2,000. Credits decrease assets: credit Prepaid Rent $2,000. Dec. 31 Rent Expense ($6,000 × 4/12) 2,000 Prepaid Rent 2,000 To record truck lease expired.
5. Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
The liability Unearned Revenue is decreased by $1,200. The revenue account Service Revenue is increased by $1,200. Debits decrease liabilities: debit Unearned Revenue $1,200. Credits increase revenues: credit Service Revenue $1,200. Dec. 31 Unearned Revenue ($1,800 × 2/3) 1,200 Service Revenue 1,200 To record revenue for services provided.
6. Basic Analysis Debit/Credit Analysis
Adjusting Journal Entry
Solutions Manual .
The liability Unearned Revenue is decreased by $1,150. The revenue account Rent Revenue is increased by $1,150. Debits decrease liabilities: debit Unearned Revenue $1,150. Credits increase revenues: credit Rent Revenue $1,150. Dec. 31 Unearned Revenue ($1,725 × 2/3) 1,150 Rent Revenue 1,150 To record revenue for rent earned.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-2A (Continued) (c)
1.
Supplies Jan. 10 3,400 Dec. 31 2,475 Dec. 31 Bal. 925
Supplies Expense Dec. 31 2,475
2. Prepaid Insurance Feb. 1 3,780 Dec. 31 3,465 Dec. 31 Bal. 315
Insurance Expense Dec. 31 3,465
3.
Mar. 31
Accumulated Depreciation—Equipment Dec. 31 2,655
Equipment 21,240
Depreciation Expense Dec. 31 2,655
4. Prepaid Rent Sept. 1 6,000 Dec. 31 2,000 Dec. 31 Bal. 4,000
Solutions Manual .
Rent Expense Dec. 31 2,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-2A (Continued) 5. Unearned Revenue Oct. 15 1,800 Dec. 31 1,200 Dec. 31 Bal. 600
Service Revenue Dec. 31 1,200
6. Unearned Revenue Nov. 1 1,725 Dec. 31 1,150 Dec. 31 Bal. 575
Rent Revenue Dec. 31
1,150
Taking It Further: Ouellette & Associates cannot avoid recording adjusting journal entries at the end of the fiscal year. Had Ouellette originally recorded items 1 though 4 as expenses and items 5 and 6 as revenues, there would have been a requirement to adjust the asset and liability accounts at the end of the fiscal year in order to arrive at accurate balances.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-3A (a)
Dec. 31 Interest Receivable ......................... Interest Revenue ........................ ($10,000 × 8% × 1/12 = $67)
67 67
31 Salaries Expense ............................ 3,900 Salaries Payable ......................... ($6,500 ÷ 10 × 6 = $3,900) 31 Accounts Receivable ...................... 3,375 Service Revenue......................... 31
(b)
Utilities Expense ............................. Accounts Payable.......................
485
31 Interest Expense ............................. Interest Payable .......................... ($25,000 × 5% × 2/12 = $208)
208
Jan. 1
Jan. 6
Cash................................................. Interest Receivable.....................
208
67 67
Jan. 18 Cash ................................................... 3,375 Accounts Receivable ................. Jan. 22 Accounts Payable ........................... Cash ............................................
485
Apr. 30
417* 208
Solutions Manual .
3-54
3,375
485
Salaries Expense ............................ 2,600* Salaries Payable.............................. 3,900 Cash ............................................ ($6,500 ÷ 10 × 4 = $2,600)
Interest Expense ............................. Interest Payable .............................. Cash ............................................ *($25,000 × 5% × 4/12)
3,900
6,500
3,375
485
625
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 .................................................... 3,900 Utilities Expense ..................................................... 485 4,593 Profit would be overstated by................................
$ 1,151
Assets would be understated by: Interest Receivable ................................................. $ 67 Accounts Receivable .............................................. 3,375
$3,442
Liabilities would be understated by: Interest Payable ..................................................... Accounts Payable .................................................. Salaries Payable ....................................................
4,593
Owner’s equity would be overstated by................
Solutions Manual .
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208 485 3,900
$ 1,151
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-4A 1.
(a)
Feb. 10 Supplies ............................................. 1,085 Cash ............................................
1,085
(b) Dec. 31 Supplies Expense ($535 + $1,085 – $370) ....................... 1,250 Supplies ......................................
1,250
2.
(a) Sept.
(b) Dec.
2 Equipment ....................................... 23,500 Cash ............................................ 31 Depreciation Expense .................... Accumulated Depreciation— Equipment ($23,500 ÷ 10 × 4/12)
23,500
783 783
3.
(a)
Oct.
(b) Dec. 31
Solutions Manual .
Cash ($200 × 250) ............................ 50,000 Unearned Revenue .....................
50,000
Unearned Revenue .......................... 14,286 Admission Revenue ($50,000 ÷ 7 × 2) ..........................
14,286
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-4A (Continued)
4. (a)
(b)
(c)
5. (a)
(b)
(c)
6. (a)
(b)
(c)
Dec. 30
Dec. 31
Jan. 6
Dec. 1
Wages Expense............................... 4,200 Cash ............................................ Wages Expense............................... Wages Payable ($4,200 ÷ 6) .......
700 700
Wages Payable ................................ 700 Wages Expense ($4,200 ÷ 6 × 5) .... 3,500 Cash ............................................
Cash................................................. Rental Revenue ..........................
350
Dec. 31 Accounts Receivable ($500 – $350) Rental Revenue ..........................
150
Jan. 7
650
June
Cash ($150 + $500).......................... Accounts Receivable ................. Rental Revenue ..........................
Mar.
Solutions Manual .
150
150 500
25,100
622
1 Interest Expense ($25,100 × 4.25% × 2/12) ................. 178 Interest Payable .............................. 622 Note Payable ................................... 25,100 Cash ............................................
3-57
4,200
350
1 Cash ................................................. 25,100 Note Payable ...............................
Dec. 31 Interest Expense ............................. Interest Payable ($25,100 × 4.25% × 7/12).............
4,200
622
25,900
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-4A (Continued) 7. (b) Dec. 31 Telephone Expense ........................ Accounts Payable.......................
325
(c)
325
Jan. 10
Accounts Payable ........................... Cash ............................................
325
325
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 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-5A 1.
Sept. 30 Supplies Expense ($2,000 + $1,800 – $750) .................... 3,050 Supplies ......................................
3,050
30 Insurance Expense ($3,200 × 11/12) 2,933 Prepaid Insurance ......................
2,933
2.
3.
4.
5.
6.
7. 8.
9.
10.
Solutions Manual .
30 Interest Expense ............................. Interest Payable ($20,000 × 6% × 7/12)..................
700
30 Depreciation Expense .................... Accumulated Depreciation— Equipment ($24,000 ÷ 15 × 7/12)
933
700
933
30 Unearned Revenue ............................ 1,000 Fees Earned ($1,500 × 4/6).........
1,000
30 Rent Expense ($9,000 ÷ 9 × 2) .......... 2,000 Prepaid Rent ...............................
2,000
No entry required 30 Accounts Receivable ........................ 1,500 Fees Earned ................................
1,500
30 Wages Expense ................................. 2,900 Wages Payable ...........................
2,900
30 Utilities Expense ............................ Accounts Payable.......................
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475 475
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-5A (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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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-6A (a) 1.
Dec. 31 Advertising Expense ......................... 5,200 Prepaid Advertising.................... A650 – $6,000 ÷ 12 = $500 per month for 8 months = ............................................ B974 – $9,600 ÷ 24 = $400 per month for 3 months = ............................................
2.
3.
$4,000 1,200 $5,200
Dec. 31 Depreciation Expense ($30,000 ÷ 5) ...................................... 6,000 Accumulated Depreciation ........
6,000
Dec. 31 Depreciation Expense ($40,000 ÷ 6 × 7/12) ............................ 3,889 Accumulated Depreciation ........
3,889
Dec. 31 Insurance Expense ......................... 11,500 Prepaid Insurance ......................
11,500
Policy 1 – $12,360 ÷ 24 = $515 per month for 12 months = .......................................... Policy 2 – $7,980 ÷ 12 = $665 per month for 8 months = ............................................
4.
5,200
Dec. 31 Interest Expense ............................... 2,302 Interest Payable .......................... ($85,000 × 6.5% × 5/12 mos. = $2,302)
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$6,180 5,320 $11,500
2,302
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-6A (Continued) (a) (Continued) 5.
Dec. 31 Salaries Expense ............................... 3,150 Salaries Payable ......................... 6 × $750 × 3/6 days =................... 3 × $600 × 3/6 days =................... Total .............................................
6.
3,150
$2,250 900 $3,150
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
(b) Truck 1, Accumulated depreciation = $6,000 × 3 = $18,000 Carrying amount = $30,000 – $18,000 = $12,000 Truck 2, Accumulated depreciation = $3,889 Carrying amount = $40,000 – $3,889 = $36,111 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7A (a) Cobalt Co.: Mar. 31/14
Cash................................................ 100,000 Note Payable (Note 1) ............. 100,000
June 1/14
Cash................................................ Note Payable (Note 2) .............
60,000
Interest Expense ............................ Cash ......................................... Note 1: ($100,000 × 4% × 3/12)
1,000
Cash................................................ Note Payable (Note 3) .............
25,000
Interest Expense ............................ Cash ......................................... Note 1: ($100,000 × 4% × 3/12)
1,000
Interest Expense ............................ Interest Payable ...................... Note 3: ($25,000 × 5% × 1/12)
104
Interest Expense ............................ Interest Payable ...................... Note 2: ($60,000 × 4.5% × 4/12)
900
Interest Payable ............................. Cash ......................................... Note 3: ($25,000 × 5% × 1/12)
104
Interest Expense ............................ Cash ......................................... Note 3: ($25,000 × 5% × 1/12)
104
June 30/14
Sept. 1/14
Sept. 30/14
Sept. 30/14
Sept. 30/14
Oct. 1/14
Nov. 1/14
Solutions Manual .
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60,000
1,000
25,000
1,000
104
900
104
104
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7A (Continued) (a) (Continued) Dec. 1/14
Dec. 31/14
Mar. 1/15
Mar. 31/15
Interest Expense ............................ Note Payable (Note 3) .................... Cash .........................................
104 25,000
Interest Expense ............................ Cash ......................................... Note 1: ($100,000 × 4% × 3/12)
1,000
25,104
1,000
Interest Expense*........................... 1,125 Interest Payable ............................. 900 Note Payable (Note 2) .................... 60,000 Cash ........................................ * Note 2: ($60,000 × 4.5% × 5/12)
62,025
Interest Expense*........................... 1,000 Note Payable (Note 1) .................... 100,000 Cash ........................................ 101,000 * Note 1: ($100,000 × 4% × 3/12)
(b) Azores Enterprises: Mar. 31/14
Note Receivable (Note 1) ............... 100,000 100,000 Cash .........................................
June 1/14
Note Receivable (Note 2) ............... Cash .........................................
60,000
Cash................................................ Interest Revenue ..................... Note 1: ($100,000 × 4% × 3/12)
1,000
Note Receivable (Note 2) ............... Cash .........................................
25,000
June 30/14
Sept. 1/14
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60,000
1,000
25,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7A (Continued) (b) (Continued) Sept. 30/14
Oct. 1/14
Oct. 31/14
Oct. 31/14
Oct. 31/14
Nov. 1/14
Dec. 1/14
Dec. 31/14
Solutions Manual .
Cash................................................ Interest Revenue ..................... Note 1: ($100,000 × 4% × 3/12)
1,000
Cash................................................ Interest Revenue ..................... Note 3: ($25,000 × 5% × 1/12)
104
Interest Receivable ........................ Interest Revenue ..................... Note 1: ($100,000 × 4% × 1/12)
333
Interest Receivable ........................ Interest Revenue ..................... Note 2: ($60,000 × 4.5% × 5/12)
1,125
Interest Receivable ........................ Interest Revenue ..................... Note 3: ($25,000 × 5% × 1/12)
104
Cash................................................ Interest Receivable ................. Note 3: ($25,000 × 5% × 1/12)
104
Cash................................................ Interest Revenue ..................... Note Receivable (Note 3) ........
25,104
Cash................................................ Interest Receivable ................. Interest Revenue ..................... Note 1: ($100,000 × 4% × 3/12)
1,000
3-65
1,000
104
333
1,125
104
104
104 25,000
333 667
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7A (Continued) (b) (Continued) Mar. 1/15
Mar. 31/15
Cash ................................................... 62,025 Interest Receivable ................. Interest Revenue*.................... Note Receivable (Note 2) ........ * Note 2: ($60,000 × 4.5% × 4/12)
1,125 900 60,000
Cash ..................................................101,000 Interest Revenue*.................... 1,000 Note Receivable (Note 1) ........ 100,000 * Note 1: ($100,000 × 4% × 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 owners equity are overstated.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (a) 1. Aug. 31 Supplies Expense ................................ 3,825 Supplies ($4,455 – $630) .......... 2.
3.
4.
5.
6.
7.
8.
Solutions Manual .
3,825
31 Insurance Expense ($12,660 × 10/12)10,550 Prepaid Insurance ....................
10,550
31 Depreciation Expense ($40,320 ÷ 8). 5,040 Accumulated Depreciation— Equipment.................................
5,040
31 Depreciation Expense ($421,200 ÷ 10)................................. 42,120 Accumulated Depreciation—Vehicles
42,120
31 Unearned Revenue ($25,000 – $4,500)............................ 20,500 Service Revenue.......................
20,500
31 Interest Expense ($162,000 × 6.5% × 1/12) ............... Interest Payable ........................
878 878
31 Salaries Expense ................................. 1,635 Salaries Payable ($545 × 3)......
1,635
31 Accounts Receivable........................... 1,350 Service Revenue.......................
1,350
31 Fuel and Repair Expense................ Accounts Payable.....................
3-67
620 620
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) (b) CASH Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance
Balance 9,000
ACCOUNTS RECEIVABLE Date
Explanation
Ref. J2
Aug. 31 Balance 31
Debit
Credit
Balance 7,080 8,430
1,350
PREPAID INSURANCE Date
Explanation
Aug. 31 Balance 31
Ref.
Debit
J2
Credit
Balance
10,550
12,660 2,110
Credit
Balance
3,825
4,455 630
SUPPLIES Date
Explanation
Aug. 31 Balance 31
Solutions Manual .
Ref. J2
3-68
Debit
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) (b) (Continued) EQUIPMENT Explanation
Date
Ref.
Debit
Credit
Balance
Aug. 31 Balance
40,320
ACCUMULATED DEPRECIATION—EQUIPMENT Date
Explanation
Aug. 31 Balance 31
Ref.
Debit
J2
Credit
Balance
5,040
25,200 30,240
Credit
Balance
VEHICLES Date
Explanation
Ref.
Debit
Aug. 31 Balance
421,200
ACCUMULATED DEPRECIATION—VEHICLES Date
Explanation
Aug. 31 Balance 31
Solutions Manual .
Ref. J2
3-69
Debit
Credit
Balance
42,120
175,500 217,620
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) (b) (Continued) ACCOUNTS PAYABLE Date
Explanation
Ref.
Debit
J2
Aug. 31 Balance 31
Credit
Balance
620
5,700 6,320
Credit
Balance
NOTES PAYABLE Date
Explanation
Ref.
Debit
Aug. 31 Balance
162,000
INTEREST PAYABLE Date
Explanation
Aug. 31
Ref.
Debit
J2
Credit
Balance
878
878
Credit
Balance
1,635
1,635
Credit
Balance
SALARIES PAYABLE Date
Explanation
Aug. 31
Ref.
Debit
J2
UNEARNED REVENUE Date
Explanation
Aug. 31 Balance 31
Solutions Manual .
Ref.
Debit
J2 20,500
3-70
25,000 4,500
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) (b) (Continued) J. REYES, CAPITAL Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance
Balance 105,075
J. REYES, DRAWINGS Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance
Balance 141,000
SERVICE REVENUE Date
Explanation
Aug. 31 Balance 31 31
Solutions Manual .
Ref. J2 J2
3-71
Debit
Credit
Balance
20,500 1,350
334,300 354,800 356,150
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) (a) (Continued) DEPRECIATION EXPENSE Date
Explanation
Aug. 31 31
Ref.
Debit
J2 J2
5,040 42,120
Credit
Balance 5,040 47,160
FUEL AND REPAIR EXPENSE Date
Explanation
Ref.
Debit
J2
Aug. 31 Balance 31
Credit
Balance 23,972 24,592
620
INSURANCE EXPENSE Date
Explanation
Aug. 31
Ref.
Debit
J2
10,550
Credit
Balance 10,550
INTEREST EXPENSE Date
Explanation
Aug. 31 Balance 31
Solutions Manual .
Ref. J2
3-72
Debit
878
Credit
Balance 9,653 10,531
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) (b) (Continued) RENT EXPENSE Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance
Balance 22,810
SALARIES EXPENSE Date
Explanation
Ref. J2
Aug. 31 Balance 31
Debit
Credit
Balance 140,625 142,260
1,635
SUPPLIES EXPENSE Date Aug. 31
Solutions Manual .
Explanation
Ref.
Debit
J2
3,825
3-73
Credit
Balance 3,825
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) (c) REYES RIDES Adjusted Trial Balance August 31, 2014
Debit $ 9,000 8,430 2,110 630 40,320
Credit
Cash.................................................................. Accounts receivable ........................................ Prepaid insurance............................................ Supplies............................................................ Equipment ........................................................ Accumulated depreciation—equipment......... $ 30,240 Vehicles ............................................................... 421,200 Accumulated depreciation—vehicles............. 217,620 Accounts payable ............................................ 6,320 Notes payable .................................................. 162,000 Interest payable ............................................... 878 Salaries payable............................................... 1,635 Unearned revenues.......................................... 4,500 J. Reyes, capital............................................... 105,075 J. Reyes, drawings .............................................. 141,000 Service revenue ............................................... 356,150 Depreciation expense...................................... 47,160 Fuel and repair expense.................................. 24,592 Insurance expense .......................................... 10,550 Interest expense .............................................. 10,531 Rent expense ................................................... 22,810 Salaries expense ................................................. 142,260 Supplies expense.............................................. 3,825 $884,418 $884,418
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8A (Continued) Taking It Further: The carrying amount of the vehicles at Aug. 31, 2014 is $421,200 − $217,620 = $203,580 or a bit less than half of the purchase price. Since the carrying amount is a bit less than half of the purchase price, the vehicles are a bit more than half depreciated though their useful life estimated at 10 years. Consequently the vehicles are slightly more than 5 years old. The carrying amount of the office equipment at Aug. 31, 2014 is $40,320 − $30,240 = $10,080 or 25% of the purchase price. Since the carrying amount is 25% of the purchase price, the office equipment is 75% depreciated though its useful life estimated at 8 years. Consequently the office equipment is 6 years old (75% × 8 years).
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (a) 1.
Aug. 31 Insurance Expense ($6,360 × 1/12) Prepaid Insurance ......................
530
31 Supplies Expense ($995 – $560) .... Supplies ......................................
435
2.
3.
4.
5.
6.
7.
8.
9.
Solutions Manual .
530
435
31 Depreciation Expense [($150,000 ÷ 50) × 1/12] ................... 250 Accumulated Depreciation—Buildings
250
31 Depreciation Expense 275 [($33,000 ÷ 10) × 1/12] ..................... Accumulated Depreciation—Furniture
275
31 Unearned Revenue.......................... 11,000 Rent Revenue ............................. [(150 – 40) × $100] 31 Interest Expense ($96,000 × 6.5% × 1/12) ................... Interest Payable ..........................
11,000
520 520
31 Salaries Expense .............................. 1,450 Salaries Payable .........................
1,450
31 Utilities Expense ............................... 3,420 Accounts Payable.......................
3,420
31 Accounts Receivable ........................ 1,350 Rent Revenue .............................
1,350
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (b) CASH Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance
Balance 17,520
ACCOUNTS RECEIVABLE Date
Explanation
Aug. 31
Ref.
Debit
J1
1,350
Credit
Balance 1,350
PREPAID INSURANCE Date
Explanation
Aug. 31 Balance 31
Ref.
Debit
J1
Credit
Balance
530
4,240 3,710
Credit
Balance
435
995 560
SUPPLIES Date
Explanation
Aug. 31 Balance 31
Solutions Manual .
Ref. J1
3-77
Debit
Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (b) (Continued) LAND Explanation
Date
Ref.
Debit
Credit
Aug. 31 Balance
Balance 35,000
BUILDINGS Explanation
Date
Ref.
Debit
Credit
Aug. 31 Balance
Balance 150,000
ACCUMULATED DEPRECIATION—BUILDINGS Date
Explanation
Aug. 31 Balance 31
Ref.
Debit
J1
Credit
Balance
250
47,750 48,000
Credit
Balance
FURNITURE Date
Explanation
Ref.
Aug. 31 Balance
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Debit
33,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (b) (Continued) ACCUMULATED DEPRECIATION—FURNITURE Date
Explanation
Ref.
Debit
J1
Aug. 31 Balance 31
Credit
Balance
275
12,925 13,200
Credit
Balance
3,420
8,500 11,920
Credit
Balance
ACCOUNTS PAYABLE Date
Explanation
Ref.
Debit
J1
Aug. 31 Balance 31
UNEARNED REVENUE Date
Explanation
Ref.
Debit
J1 11,000
Aug. 31 Balance 31
15,000 4,000
SALARIES PAYABLE Date Aug. 31
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Explanation
Ref. J1
3-79
Debit
Credit
Balance
1,450
1,450
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (b) (Continued) INTEREST PAYABLE Date
Explanation
Aug. 31
Ref.
Debit
J1
Credit
Balance
520
520
Credit
Balance
MORTGAGE PAYABLE Date
Explanation
Ref.
Debit
Aug. 31 Balance
96,000
K. MACPHAIL, CAPITAL Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance
Balance 85,000
K. MACPHAIL, DRAWINGS Date
Explanation
Ref.
Aug. 31 Balance
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Debit
Credit
Balance 42,735
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (b) (Continued) RENT REVENUE Date
Explanation
Ref.
Debit
J1 J1
Aug. 31 Balance 31 31
Credit
Balance
11,000 1,350
246,150 257,150 258,500
Credit
Balance
DEPRECIATION EXPENSE Date
Explanation
Ref.
Debit
J1 J1
Aug. 31 31 31
5,775 6,025 6,300
250 275
INSURANCE EXPENSE Date
Explanation
Ref.
Debit
J1
Aug. 31 Balance 31
Credit
Balance 6,890 7,420
530
INTEREST EXPENSE Date
Explanation
Aug. 31 Balance 31
Solutions Manual .
Ref. J1
3-81
Debit
520
Credit
Balance 5,720 6,240
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (b) (Continued) REPAIR EXPENSE Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance
Balance 14,400
SALARIES EXPENSE Date
Explanation
Ref. J1
Aug. 31 Balance 31
Debit
Credit
Balance 153,000 154,450
1,450
SUPPLIES EXPENSE Date
Explanation
Ref.
Debit
Credit
Aug. 31 Balance 31 J1
Balance 4,450 4,885
435 UTILITIES EXPENSE
Date
Explanation
Aug. 31 Balance 31
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Ref. J1
3-82
Debit
3,420
Credit
Balance 37,600 41,020
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (c) HIGHLAND COVE RESORT Adjusted Trial Balance August 31, 2014
Debit Credit Cash ................................................................... $ 17,520 Accounts receivable ......................................... 1,350 Prepaid insurance............................................. 3,710 Supplies............................................................. 560 Land ................................................................... 35,000 Buildings ........................................................... 150,000 Accumulated depreciation—buildings ............ $ 48,000 33,000 Furniture............................................................ 13,200 Accumulated depreciation—furniture ............. Accounts payable ............................................. 11,920 Unearned revenue ............................................ 4,000 Salaries payable................................................ 1,450 Interest payable ................................................ 520 Mortgage payable ............................................. 96,000 K. MacPhail, capital .......................................... 85,000 K. MacPhail, drawings...................................... 42,735 Rent revenue ..................................................... 258,500 Depreciation expense....................................... 6,300 Insurance expense ........................................... 7,420 Interest expense ............................................... 6,240 Repair expense ................................................. 14,400 Salaries expense............................................... 154,450 Supplies expense ............................................. 4,885 Utilities expense ............................................... 41,020 $518,590 $518,590
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (d) HIGHLAND COVE RESORT Income Statement Year Ended August 31, 2014
Revenues Rent revenue ............................................... $258,500 Expenses Depreciation expense ................................ $ 6,300 Insurance expense ...................................... 7,420 Interest expense.......................................... 6,240 Repair expense............................................ 14,400 Salaries expense ......................................... 154,450 Supplies expense ........................................ 4,885 Utilities expense.......................................... 41,020 Total expenses........................................ 234,715 Profit ................................................................. $ 23,785
HIGHLAND COVE RESORT Statement of Owner's Equity Year Ended August 31, 2014
K. MacPhail, capital, September 1, 2013 ........................ Add: Profit ........................................................................ Less: Drawings ................................................................ K. MacPhail, capital, August 31, 2014 ............................
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$ 85,000 23,785 108,785 42,735 $ 66,050
Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) (d) (Continued) HIGHLAND COVE RESORT Balance Sheet August 31, 2014
Assets Cash.................................................................... $ 17,520 Accounts receivable .......................................... 1,350 Prepaid insurance.............................................. 3,710 Supplies.............................................................. 560 Land .................................................................... 35,000 Cottages ............................................................ $150,000 Less: Accumulated depreciation ...................... 48,000 102,000 Furniture ............................................................. $ 33,000 Less: Accumulated depreciation ...................... 13,200 19,800 Total Assets................................................... $179,940 Liabilities and Owner's Equity Liabilities Accounts payable........................................................ $ 11,920 Unearned revenue ....................................................... 4,000 Salaries payable .......................................................... 1,450 Interest payable .......................................................... 520 Mortgage payable........................................................ 96,000 Total liabilities......................................................... 113,890 Owner's equity K. MacPhail, capital ........................................................ 66,050 Total liabilities and owner's equity .......................... $179,940
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9A (Continued) Taking It Further: The balance of the owner’s capital account that appears on the adjusted trial balance on August 31, 2014 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 August 31, 2014.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10A (a)
Nov. 30 Accounts Receivable ...................... 1,100 Service Revenue......................... ($14,750 – $13,650) 30
30
Solutions Manual .
Supplies Expense ........................... 5,935 Supplies ......................................
5,935
Insurance Expense ......................... 1,600 Prepaid Insurance ......................
1,600
30 Depreciation Expense .................... Accumulated Depreciation— Equipment...................................
5,500
30 Rent Expense ($7,750 – $7,150) ..... Accounts Payable.......................
600
30
Interest Expense ............................. Interest Payable ..........................
125
30 Unearned Revenue ......................... Service Revenue......................... ($7,100 – $6,200)
900
30
1,100
5,500
600
125
Salaries Expense ............................ 1,475 Salaries Payable .........................
3-87
900
1,475
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10A (Continued) (b) QUEEN STREET ADVERTISING AGENCY Income Statement Year Ended November 30, 2014
Revenues Service revenue........................................... Expenses Depreciation expense ................................. $ 5,500 Insurance expense ...................................... 1,600 Interest expense.......................................... 1,000 Rent expense............................................... 7,750 Salaries expense ......................................... 14,350 Supplies expense ........................................ 5,935 Total expenses........................................ Profit .................................................................
$60,750
36,135 $24,615
QUEEN STREET ADVERTISING AGENCY Statement of Owner's Equity Year Ended November 30, 2014
S. Dufferin, capital, December 1, 2013 ........................... Add: Profit ........................................................................ Less: Drawings ................................................................ S. Dufferin, capital, November 30, 2014 .........................
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$17,800 24,615 42,415 27,200 $15,215
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10A (Continued) (b) (Continued) QUEEN STREET ADVERTISING AGENCY Balance Sheet November 30, 2014
Assets Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Prepaid insurance.............................................. Equipment ........................................................... $66,000 Less: Accumulated depreciation ....................... 34,000 Total Assets ..............................................
$ 9,000 14,750 1,265 800 32,000 $57,815
Liabilities and Owner’s Equity Liabilities Note payable ................................................................ Accounts payable........................................................ Interest payable ........................................................... Unearned revenue ....................................................... Salaries payable .......................................................... Total liabilities.........................................................
$30,000 4,800 125 6,200 1,475 42,600
Owner’s Equity S. Dufferin, capital ........................................................... 15,215 Total liabilities and owner’s equity ............................ $57,815
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10A (Continued) (c)
$30,000 × ? × 8/12 = $1,000 $1,000 interest for 8 months is equivalent to $1,500 interest for 12 months. $1,500 ÷ $30,000 = 5% interest per year
(d) Salaries Expense, $14,350 less Salaries Payable on Nov. 30, 2014, $1,475 = $12,875 payment made for fiscal year 2014 salaries. Total Payments, $15,250 – $12,875 = $2,375 Salaries Payable on Nov. 30, 2013
Payments
Salaries Payable Nov. 30/13 15,250 Expense
2,375 14,350
Nov. 30/14
1,475
Taking It Further: The advertising agency has managed to generate a profit for the year of $24,615. This would appear to be a strong result in comparison to the amount of revenue. Your friend should find out how much effort the owner put into the business to generate this profit, without receiving a salary. The profit might be too low for the amount of the work done. A worrisome figure that appears on the balance sheet is the notes payable balance of $30,000. Depending on when this liability is due to be repaid, the business financial position appears weak. As well, there are considerably more liabilities than there is equity which will make the business less attractive as an investment, and lenders will find it a high risk borrower.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11A (a) 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.
Solutions Manual .
31 Interest Expense ($11,000 × 6% × 3/12) ...................... Interest Payable .......................... 31
165 165
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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170 170
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11A (Continued) (b) AGOPIAN ENTERPRISES Adjusted Trial Balance January 31, 2014
Debit Credit Cash................................................................... $ 4,970 Accounts receivable ($14,540 + $2,675) .......... 17,215 Supplies ($6,580 − $5,660) ............................... 920 Prepaid insurance ($3,960 − $2,310) ............... 1,650 Equipment ......................................................... 32,350 Accumulated depreciation— equipment ($12,940 + $6,470) ........................ $ 19,410 Notes payable ................................................... 11,000 Accounts payable ($7,760 + $170) ................... 7,930 Interest payable ................................................ 165 Salaries payable................................................ 1,315 Unearned revenue ($7,480 − $5,230) ............... 2,250 R. Scholz, capital .............................................. 18,320 R. Scholz, drawings.......................................... 119,000 Service revenue ($214,500 + $2,675 + $5,230) .......................... 222,405 Depreciation expense....................................... 6,470 Insurance expense ........................................... 2,310 Interest expense ............................................... 165 Rent expense .................................................... 20,750 Salaries expense ($66,950 + $1,315) ............... 68,265 Supplies expense ............................................. 5,660 Telephone expense ($2,900 + $170) ................ 3,070 $282,795 $282,795
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11A (Continued) (c) AGOPIAN ENTERPRISES Income Statement Year Ended January 31, 2014
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 .................................................................. $115,715
AGOPIAN ENTERPRISES Statement of Owner's Equity Year Ended January 31, 2014
E. Agopian, capital, February 1, 2013 ............................. Add: Profit ........................................................................ Less: Drawings ................................................................ E. Agopian, capital, January 31, 2014 ............................
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$ 18,320 115,715 134,035 119,000 $ 15,035
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11A (Continued) (c) (Continued) AGOPIAN ENTERPRISES Balance Sheet January 31, 2014
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. Agopian, capital........................................................... 15,035 Total liabilities and owner's equity ............................ $37,695
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11A (Continued) Taking It Further: Agopian 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 Agopian 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 Agopian Enterprises wishes to purchase additional assets, the company may require additional cash. This will have to be obtained from E. Agopian by additional investment of cash or bank financing will have to be obtained.
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-12A (a) 1.
Jan. 15
Apr.
Nov.
2.
Supplies........................................... Cash ............................................
960 960
1 Prepaid Insurance........................... 3,090 Cash ............................................ 1
Cash................................................. 1,750 Unearned Revenue .....................
Dec. 31 Supplies Expense ($960 − $245) .... Supplies ......................................
3,090
1,750
715
Dec. 31 Insurance Expense ........................ 2,318 Prepaid Insurance ...................... ($3,090 ÷ 12 × 9) Dec. 31 Unearned Revenue ......................... 1,050 Service Revenue ($1,750 × 3/5) .
715
2,318
1,050
3. Jan. 15 Dec. 31 Bal.
Supplies 960 Dec. 31
Supplies Expense Dec.31 715 715
245
Prepaid Insurance Apr. 1 3,090 Dec. 31 2,318 Dec. 31 Bal. 772
Solutions Manual .
Insurance Expense Dec. 31 2,318
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-12A (Continued) (a) (Continued) Unearned Revenue Nov. 1 1,750 Dec. 31 1,050 Dec. 31 Bal. 700
Service Revenue Dec. 31 1,050
(b) 1.
Jan. 15 Supplies expense............................ Cash ............................................ Apr.
Nov.
2.
960 960
1 Insurance Expense ......................... 3,090 Cash ............................................ 1
Dec. 31
Cash................................................. 1,750 Service Revenue.........................
Supplies........................................... Supplies Expense.......................
245
Dec. 31 Prepaid Insurance ($3,090 ÷ 12 × 3) Insurance Expense.....................
772
Dec. 31 Service Revenue ($350 × 2) ............ Unearned Revenue .....................
700
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3,090
1,750
245
772
700
Chapter 3
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-12A (Continued)
(b) (Continued) 3. Dec. 31
Supplies 245
Prepaid Insurance Dec. 31 772
Unearned Revenue Dec. 31
Supplies Expense Jan. 15 960 Dec. 31 Dec. 31 715 Bal.
245
Insurance Expense Apr. 1 3,090 Dec. 31 Dec. 31 2,318 Bal.
772
Service Revenue Nov. 1 1,750 Dec. 31 700 Dec. 31 1,050 Bal.
700
Taking It Further: The adjusting entries required are different but the ending balances in all accounts are the same.
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-13A (a) 1. Dec. 31 Prepaid Insurance ($4,020 × 1/12) ........... Insurance Expense .............................. 2.
3.
4.
5.
6.
7.
31 Interest Expense ($44,000 × 5% × 10/12).............................. Interest Payable ...................................
335 335
1,833 1,833
31 Depreciation Expense ($80,000 ÷ 8 × 10/12) ................................. 8,333 Accumulated Depreciation— Equipment ............................................ 31 Supplies .................................................... Supplies Expense ................................ 31
31
31
Solutions Manual .
8,333
785 785
Service Revenue....................................... 2,550 Unearned Revenue ..............................
2,550
Accounts Receivable ............................... 1,275 Service Revenue ..................................
1,275
Prepaid Rent ............................................. Rent Expense .......................................
3-99
600 600
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-13A (Continued) (b) WINTER DESIGNS Adjusted Trial Balance December 31, 2014
Debit Credit Cash................................................................... $16,600 Accounts receivable ($26,000 + $1,275) .......... 27,275 Supplies............................................................. 785 Prepaid insurance............................................. 335 Prepaid rent....................................................... 600 Equipment ......................................................... 80,000 Accumulated depreciation—equipment.......... $ 8,333 Note payable ..................................................... 44,000 Accounts payable ............................................. 14,820 Interest payable ................................................ 1,833 Unearned revenue ............................................ 2,550 K. Brownsey, capital......................................... 60,000 K. Brownsey, drawings .................................... 40,000 Service revenue ($121,400 + $1,275 − $2,550) ................... 120,125 Depreciation expense....................................... 8,333 Insurance expense ($4,020 − $335) ................. 3,685 Interest expense ............................................... 1,833 Rent expense ($7,800 − $600) .......................... 7,200 Salaries expense............................................... 59,900 Supplies expense ($5,900 − $785) ................... 5,115 $251,661 $251,661 Taking It Further: The required adjusting journal entries would be different but the adjusted balances would remain the same.
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Accounting Principles, Sixth Canadian Edition
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 a 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 Unpaid Wages Owing at the end of 2013 would not be considered expenses until they are actually paid out in 2014; and Under the ACCRUAL BASIS of accounting, Unpaid Wages Owing at the end of 2013 would be considered expenses in 2013, because the cost was incurred or “used up” during 2013, even though the cash will not be paid out until 2014.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-1B (Continued) (a) and (b) $27,500
Cash basis income ($136,200 − $108,700)
−3,990 Accounts Payable owing at the end 2014 should be accrued; the related expense was incurred in 2014 and thus, reduces income. +1,460 Accounts Payable owing at year end 2013 represents expenses of 2013. 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 2014, and thus, revenue must be recognized and recorded in 2014. −13,200 Accounts Receivable collected in 2014 from sales made (and revenue that was earned) in 2013. −3,250
Depreciation Expense is equal to the increase in accumulated depreciation from 2013 to 2014 ($18,250 − $15,000 = $3,250)
+620 Prepaid Insurance at year end 2014 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 2013 has been used up and must be recorded as an expense during 2014. +550
Supplies on hand at year end 2014 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 2013 have been used up and must be recorded as an expense during 2014.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-1B (Continued) (a) and (b) (Continued) −7,400
Unearned Revenue was received in cash in 2014 but has not been earned and thus, must be taken away.
+1,560
Unearned Revenue received in cash in 2013 has now been earned and must be recorded in 2014.
$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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Accounting Principles, Sixth Canadian Edition
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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Accounting Principles, Sixth Canadian Edition
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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Accounting Principles, Sixth Canadian Edition
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
Solutions Manual .
Rent Expense Dec. 31 1,100
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-2B (Continued) 5. Unearned Revenue Oct. 1 2,600 Dec. 31 975 Dec. 31 1,625 Bal.
Rent Revenue Dec. 31
975
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 though 4 as expenses and items 5 and 6 as revenues, there would 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-3B (a)
Dec. 31 Interest Expense ............................. Interest Payable .......................... ($40,000 × 5.5% × 1/12 = $183)
183 183
31 Accounts Receivable ...................... 12,000 Rental Revenue .......................... 31 Telephone Expense ........................ Accounts Payable.......................
290 290
31 Salaries Expense ($7,500 × 3/10) ... 2,250 Salaries Payable .........................
(b)
Jan.
Jan.
Jan.
31 Interest Receivable ......................... Interest Revenue ........................ ($10,000 × 7% × 2/12 = $117)
117
1 Interest Payable .............................. Cash ............................................
183
5
Jan. 12
Solutions Manual .
183
3-109
12,000 6,000
290 290
Salaries Payable.............................. 2,250 Salaries Expense ............................ 5,250 Cash ............................................
Apr. 30 Cash ($10,000 × 7% × 6/12)............. Interest Receivable..................... Interest Revenue ($10,000 × 7% × 4/12)..................
2,250
117
Cash................................................. 18,000 Accounts Receivable ................. Rental Revenue ..........................
9 Accounts Payable ........................... Cash ............................................
12,000
7,500
350 117 233
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
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 ...................................................... 2,250 Utilities Expense ..................................................... 290 2,723 Profit would be understated by .............................
$ 9,394
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 ....................................................... 2,250 Owner’s equity would be understated by .............
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2,723 $ 9,394
Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-4B 1. (a)
(b)
2. (a)
(b)
3. (a)
(b)
(c)
Feb. 17
Supplies........................................... 1,975 Cash ............................................
1,975
Nov. 30 Supplies Expense ($650 + $1,975 − $440) .................... 2,185 Supplies ......................................
2,185
Aug.
Cash ($210 × 245)............................ 51,450 Unearned Revenue .....................
51,450
Nov. 30 Unearned Revenue ......................... 15,435 Admission Revenue ($51,450 ÷ 10 × 3) ........................
15,435
Nov. 26
Nov. 30
Dec.
Solutions Manual .
3
Wages Expense............................... 4,500 Cash ............................................
4,500
Wages Expense............................... 4,500 Wages Payable ...........................
4,500
Wages Payable ................................ 4,500 Cash ............................................
4,500
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-4B (Continued) 4. (a)
(b)
(c)
5. (a)
(b)
(c)
Nov.
Cash................................................. Rent Revenue .............................
245
Nov. 30 Accounts Receivable ($425 − $245) Rent Revenue .............................
180
Dec.
605
June
1
4 Cash ($180 + $425) ......................... Accounts Receivable ................. Rent Revenue .............................
180
180 425
1 Cash ................................................. 14,000 Note Payable ...............................
Nov. 30 Interest Expense ............................. Interest Payable ($14,000 × 5.5% × 6/12)............... Feb.
245
385 385
1 Interest Expense ($14,000 × 5.5% × 2/12) ................... 128 Interest Payable .............................. 385 Note Payable ................................... 14,000 Cash ............................................
6. (b) Nov. 30 Utilities Expense ............................. Accounts Payable.......................
935
(c)
935
Dec. 10 Accounts Payable ........................... Cash ............................................
3-112
14,513
935
7. (b) Nov. 30 Depreciation Expense ($37,975 ÷ 7) 5,425 Accumulated Depreciation—Vehicles
Solutions Manual .
14,000
935
5,425
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-4B (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 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 December but had not been recorded in the recording of daily transactions.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-5B 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
31 Insurance Expense ($3,600 × 5/12) 1,500 Prepaid Insurance ......................
1,500
2.
3.
4.
5.
6.
31 Interest Expense ............................. Interest Payable ($28,000 × 6% × 4/12)..................
560
31
800
9. 10.
Solutions Manual .
800
31 Unearned Revenue ......................... 2,000 Fees Earned [$200 × (15 − 5)] ....
7. 8.
Rent Expense .................................. Prepaid Rent ...............................
560
2,000
No entry required 31 Accounts Receivable ...................... 1,550 Fees Earned ................................ 31 Wages Expense ($125 × 2 × 3) ....... Wages Payable ...........................
750
31
360
Telephone Expense ....................... Accounts Payable.......................
3-114
1,550
750 360
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-5B (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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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-6B (a) 1.
Prepaid Insurance – before adjustments A2958 – $ 5,400 B4564 – 8,700 $14,100
2.
($10,440 × 20/24)
Unearned Subscription Revenue – before adjustments Oct. 1 Nov. 1 Dec. 1
$11,375 15,750 19,425 $46,550
(325 × $35) (450 × $35) (555 × $35)
Dec. 31
Interest Receivable ......................... Interest Revenue ........................ $25,000 × 7% × 3/12 = $438
(b) 1.
2.
Dec. 31
Insurance Expense ........................... 9,720 Prepaid Insurance ......................
Expired insurance: B4564 $10,440 × 12/24 A2958 $ 5,400 × 10/12
Solutions Manual .
438 438
9,720
$5,220 4,500 $9,720
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-6B (Continued) (b) (Continued) 3.
Dec. 31
Rent Expense .................................... 1,380 Prepaid Rent ...............................
Expired rent: Agreement 1: Agreement 2:
4.
5.
$335 × 3 months $375 × 1 month
1,380
$1,005 375 $1,380
Dec. 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
Dec. 31
Unearned Subscription Revenue ..... 7,088 Rent Subscription Revenue.......
7,088
Earned Subscription Revenue at December 31, 2014: October 325 × $35 × 3/12 = $ 2,844 November 450 × $35 × 2/12 = 2,625 December 555 × $35 × 1/12 = 1,619 $7,088 6.
Dec. 31
Salaries Expense............................... 3,870 Salaries Payable .........................
6 × $650 × 3/5 = 3 × $850 × 3/5 = Total
Solutions Manual .
3,870
$2,340 1,530 $3,870
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-6B (Continued) (c)
First building, Accumulated Depreciation = $4,260 × 13 = $55,380 + 4 months for 2001 ($4,260 × 4/12 = $1,420) = $56,800 Carrying amount = $127,800 − $56,800 = $71,000 Second building, Accumulated Depreciation = $4,104 × 11 = $45,144 + 8 months for 2003 ($4,104 × 8/12 = $2,736) = $47,880 Carrying amount = $164,160 − $47,880 = $116,280
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7B (a) Alabaster Co.: June 1/14
Sept. 30/14
Oct. 1/14
Oct. 31/14
Oct. 31/14
Oct. 31/14
Nov. 1/14
Dec. 1/14
Dec. 31/14
Solutions Manual .
Cash................................................ Note Payable (Note 1) .............
50,000
Cash................................................ Note Payable (Note 2) .............
80,000
Cash................................................ Note 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
3-119
50,000
80,000
45,000
833
233
206
206
206
700
Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7B (Continued) (a) (Continued) Jan. 1/15
Jan. 1/15
Mar. 31/15
June 30/15
Sept. 30/15
Interest Expense ............................ Note Payable (Note 3) .................... Cash .........................................
206 45,000
Interest Expense*........................... Interest Payable ............................. Note 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 Note Payable (Note 2) .................... 80,000 Cash ........................................ 80,700 * Note 2: ($80,000 × 3.5% × 3/12)
(b) Fuchsia Enterprises: June 1/14
Sept. 30/14
Oct. 1/14
Solutions Manual .
Note Receivable (Note 1) ............... Cash .........................................
50,000
Note Receivable (Note 2) ............... Cash .........................................
80,000
Note Receivable (Note 3) ............... Cash .........................................
45,000
3-120
50,000
80,000
45,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7B (Continued) (b) (Continued) Nov. 1/14
Nov. 30/14
Nov. 30/14
Nov. 30/14
Dec. 1/14
Dec. 31/14
Jan. 1/15
Jan. 1/15
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 ..................... Note Receivable (Note 3) ........
45,206
Cash................................................ Interest Receivable ................. Interest Revenue*.................... Note Receivable (Note 1) ........ * Note 1: ($50,000 × 4% × 1/12)
51,167
3-121
206
1,000
467
206
206
467 233
206 45,000
1,000 167 50,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-7B (Continued) (b) (Continued) Mar. 31/15
June 30/15
Sept. 30/15
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
Cash ................................................... 80,700 Interest Revenue*.................... Note Receivable (Note 2) ........ * Note 2: ($80,000 × 3.5% × 3/12)
700
700 80,000
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 owners equity are understated.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (a) 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) (b) CASH Date
Explanation
Ref.
Debit
Credit
June 30 Balance
Balance 9,810
ACCOUNTS RECEIVABLE Date
Explanation
Ref. J2
June 30 Balance 30
Debit
Credit
Balance 5,310 6,410
1,100
PREPAID INSURANCE Date
Explanation
June 30 Balance 30
Ref.
Debit
J2
Credit
Balance
7,110
9,480 2,370
Credit
Balance
3,755
4,470 715
SUPPLIES Date
Explanation
June 30 Balance 30
Solutions Manual .
Ref. J2
3-124
Debit
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) (b) (Continued) VEHICLES Explanation
Date
June 30 Balance
Ref.
Debit
Credit
Balance
210,600
ACCUMULATED DEPRECIATION— VEHICLES Explanation
Date
June 30 Balance 30
Ref.
Debit
J2
Credit
Balance
26,325
26,325 52,650
Credit
Balance
EQUIPMENT Explanation
Date
June 30 Balance
Ref.
Debit
30,240
ACCUMULATED DEPRECIATION—EQUIPMENT Date
Explanation
June 30 Balance 30
Solutions Manual .
Ref. J2
3-125
Debit
Credit
Balance
5,040
5,040 10,080
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) (b) (Continued) ACCOUNTS PAYABLE Date
Explanation
Ref.
Debit
Credit
June 30 Balance
Balance 5,075
NOTES PAYABLE Date
Explanation
Ref.
Debit
Credit
June 30 Balance
Balance 120,000
UNEARNED REVENUE Date
Explanation
Ref.
Debit
Credit
J2 16,500
June 30 Balance 30
Balance 18,750 2,250
INTEREST PAYABLE Date June 30
Solutions Manual .
Explanation
Ref. J2
3-126
Debit
Credit
Balance
450
450
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) (b) (Continued) SALARIES PAYABLE Date
Explanation
June 30
Ref.
Debit
J2
Credit
Balance
2,340
2,340
Credit
Balance
K. CORDIAL, CAPITAL Date
Explanation
Ref.
Debit
June 30 Balance
75,000
K. CORDIAL, DRAWINGS Date
Explanation
June 30 Balance
Ref.
Debit
Credit
Balance 91,650
SERVICE REVENUE Date
Explanation
June 30 Balance 30 30
Solutions Manual .
Ref. J2 J2
3-127
Debit
Credit
Balance
16,500 1,100
252,795 269,295 270,395
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) (b) (Continued) SALARIES EXPENSE Date
Explanation
Ref.
Debit
J2
June 30 Balance 30
Credit
Balance 101,400 103,740
2,340
INTEREST EXPENSE Date
Explanation
June 30 Balance 30
Ref.
Debit
J2
Credit
Balance 4,950 5,400
450
RENT EXPENSE Date
Explanation
June 30 Balance
Ref.
Debit
Credit
Balance 17,095
FUEL AND REPAIR EXPENSE Date
Explanation
June 30 Balance
Solutions Manual .
Ref.
3-128
Debit
Credit
Balance 17,980
Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) (b) (Continued) INSURANCE EXPENSE Date
Explanation
June 30
Ref.
Debit
J2
7,110
Credit
Balance 7,110
DEPRECIATION EXPENSE Date
Explanation
June 30 June 30
Ref.
Debit
J2 J2
26,325 5,040
Credit
Balance 26,325 31,365
SUPPLIES EXPENSE Date June 30
Solutions Manual .
Explanation
Ref.
Debit
J2
3,755
3-129
Credit
Balance 3,755
Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) (c) RED BRIDGES TOWING Adjusted Trial Balance June 30, 2014
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 and repair expense................................... 17,980 Insurance expense ........................................... 7,110 Depreciation expense....................................... 31,365 Supplies expense ............................................. 3,755 $538,240 $538,240
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-8B (Continued) Taking It Further: The carrying amount of the vehicles at June 30, 2014 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, 2014 is $30,240 − $10,080 = $20,160 or 67% of the purchase price. Since the carrying amount is 67% of the purchase price, the office equipment is 33% depreciated though its useful life estimated at 6 years. Consequently the office equipment is 2 years old (33% × 6 years).
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PROBLEM 3-9B (a) 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 .............................
3-132
950 950
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (b) CASH Date
Explanation
Ref.
Debit
Credit
May 31 Balance
Balance 12,365
ACCOUNTS RECEIVABLE Date
Explanation
May 31
Ref.
Debit
J1
950
Credit
Balance 950
PREPAID INSURANCE Date
Explanation
May 31 Balance 31
Ref.
Debit
J1
Credit
Balance
440
3,080 2,640
Credit
Balance
290
1,050 760
SUPPLIES Date
Explanation
May 31 Balance 31
Solutions Manual .
Ref. J1
3-133
Debit
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (b) (Continued) LAND Explanation
Date
May 31 Balance
Ref.
Debit
Credit
Balance
80,000
BUILDINGS Explanation
Date
May 31 Balance
Ref.
Debit
Credit
Balance
180,000
ACCUMULATED DEPRECIATION— BUILDINGS Date
Explanation
May 31 Balance 31
Ref.
Debit
J1
Credit
Balance
375
76,125 76,500
Credit
Balance
FURNITURE Date
Explanation
May 31 Balance
Solutions Manual .
Ref.
3-134
Debit
21,000
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (b) (Continued) ACCUMULATED DEPRECIATION—FURNITURE Date
Explanation
Ref.
Debit
J1
May 31 Balance 31
Credit
Balance
350
12,250 12,600
Credit
Balance
1,250
4,780 6,030
Credit
Balance
ACCOUNTS PAYABLE Date
Explanation
Ref.
Debit
J1
May 31 Balance 31
UNEARNED REVENUE Date
Explanation
Ref. J1
May 31 Balance 31
Debit
8,500 6,500
2,000
SALARIES PAYABLE Date May 31
Solutions Manual .
Explanation
Ref. J1
3-135
Debit
Credit
Balance
1,025
1,025
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (b) (Continued) INTEREST PAYABLE Date
Explanation
May 31
Ref.
Debit
J1
Credit
Balance
671
671
Credit
Balance
MORTGAGE PAYABLE Date
Explanation
Ref.
Debit
May 31 Balance
146,400
M. RUNDLE, CAPITAL Date
Explanation
Ref.
Debit
Credit
May 31 Balance
Balance 54,800
M. RUNDLE, DRAWINGS Date
Explanation
May 31 Balance
Solutions Manual .
Ref.
3-136
Debit
Credit
Balance 18,750
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (b) (Continued) RENT REVENUE Date
Explanation
Ref.
Debit
J1 J1
May 31 Balance 31 31
Credit
Balance
2,000 950
102,100 104,100 105,050
Credit
Balance
ADVERTISING EXPENSE Date
Explanation
Ref.
Debit
May 31 Balance
500
DEPRECIATION EXPENSE Date
Explanation
Ref.
Debit
J1 J1
May 31 Balance 31 31
Credit
Balance 7,975 8,350 8,700
375 350
SALARIES EXPENSE Date
Explanation
May 31 Balance 31
Solutions Manual .
Ref. J1
3-137
Debit
1,025
Credit
Balance 49,304 50,329
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (b) (Continued) SUPPLIES EXPENSE Date
Explanation
Ref.
Debit
J1
May 31 Balance 31
Credit
Balance 5,410 5,700
290
INTEREST EXPENSE Date
Explanation
Ref.
Debit
J1
May 31 Balance 31
Credit
Balance 7,381 8,052
671
INSURANCE EXPENSE Date
Explanation
Ref.
Debit
J1
May 31 Balance 31
Credit
Balance 4,840 5,280
440
UTILITIES EXPENSE Date
Explanation
May 31 Balance 31
Solutions Manual .
Ref. J1
3-138
Debit
1,250
Credit
Balance 13,300 14,550
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (c) MOUNTAIN BEST LODGE Adjusted Trial Balance May 31, 2014
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
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (d) MOUNTAIN BEST LODGE Income Statement Year Ended May 31, 2014
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, 2014
M. Rundle, capital, June 1, 2013 ..................................... Add: Profit...................................................................... Less: Drawings ............................................................... M. Rundle, capital, May 31, 2014 ....................................
Solutions Manual .
3-140
$54,800 11,939 66,739 18,750 $47,989
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) (d) (Continued) MOUNTAIN BEST LODGE Balance Sheet May 31, 2014
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
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-9B (Continued) Taking It Further: The balance of the owner’s capital account that appears on the adjusted trial balance on May 31, 2014 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, 2014.
Solutions Manual .
3-142
Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10B (a)
Sept. 30 Accounts Receivable ...................... 1,100 Service Revenue......................... ($7,435 – $6,335) 30 Supplies Expense ........................... Supplies ......................................
675 675
30 Rent Expense ($2,400 – $1,050) ..... 1,350 Prepaid Rent ...............................
Solutions Manual .
30 Depreciation Expense .................... Accumulated Depreciation— Equipment...................................
500
30
Interest Expense ............................. Interest Payable ..........................
50
30 Unearned Revenue ($875 – $550) .. Service Revenue.........................
325
30 Salaries Expense ............................ Salaries Payable .........................
940
30 Utilities Expense ($920 – $610) ...... Accounts Payable.......................
310
3-143
1,100
1,350
500
50
325
940
310
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10B (Continued) (b) SAINTE-CATHERINE INTERIOR DESIGN CO. Income Statement Quarter Ended September 30, 2014
Revenues Service revenue............................................ Expenses Depreciation expense .................................. $ 500 Interest expense........................................... 100 Rent expense................................................ 1,350 Salaries expense .......................................... 13,990 Supplies expense ......................................... 675 Utilities expense........................................... 920 Total expenses......................................... Loss ..................................................................
$15,845
17,535 $ (1,690)
SAINTE-CATHERINE INTERIOR DESIGN CO. Statement of Owner’s Equity Quarter Ended September 30, 2014
C. Larocque, capital, July 1, 2014................................... Less: Loss ........................................................... $ 1,690 Drawings.................................................... 2,700 C. Larocque, capital, September 30, 2014......................
Solutions Manual .
3-144
$10,000 4,390 $ 5,610
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10B (Continued) (b) (Continued) SAINTE-CATHERINE INTERIOR DESIGN CO. Balance Sheet September 30, 2014
Assets Cash................................................................... Accounts receivable ......................................... Supplies............................................................. Prepaid rent....................................................... Equipment ......................................................... $16,000 Less: Accumulated depreciation .................... 5,000 Total assets..............................................
$ 3,250 7,435 1,075 1,050 11,000 $23,810
Liabilities and Owner’s Equity Liabilities Notes payable .............................................................. Accounts payable........................................................ Interest payable ........................................................... Unearned revenue ....................................................... Salaries payable .......................................................... Total liabilities.........................................................
$12,000 4,660 50 550 940 18,200
Owner’s equity C. Larocque, capital ........................................................ 5,610 Total liabilities and owners’ equity ............................ $23,810
Solutions Manual .
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Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-10B (Continued) (c)
Interest of 5% per year equals a monthly rate of 0.417%; monthly interest is $50 ($12,000 × 0.417%). Since total interest expense is $100, the note has been outstanding two months.
Taking It Further: The company is not performing well. It incurred a loss for the quarter of $1,690. Salary expense is very high in relation to the revenue. Another negative indicator is the amount of drawings Catherine Larocque has taken. This further reduces the amount of owner’s equity and cash available to pay the notes payable. The financial position of Sainte-Catherine appears tenuous. Total cash and accounts receivable ($10,685) are not enough to pay all liabilities outstanding ($18,200). If all accounts receivable are not collected, there may not be adequate cash to repay all liabilities. And even if all of the accounts receivable are collected, it might not be in time to pay the liabilities, depending on when the liabilities must be paid.
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11B (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
2.
3.
4.
5.
6.
7.
8.
Solutions Manual .
31
Unearned Revenue ......................... 4,000 Service Revenue.........................
31 Interest Expense ($14,000 × 5% × 3/12) ...................... Interest Payable ..........................
175
31
915
Salaries Expense ............................ Salaries Payable .........................
175
915
31 Accounts Receivable ...................... 2,000 Service Revenue......................... 31
Telephone Expense ........................ Accounts Payable.......................
3-147
4,000
2,000
210 210
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11B (Continued) (b) SHEK ENTERPRISES Adjusted Trial Balance December 31, 2014
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
Solutions Manual .
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Chapter 3
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Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11B (Continued) (c) SHEK ENTERPRISES Income Statement Year Ended December 31, 2014
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, 2014
M. Shek, capital, January 1, 2014 ................................... Add: Profit ...................................................................... Less: Drawings .............................................................. M. Shek, capital, December 31, 2014..............................
Solutions Manual .
3-149
$13,750 81,645 95,395 85,000 $10,395
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11B (Continued) (c) (Continued) SHEK ENTERPRISES Balance Sheet December 31, 2014
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 Note 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
Solutions Manual .
3-150
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 3-11B (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 $1,555 = $7,065).
Solutions Manual .
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Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-12B (a) 1.
Jan.
Feb.
Dec.
2.
1
Supplies........................................... 1,250 Cash ............................................
1,250
1 Prepaid Insurance........................... 2,820 Cash ............................................
2,820
1
Cash................................................. 1,200 Unearned Revenue .....................
Dec. 31 Supplies Expense ($1,250 − $375) . Supplies ......................................
875 875
Dec. 31 Insurance Expense ........................ 2,585 Prepaid Insurance ...................... ($2,820 ÷ 12 × 11) Dec. 31 Unearned Revenue ......................... Service Revenue.........................
1,200
2,585
300 300
3.
Jan. 1
Supplies 1,250 Dec. 31
Dec. 31 Bal.
Supplies Expense Dec. 31 875 875
375
Prepaid Insurance Feb. 1 2,820 Dec. 31 2,585 Dec. 31 Bal. 235
Solutions Manual .
Insurance Expense Dec. 31 2,585
3-152
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-12B (Continued) (a) 3. (Continued) Unearned Revenue Dec. 1 1,200 Dec. 31 300 Dec. 31 900 Bal.
(b) 1.
Jan.
Feb.
Dec.
2.
1
Service Revenue Dec. 31
Supplies expense............................ 1,250 Cash ............................................
1,250
1 Insurance Expense ......................... 2,820 Cash ............................................
2,820
1
Dec. 31
Cash................................................. 1,200 Service Revenue.........................
Supplies........................................... Supplies Expense.......................
375
Dec. 31 Prepaid Insurance ($2,820 ÷ 12 × 1) Insurance Expense.....................
235
Dec. 31
900
Solutions Manual .
300
Service Revenue ............................. Unearned Revenue .....................
3-153
1,200
375
235
900
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-12B (Continued)
(b) (Continued) 3. Dec. 31
Supplies 375
Prepaid Insurance Dec. 31 235
Unearned Revenue Dec. 31
Supplies Expense Jan. 1 1,250 Dec. 31 Dec. 31 875 Bal.
375
Insurance Expense Feb. 1 2,820 Dec. 31 Dec. 31 2,585 Bal.
235
Service Revenue Dec. 1 1,200 Dec. 31 900 Dec. 31 300 Bal.
900
Taking It Further: The adjusting entries required are different but the ending balances in all accounts are the same.
Solutions Manual .
3-154
Chapter 3
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-13B (a) 1. Dec. 31 Interest Expense ($32,400 × 5% × 1/12).................................... Interest Payable ...................................... 2.
3.
4.
5.
6.
7.
135 135
31 Depreciation Expense ($45,900 ÷ 12) ................................................ 3,825 Accumulated Depreciation— Equipment ............................................... 31 Prepaid Insurance ($1,980 × 3/12) ............... Insurance Expense .................................
495 495
31 Service Revenue........................................... 1,500 Unearned Revenue ................................. ($6,000 – $4,500 = $1,500) 31 Supplies ........................................................ Supplies Expense ................................... 31
31
Solutions Manual .
3,825
1,500
445 445
Salaries Expense.......................................... 850 Salaries Payable .....................................
850
Prepaid Rent ................................................. 625 Rent Expense ..........................................
625
3-155
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 3-13B (Continued) (b) SUMMER DESIGN COMPANY Adjusted Trial Balance December 31, 2014
Debit Credit Cash................................................................... $ 8,790 Accounts receivable ......................................... 12,970 Supplies............................................................. 445 Prepaid insurance............................................. 495 Prepaid rent....................................................... 625 Equipment ......................................................... 45,900 Accumulated depreciation ............................... $ 3,825 Note payable ..................................................... 32,400 Accounts payable ............................................. 5,500 Interest payable ................................................ 135 Salaries payable................................................ 850 Unearned revenue ............................................ 1,500 C. Burian, capital .............................................. 28,000 C. Burian, drawings .......................................... 16,800 Service revenue ($64,300 − $1,500) ................. 62,800 Depreciation expense....................................... 3,825 Insurance expense ($1,980 − $495) ................. 1,485 Interest expense ($1,485 + $135) ..................... 1,620 Rent expense ($8,125 − $625) .......................... 7,500 Salaries expense ($28,800 + $850) .................. 29,650 Supplies expense ($5,350 − $445) ................... 4,905 $135,010 $135,010
Taking It Further: The required adjusting journal entries would be different but the adjusted balances would remain the same.
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (a) GENERAL JOURNAL Date
J2
Account Titles and Explanation
Debit
Dec. 31 Supplies Expense ..................................... Supplies ................................................ ($198 − $95) 31
31
Credit
103 103
Accounts Receivable ................................ Fees Earned..........................................
175
Salaries Expense ...................................... Salaries Payable ................................... (4 hours x $12)
48
175
48
31 Depreciation Expense .............................. 58 Accumulated Depreciation—Equipment [($550 ÷ 36 months x 2) + ($1,000 ÷ 36 months)]
58
31 Interest Expense ....................................... Interest Payable.................................... ($3,000 × 3% × 1/12)
8
8
Cash Date
Explanation
Dec. 31 Balance
Solutions Manual .
Ref.
3-157
Debit
Credit
Balance 2,954
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued) Accounts Receivable Date
Explanation
Dec. 31 Balance 31
Ref.
Debit
J2
Credit
Balance
175
500 675
Credit
Balance
103
198 95
Credit
Balance
Supplies Date
Explanation
Dec. 31 Balance 31
Ref.
Debit
J2 Equipment
Date
Explanation
Dec. 31 Balance
Ref.
Debit
1,550
Accumulated Depreciation—Equipment Date
Explanation
Dec. 31
Ref.
Debit
J2
Credit
Balance
58
58
Credit
Balance
Accounts Payable Date
Explanation
Dec. 31 Balance
Solutions Manual .
Ref.
3-158
Debit
76
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued) Unearned revenue Date
Explanation
Dec. 31 Balance
Ref.
Debit
Credit
Balance
125
Salaries Payable Date
Explanation
Dec. 31
Ref.
Debit
J2
Credit
Balance
48
48
Interest Payable Date
Explanation
Dec. 31
Ref.
Debit
Credit
J2
Balance 8
8
Notes Payable Date
Explanation
Dec. 31 Balance
Ref.
Debit
Credit
Balance 3,000
N. Koebel, Capital Date
Explanation
Dec. 31 Balance
Solutions Manual .
Ref.
3-159
Debit
Credit
Balance 1,450
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued) Fees Earned Date
Explanation
Ref.
Debit
J2
Dec. 31 Balance Dec. 31
Credit
Balance
175
1,050 1,225
Credit
Balance
Advertising Expense Date
Explanation
Ref.
Debit
Dec. 31
325
Telephone Expense Date
Explanation
Ref.
Debit
Credit
Dec. 31
Balance 174
Supplies Expense Date
Explanation
Dec. 31
Ref.
Debit
J2
Credit
Balance
103
103
Credit
Balance
48
48
Salaries Expense Date Dec. 31
Solutions Manual .
Explanation
Ref. J2
3-160
Debit
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued) Depreciation Expense Date
Explanation
Dec. 31
Ref.
Debit
J2
58
Credit
Balance 58
Interest Expense Date Dec. 31
Solutions Manual .
Explanation
Ref. J2
3-161
Debit
Credit 8
Balance 8
Chapter 3
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (b) COOKIE CREATIONS Adjusted Trial Balance December 31, 2013
Debit $2,954 675 95 1,550
Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment .......................................................... Accumulated depreciation—equipment........... Accounts payable .............................................. Unearned revenue ............................................. Salaries payable................................................. Interest payable ................................................. Note payable ...................................................... N. Koebel, capital............................................... Fees earned........................................................ Advertising expense.......................................... 325 Telephone expense............................................ 174 Supplies expense .............................................. 103 Salaries expense................................................ 48 Depreciation expense........................................ 58 Interest expense ................................................ 8 Totals ............................................................. $5,990
Solutions Manual .
3-162
Credit
$
58 76 125 48 8 3,000 1,450 1,225
$5,990
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (c) COOKIE CREATIONS Income Statement Two Months Ended December 31, 2013
Revenues Fees earned ............................................................ $1,225 Expenses Advertising expense .............................................. $325 Telephone expense ................................................ 174 Supplies expense ................................................... 103 Depreciation expense ............................................ 58 Salaries expense .................................................... 48 Interest expense..................................................... 8 716 Profit ............................................................................ $509 [Note: Statement of Owner’s Equity is not required – shown for information purposes only.] COOKIE CREATIONS Statement of Owner's Equity Two Months Ended December 31, 2013
N. Koebel, capital, November 1........................................... $ 0 Add: Investment................................................................... 1,450 Profit ............................................................................ 509 N. Koebel, capital, December 31......................................... $1,959
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CONTINUING COOKIE CHRONICLE (Continued) (c) (Continued) [Note: Balance Sheet is not required – shown for information purposes only.] COOKIE CREATIONS Balance Sheet December 31, 2013
Assets Cash.................................................................... Accounts receivable .......................................... Supplies.............................................................. Equipment .......................................................... $1,550 Less: Accumulated depreciation. .................... 58 Total assets ...................................................
$2,954 675 95 1,492 $5,216
Liabilities and Owner's Equity Liabilities Notes payable .................................................................... $3,000 Accounts payable............................................................ 76 Unearned revenue ........................................................... 125 Salaries payable .............................................................. 48 Interest payable ................................................................. 8 Total liabilities ................................................................. 3,257 Owner's equity N. Koebel, capital............................................................... 1,959 Total liabilities and owner's equity .............................. $5,216 (d)
Yes, Cookie Creations was profitable in the two months of November and December. It has a profit of $509 which is approximately 42% of the revenue earned in the period. 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.
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (e)
Natalie has $2,954 in cash available to her. The amount is different because cash includes transactions that do not affect profit directly such as the $3,000 loan from her grandmother and the unearned revenue. Profit also includes items for which cash has not yet been received or paid such as accrued revenues and expenses. The company’s balance sheet shows that Cookie Creations has total liabilities of $3,257. All of these liabilities will be due in the coming year. Cookie Creations currently has only $2,954 of cash, but the company also has $675 in outstanding accounts receivable, totalling $3,629. Even though the company has slightly more cash and receivables than liabilities, Natalie may have to borrow additional money from her grandmother 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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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (a) , (c), and (e)
Cash Explanation
Date Sep.
Ref. J102 J102 J102 J102 J102 J102 J102 J102
1 Balance 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 Explanation
Date Sep.
1 Balance 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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Ref.
Debit
J102
500
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500
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Supplies Explanation
Date Sep.
1 Balance 17 30 Adj. entry
Ref. J102 J103
Debit
Credit
Balance
1,020
800 2,300 1,280
Credit
Balance
1,500
Equipment Explanation
Date Sep.
1 Balance 30
Ref. J102
Debit
15,000 18,000
3,000
Accumulated Depreciation—Equipment Explanation
Date Sep.
1 Balance 30 Adj. entry
Ref.
Debit
J103
Credit
Balance
250
1,500 1,750
Credit
Balance
Accounts Payable Explanation
Date Sep.
1 Balance 17 20 30
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Debit
1,500 4,500 3,000
3,100 4,600 100 3,100
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (a), (c), and (e) (Continued) Unearned Revenue Explanation
Date Sep.
1 Balance 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 Sep.
1 Balance 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 Explanation
Date Sep.
1 Balance
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Debit
15,700
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Accounting Principles, Sixth Canadian Edition
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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Ref.
Debit
J102
500
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Credit
Balance 500
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Accounting Principles, Sixth Canadian Edition
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
3-170
Credit
Balance 1,020
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Accounting Principles, Sixth Canadian Edition
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........................................................... Unearned Revenue ...............................
700
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (b) (Continued) GENERAL JOURNAL Date
Account Titles and Explanation
J102 Debit
30 Equipment ................................................. 3,000 Accounts Payable.................................
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Credit
3,000
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (d) and (f) PITRE EQUIPMENT REPAIR Unadjusted and Adjusted Trial Balances September 30, 2014
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
Solutions Manual .
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
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CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (e) GENERAL JOURNAL Date 1.
Account Titles and Explanation
J103 Debit
Sep. 30 Supplies Expense .............................. 1,020 Supplies ($2,300 – $1,280) ............
2.
3.
4.
5.
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Salaries Expense ............................... Salaries Payable ............................
775
30 Depreciation Expense........................ Accumulated Depreciation —Equipment .................................. [($15,000 ÷ 5 years) × 1/12]
250
Credit
1,020
775
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, 2014
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, 2014
R. Pitre, capital, September 1, 2014 ................................. Add: Profit ........................................................................ R. Pitre, capital, September 30, 2014................................
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$15,700 763 $16,463
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE: CHAPTERS 1 TO 3 (Continued) (g) (Continued) PITRE EQUIPMENT REPAIR Balance Sheet September 30, 2014
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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Accounting Principles, Sixth Canadian Edition
BYP 3-1 FINANCIAL REPORTING PROBLEM (a)
The title Reitmans uses for its income statement is “Statements of Earnings.”
(b) Depreciation expense was $54,899,000 in 2012 and $55,180,000 in 2011. The company reports its depreciation expense as part of selling and distribution expenses and administrative expenses in the statement of earnings. (c)
Reitmans revenues include sale of merchandise and finance income which includes interest and dividend income from investments, interest income from loans and receivables and finance income.
(d) Reitmans reports unearned (deferred) revenue in the form of loyalty points and awards granted under loyalty programs and unredeemed gift cards. (e)
Reitmans shows prepaid expenses on its balance sheet. These prepaid expenses include prepaid insurance and maintenance contracts. This additional detail is included in the annual report as part of the management discussion and analysis.
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Accounting Principles, Sixth Canadian Edition
BYP 3-2 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.
(d) Recording depreciation on new installation costs over the useful life of the related assets is an appropriate method of expense recognition. The benefit received from the asset is obtained over several years from the earning of revenues. The expense of the installation costs should be allocated to the same periods of benefit by using depreciation expense.
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BYP 3-3 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 3-4 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 of calculating profit 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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Accounting Principles, Sixth Canadian Edition
BYP 3-5 ETHICS CASE (a)
The stakeholders in this situation are:
Carole Chiasson, controller The president of Die Hard Company The shareholders of Die Hard Company The external users of Die Hard’s financial information
(b) 1. It is unethical for the president to place pressure on Carole to misstate profits by requesting her to prepare incorrect adjusting entries. 2. It is a common occurrence for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. It is impractical to expect that all adjusting entries could be prepared at December 31. Carole did nothing unethical by dating the adjusting entries December 31. (c)
Carole should not “aggressively” accrue revenues and defer expenses. But Carole can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the company’s financial condition and its results of operations is unethical (it is also illegal).
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Accounting Principles, Sixth Canadian Edition
BYP 3-6 “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 non transferable 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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BYP3-6 (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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Accounting Principles, Sixth Canadian Edition
CHAPTER 4 Completion of the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE Study 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. 3. Prepare correcting entries. 4. Prepare a classified balance sheet. 5. Illustrate measures used to evaluate liquidity. *6. Prepare a work sheet (Appendix 4A).
1, 2 ,3, 4, 5, 6
1, 2, 3, 4, 6
1, 2, 3, 4, 7, *11
1, 2, 3, 4, 7, *11
5, 6
1, 2, 3, 4, 5, 6, 7, *15 5, 6, 7
6, 7, 8, 9, 10
3, 4
3, 4
10, 11, 12
7, 8
8, 9
5, 6
5, 6
13, 14, 15, 16, 17 18, 19, 20
9, 10
10, 11
11, 12
11, 12
1, 2, 3, 4, 7 7, 8
1, 2, 3, 4, 7 7, 8
*21, *22, *23
*13, *14
*13, *14
*9, *10
*9, *10
*7. Prepare reversing entries (Appendix 4B).
*24, *25
*15, *16
*15, *16
*11, *12
*11, *12
Exercises
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendix to each chapter.
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Prepare financial statements, closing entries and post-closing trial balance.
Simple
70-80
2A
Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.
Simple
60-70
3A
Complete all steps in the accounting cycle.
Moderate
90-120
4A
Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.
Simple
60-70
5A
Analyze errors and prepare corrections.
Moderate
60-70
6A
Determine impact of errors on financial statements, and correct.
Moderate
60-70
7A
Calculate capital account balance; prepare classified balance sheet and liquidity ratios.
Moderate
30-40
8A
Calculate current assets and liabilities, working capital, current ratio, and acid-test ratio; comment on liquidity.
Moderate
30-35
*9A
Prepare work sheet.
Moderate
50-60
*10A
Prepare work sheet.
Moderate
50-60
*11A
Prepare and post adjusting, closing, reversing, and cash transaction entries.
Moderate
40-50
*12A
Prepare adjusting, reversing and subsequent cash entries.
Simple
40-50
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
1B
Prepare financial statements, closing entries and post-closing trial balance.
Simple
70-80
2B
Prepare adjusting entries, adjusted trial balance, financial statements and closing entries.
Simple
60-70
3B
Complete all steps in accounting cycle.
Moderate
90-120
4B
Prepare adjusting entries, adjusted trial balance, financial statements, and closing entries.
Simple
60-70
5B
Analyze errors and prepare corrections.
Moderate
60-70
6B
Determine impact of errors on financial statements, and correct.
Moderate
60-70
7B
Calculate capital account balance; prepare classified balance sheet and liquidity ratios.
Moderate
30-40
8B
Calculate current assets and liabilities, working capital, current ratio, and acid-test ratio; comment on liquidity.
Moderate
30-35
9B
Prepare work sheet.
Moderate
50-60
10B
Prepare work sheet.
Moderate
50-60
*11B
Prepare and post adjusting, closing, reversing, and cash transaction entries.
Moderate
40-50
*12B
Prepare adjusting, reversing and subsequent cash entries.
Simple
40-50
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Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study Objective
Knowledge
Comprehension
Application
1. Prepare closing entries and a post-closing trial balance.
BE4-1
Q4-1 Q4-2 Q4-3 Q4-4 Q4-5 Q4-6
BE4-2 BE4-3 BE4-4 BE4-6 E4-1 E4-2 E4-3 E4-4 E4-5 E4-6 E4-7 *E4-15
P4-1A P4-2A P4-3A P4-4A P4-7A *P4-11A P4-1B P4-2B P4-3B P4-4B P4-7B *P4-11B
2. Explain the steps in the accounting cycle including optional steps.
BE4-5 Q4-9
Q4-6 Q4-7 Q4-8 Q4-10
BE4-6 E4-5 E4-6 E4-7
P4-3A P4-4A P4-3B P4-4B
Analysis
3.
Prepare correcting entries.
Q4-10 Q4-11 Q4-12
BE4-7 BE4-8 E4-8 E4-9
P4-5A P4-6A P4-5B P4-6B
4.
Prepare a Q4-17 classified balance sheet.
Q4-13 Q4-14 Q4-15 Q4-16 Q4-17
BE4-9 BE4-10 E4-10 P4-1A P4-2A P4-3A
P4-4A P4-7A P4-1B P4-2B P4-3B P4-4B P4-7B
E4-11 P4-8A P4-8B
5.
Illustrate BE4-11 measures used to evaluate liquidity.
Q4-18 Q4-19 Q4-20
BE4-12 P4-7A P4-7B
E4-11 E4-12 P4-8A P4-8B
*6. Prepare a work sheet (Appendix 4A).
*Q4-21 *Q4-22 *Q4-23
*BE4-13 *P4-9A *BE4-14 *P4-10A *E4-13 *P4-9B *E4-14 *P4-10B
*7. Prepare reversing entries (Appendix 4B).
*Q4-24 *Q4-25
*BE4-15 *P4-11A *BE4-16 *P4-12A *E4-15 *P4-11B *E4-16 *P4-12B
Broadening Your Perspective
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BYP4-3 BYP4-4
Continuing BYP4-2 Cookie Chronicles BYP4-6 Cumulative Coverage BYP4-1
4-4
Synthesis
Evaluation
BYP4-5
Chapter 4
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Accounting Principles, Sixth Canadian Edition
ANSWERS TO QUESTIONS 1.
Permanent accounts are those accounts that appear on the balance sheet and are never closed at the end of the annual accounting year. Temporary accounts, on the other hand, get closed at the end of the year and the net result of the closing entries updates the owner’s equity account Capital, 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. If an Income Summary account was not used, the owner’s capital account would be credited when closing the individual revenue accounts and it would be debited when closing the individual expense accounts.
4.
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 calculated 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.
5.
(1) The balance in Income Summary, immediately before the closing entry to transfer its balance to the owner’s capital account, should equal the profit (or loss) reported in the income statement. (2) All temporary accounts (revenues, expenses, owner’s drawings, and Income Summary) should have zero balances. (3) The balance in the capital account should equal the ending balance reported in the statement of owner’s equity and balance sheet.
6.
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 transaction for the fiscal year to date are reported on the financial statements.
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Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 7.
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 at an amount that can be measured.
8.
(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.
9.
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 post closing trial balance.
10.
Correcting entries differ from reversing 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. Reversing entries are an optional step in the accounting cycle. Reversing entries will always affect an income statement and a balance sheet account. They are used to simplify the recording of subsequent transactions related to the adjustments.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 11.
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. Christopher’s suggestion of erasing or removing previously recorded incorrect entries and replacing them with correct entries is not acceptable. Allowing entries to be erased would hamper the accounting cycle. The preparers and users of the accounting information could not rely on the completeness and accuracy of the entries used 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.
12.
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. Once the correct and incorrect entries have been arrived at, the correcting entry can be recorded. The accounts that are not in error can be omitted in the correcting entry. An alternative is to reverse the incorrect entry and to then record the correct entry.
13.
Current assets are normally cash and other assets that will be converted to cash, sold, or used up within one year from the balance sheet date. 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 will not 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.
14.
A company’s operating cycle is the average time it takes to go from starting with cash and ending with cash in producing revenues.
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.
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Chapter 4
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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. Intangible asset are similar to property, plant, and equipment, but lack physical substance. Finally, 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.
17.
There are alternative methods of presentation that can be followed in the preparation of a balance sheet. The differences in balance sheet presentation when following IFRS, as compared with ASPE, are not significant. The content of the balance sheet is the same as to amounts and key sub-totals, but the sequence of the major categories of the elements in the balance sheet may change. The traditional Canadian standards call for the presentation of assets in the balance sheet to follow the order: current assets (in decreasing liquidity order), long-term investments, property, plant, and equipment, intangible assets, and goodwill. Current liabilities, long-term debt and owners’ or shareholders’ equity then complete the balance sheet. For the IFRS format, the presentation often follows this sequence: noncurrent assets, including property, plant, and equipment and then intangible assets, current assets (in increasing liquidity order), shareholders’ equity, non-current liabilities and current liabilities. But public Canadian companies will still have the choice to follow the traditional conventions.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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. If the company has a loss, the amount is entered in the credit column on the income statement and in the debit column on the balance sheet. *22. It is still necessary to journalize and post adjusting entries that have been made on the work sheet because the work sheet is not part of the company’s permanent accounting records. The general ledger and journal must contain all of the adjusting data. If this were not done, balances for the start of the next year would be incorrect. *23. Yes. The work sheet is a convenient and efficient tool for completing some of the steps 4-6 (trial balance, adjusting entries, adjusted trial balance) and for assisting with step 7 (prepare financial statements) in the accounting cycle. *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 if 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, Kinnear, Barlow
Accounting Principles, Sixth 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)
Solutions Manual .
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
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 4-2 (a) Service Revenue .................................................................. $38,500 Expenses Insurance Expense .......................................... $2,750 Rent Expense ..................................................... 8,000 Supplies Expense ............................................ 1,500 Total expenses ........................................................... 12,250 Profit ..................................................................................... $26,250 (b) Nov. 30
30
30
30
(c)
Service Revenue................................. 38,500 Income Summary ...........................
38,500
Income Summary ............................... 12,250 Insurance Expense ........................ Rent Expense ................................. Supplies Expense ..........................
2,750 8,000 1,500
Income Summary ............................... 26,250 L. Wilfrid, Capital ...........................
26,250
L. Wilfrid, Capital ................................ 29,000 L. Wilfrid, Drawings .......................
29,000
The closing balance of the L. Wilfrid, Capital account at November 30, 2014 is $39,250 calculated as follows: L. Wilfrid, Capital 42,000 26,250 29,000 Bal.
Solutions Manual .
39,250
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 4-3 (a) 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
(b) Income Summary 105,000 130,000 25,000 25,000 0 N. Mosquera, Capital 65,000 25,000 45,000 45,000
N. Mosquera, Drawings 45,000 45,000 0
Service Revenue 130,000 130,000 0 Rent Expense 10,000 10,000 0
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Maintenance Expense 23,000 23,000 0 Salaries Expense 72,000 72,000 0
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BRIEF EXERCISE 4-4 MOSQUERA GOLF CLUB Post-Closing Trial Balance October 31, 2014
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
BRIEF EXERCISE 4-5 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.
Solutions Manual .
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Chapter 4
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 4-6 (a)
April 15 Supplies...............................................1,850 Cash .............................................
1,850
(b) Supplies Apr. 15 1,850
(c)
Supplies Expense
Mar. 31 Supplies Expense ...............................1,450 Supplies.......................................
Supplies Apr. 15 1,850 Mar. 31 1,450 Bal. 400
Supplies Expense Mar.31 1,450
(d) Mar. 31 Income Summary ................................1,450 Supplies Expense ....................... Income Summary Mar. 31 1,450
Solutions Manual .
1,450
1,450
Supplies Expense Mar.31 1,450 Mar. 31 1,450 Bal. 0
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Chapter 4
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 4-7
1. 2. 3. 4.
Balance Sheet Income Statement Owner's Assets Liabilities Equity Revenue Expenses Profit O NE O O NE O NE O U U NE U NE NE O/U NE O U O O NE NE NE NE
BRIEF EXERCISE 4-8 1.
2.
3.
4.
Solutions Manual .
Service Revenue ................................... Accounts Receivable .....................
750
Unearned Revenue................................ Service Revenue.............................
600
Roch Hébert, Drawings......................... Salary Expense ...............................
500
Accounts Payable ($280 × 2) ................ Cash ................................................
560
4-15
750
600
500
560
Chapter 4
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 4-9 DARIUS COMPANY Balance Sheet December 31, 2014 (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 ................................................. $53,900 (b) Long-term investments Notes receivable (due February 1, 2016).........$ 5,500 Property, plant, and equipment Vehicles ...............................................................22,500 Intangible assets Patents ...................................................................3,900 Goodwill .....................................................................9,250 Unearned revenue of $2,900 is classified as a current liability.
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 4-10 ODOM COMPANY Balance Sheet December 31, 2014 (a) 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 (b) Current assets Supplies ........................................................................ Merchandise inventory................................................. Notes receivable (due April 1, 2015)............................
$ 2,900 14,000 7,800
The notes payable of $28,000 is classified as a non-current liability.
BRIEF EXERCISE 4-11 Working capital = Current assets − Current liabilities Big: Working capital = $1,000,000 − $900,000 = $100,000 Small: 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. Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 4-12 (a) (1) Working capital = Current assets − Current liabilities Working capital 2013 = $33,510 − $24,800 = $8,710 Working capital 2014 = $35,100 − $24,460 = $10,640 (2) Current ratio = Current assets ÷ Current liabilities Current ratio 2013 = $33,510 ÷ $24,800 = 1.35:1 Current ratio 2014 = $35,100 ÷ $24,460 = 1.43:1 (3) Acid-test ratio
= (Cash + Accounts Receivable + Short-term Investments) ÷ Current liabilities
Acid-test ratio 2013
= $20,430 ÷ $24,800 = 0.82:1
Acid-test ratio 2014
= $22,680 ÷ $24,460 = 0.93:1
(b) All three measures of Drew Co.’s improvement in 2014 compared to 2013.
liquidity
show
*BRIEF EXERCISE 4-13
Totals Profit Totals
Solutions Manual .
Income Statement Dr. Cr. 75,000 95,500 20,500 95,500 95,500
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Balance Sheet Dr. Cr. 191,000 170,500 20,500 191,000 191,000
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Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 4-14
Totals Loss Totals
Solutions Manual .
Income Statement Dr. Cr. 53,875 43,425 10,450 53,875 53,875
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Balance Sheet Dr. Cr. 55,550 66,000 10,450 66,000 66,000
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*BRIEF EXERCISE 4-15 (a) Dec. 31 Salaries Expense .................................. 1,700 Salaries Payable............................... To accrue salaries at year-end (b) Dec. 31 Income Summary.................................. 1,700 Salaries Expense ............................. Closing entry (c) Jan. 1 Salaries Payable ....................................... 1,700 Salaries Expense ............................. To reverse Dec. 31 accrual. 4 Salaries Expense...................................... 3,000 Cash .................................................. To record Jan. 4 payment of salary.
1,700
1,700
1,700
3,000
(d) Date
Salaries Expense Explanation Ref. Debit
Credit
Dec. 31 31 Jan. 1 4
Accrual Closing entry Reversing entry Payment of salary
1,700 Dr. 1,700 0 1,700 1,700 Cr. 1,300 Dr.
Date
Salaries Payable Explanation Ref. Debit
1,700
3,000
Dec. 31 Accrual Jan. 1 Reversing entry
1,700
Balance
Credit
Balance
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, Sixth Canadian Edition
*BRIEF EXERCISE 4-16 (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 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
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 4-1 (a)
When we look at the L. Welker, Capital account we know that the entry on the debit side of the account does not represent a loss for the month since the amount of this entry corresponds to the closing entry from the L. Welker, Drawings account. The entry on the credit side of the L. Welker, Capital account provides the amount of the profit for the year in the amount of $3,700, which corresponds to the closing entry that would be coming from the Income Summary account.
(b)
Total owner’s equity at May 31 corresponds to the L. Welker, Capital account balance of $12,200.
(c)
May
31 Service Revenue .................... Income Summary...............
16,800
31 Income Summary ................... Advertising Expense ......... Rent Expense ..................... Salaries Expense ...............
13,100
31 Income Summary ................... L. Welker, Capital...............
3,700
31 L. Welker, Capital ................... L. Welker, Drawings ..........
2,500
16,800
1,300 3,000 8,800
3,700
2,500
(d) Date
Income Summary Explanation Ref. Debit
May 31 Close Revenues 31 Close Expenses 31 Closing entry
Solutions Manual .
13,100 3,700
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Credit
Balance
16,800
16,800 3,700 0
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-2 (a) VICTOIRE ESTHETICS Statement of Owner's Equity Month Ended August 31, 2014
B. Victoire, capital, August 1, 2014 ................................ Add: Investment .............................................................. Profit ....................................................................... Less: Drawings............................................................... B. Victoire, capital, August 31, 2014 ..............................
$ 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
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7,000
4,700
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-2 (Continued) (b) (Continued)
Date
Income Summary Explanation Ref. Debit
Aug. 31 Balance 31 Closing entry
Date
B. Victoire, Drawings Explanation Ref. Debit
B. Victoire, Capital Explanation Ref. Debit
Aug. 31 Balance 31 Closing entry 31 Closing entry
Solutions Manual .
4,700
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Balance 7,000 Cr 0
7,000
Aug. 31 Balance 31 Closing entry
Date
Credit
Credit
Balance
4,700
4,700 0
Credit
Balance
7,000
11,000 18,000 13,300
Chapter 4
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-3 (a) GENERAL JOURNAL
J15
Date
Account Titles and Explanation
Debit
Credit
July 31
Service Revenue................................. 75,000 Interest Revenue ................................ 320 Income Summary ...........................
75,320
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
31 B. Donatello, Capital .......................... Income Summary ...........................
5,980
31 B. Donatello, Capital .......................... 16,500 B. Donatello, Drawings..................
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5,980
16,500
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-3 (Continued) (a) (Continued)
Date Explanation July 31 Balance
Cash Ref.
Debit
Credit
Balance 4,650
Accounts Receivable Date Explanation Ref. Debit July 31 Balance
Credit
Balance 11,400
Prepaid Rent Ref. Debit
Credit
Balance 500
Debit
Credit
Balance 750
Debt Investments Date Explanation Ref. Debit July 31 Balance
Credit
Balance 8,000
Equipment Ref. Debit
Credit
Balance 19,950
Date Explanation July 31 Balance
Date Explanation July 31 Balance
Date Explanation July 31 Balance
Supplies Ref.
Accumulated Depreciation—Equipment Date Explanation Ref. Debit Credit July 31 Balance
Date Explanation July 31 Balance
Solutions Manual .
Patents Ref.
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Debit
Credit
Balance 5,700
Balance 18,300
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-3 (Continued) (a) (Continued) Accounts Payable Date Explanation Ref. Debit July 31 Balance
Credit
Balance 4,245
Interest Payable Date Explanation Ref. Debit July 31 Balance
Credit
Balance 750
Unearned Revenue Date Explanation Ref. Debit July 31 Balance
Credit
Balance 2,050
Notes Payable Ref. Debit
Credit
Balance 45,000
Credit
Balance 28,285 22,305 5,805
Date Explanation July 31 Balance
B. Donatello, Capital Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15 5,980 31 Closing entry J15 16,500 B. Donatello, Drawings Date Explanation Ref. Debit July 31 Balance 31 Closing entry
Date July 31 31 31 31
Solutions Manual .
Credit
Balance 16,500 16,500 0
Income Summary Explanation Ref. Debit Credit Balance Balance 0 Closing entry J15 75,320 75,320 Closing entry J15 81,300 5,980 Dr. Closing entry J15 5,980 0
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-3 (Continued) (a) (Continued) Service Revenue Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15 75,000 Interest Revenue Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15 320 Depreciation Expense Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15 Interest Expense Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15 Rent Expense Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15 Salaries Expense Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15 Supplies Expense Date Explanation Ref. Debit July 31 Balance 31 Closing entry J15
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Credit
Balance 75,000 0
Credit
Balance 320 0
Credit
Balance 2,850 2,850 0
Credit
Balance 3,000 3,000 0
Credit
Balance 18,550 18,550 0
Credit
Balance 36,050 36,050 0
Credit
Balance 20,850 20,850 0
Chapter 4
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-3 (Continued) (b) DONATELLO COMPANY Post-Closing Trial Balance July 31, 2014
Debit Cash .................................................................... $ 4,650 Accounts receivable .......................................... 11,400 Prepaid rent ........................................................ 500 Supplies .............................................................. 750 Debt investments .............................................. 8,000 Equipment........................................................... 19,950 Accumulated depreciation—equipment ........... Patents ................................................................ 18,300 Accounts payable............................................... Interest payable .................................................. Unearned revenue .............................................. Notes payable ..................................................... B. Donatello, capital ........................................... $63,550
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Credit
$ 5,700 4,245 750 2,050 45,000 5,805 $63,550
Chapter 4
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-4 (a)
Aug. 31 Service Revenue .................... Interest Revenue .................... Income Summary...............
35,900 400
31 Income Summary ................... Depreciation Expense ....... Insurance Expense ............ Interest Expense ................ Supplies Expense ..............
22,745
31 Income Summary ................... T. Williams, Capital ............
13,555
31 T. Williams, Capital ................ T. Williams, Drawings........
18,500
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36,300
9,300 4,100 1,500 7,845
13,555
18,500
Chapter 4
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-4 (Continued) (b)
Clos. Clos. Bal.
Income Summary 22,745 Clos. 36,300 Bal. 13,555 13,555 0
T. Williams, Capital Bal. 85,500 Clos. 18,500 Clos. 13,555 Bal. 80,555
Clos.
Service Revenue 35,900 Bal. 35,900 Bal. 0
Depreciation Expense Bal. 9,300 Clos. 9,300 Bal. 0
Bal. Bal.
Insurance Expense 4,100 Clos. 4,100 0
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T. Williams, Drawings Bal. 18,500 Clos. 18,500 Bal. 0
Interest Revenue Clos. 400 Bal. Bal.
Bal. Bal.
400 0
Interest Expense 1,500 Clos. 1,500 0
Supplies Expense Bal. 7,845 Clos. 7,845 Bal. 0
Chapter 4
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-4 (Continued) (c) ALPINE BOWLING LANES Post-Closing Trial Balance August 31, 2014
Cash ................................................................. Accounts receivable ....................................... Prepaid insurance ........................................... Supplies ........................................................... Debt investments ............................................ Equipment........................................................ Accumulated depreciation—equipment ........ Accounts payable............................................ Unearned revenue ........................................... Notes payable .................................................. Interest payable ............................................... T. Williams, capital ..........................................
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Debit $ 17,940 10,980 820 740 10,000 93,000
Credit
$ 18,600 8,200 980 25,000 145 80,555 $133,480 $133,480
Chapter 4
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-5 (a)
Apr.
2
6
15
25
Cash ................................................ 4,000 Tim Sasse, Capital .....................
4,000
Supplies .......................................... 1,500 Cash............................................
1,500
Cash ................................................ Service Revenue ........................
600
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. 5,300
1,500
Apr. 6 Apr.30
Supplies 1,500 Apr. 30 800
700
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. Bal. 0
Income Summary Clos. 700 Clos. 2,000 Clos. 1,300 Bal. 0
Solutions Manual .
700
Tim Sasse, Capital Apr. 2 4,000 Clos. 1,300 Bal. 5,300
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-5 (Continued)
(c)
(Continued) Apr. 30 Accounts Receivable ..................... Service Revenue ........................
600
30 Supplies Expense........................... Supplies...................................... ($1,500 – $800 = $700)
700
30
800
600
700
Unearned Revenue ......................... Service Revenue .......................
800
(d) SASSE ROOF REPAIRS Adjusted Trial Balance April 30, 2014
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 Revenues................... Income Summary...............
2,000
30 Income Summary ................... Supplies Expense ..............
700
30 Income Summary ................... Tim Sasse, Capital .............
1,300
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Credit
$ 1,400 4,000 2,000 _ $7,400
2,000
700
1,300 Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 4-6 (a)
(b)
Apr.
Apr.
Solutions Manual .
30 Unearned Revenue ................. Service Revenue ................
500
30 Rent Expense ......................... Prepaid Rent ...................... ($4,875 ÷ 5 = $975)
975
30 Depreciation Expense............ Accumulated Depreciation —Equipment ...................... [($24,000 ÷ 8) ÷ 12 = $250]
250
30 Interest Expense .................... Interest Payable ................. [($12,000 × 6%) ÷ 12 = $60]
60
30 Service Revenues................... Income Summary............... ($15,400 + $500 = $15,900)
15,900
30 Income Summary ................... Rent Expense ..................... Salaries Expense ............... Depreciation Expense ....... Interest Expense ................
11,150
30 Income Summary ................... T. Muzyka, Capital..............
4,750
30 T. Muzyka, Capital .................. T. Muzyka, Drawings .........
4,150
4-35
500
975
250
60
15,900
975 9,865 250 60
4,750
4,150
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 4-7 (a)
Dec. 31 Accounts Receivable ............. Service Revenue ................
1,440
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 – $750 = $4,510)
4,510
1,440
4,340
2,780
4,510
31 Interest Receivable ................ Interest Revenue................ [($12,000 × 4%) ÷ 12 × 3 = $120] (b)
120
Dec. 31 Service Revenue ........................ 113,740 Interest Revenue .................... 120 Income Summary............... ($112,300 + $1,440 = $113,740)
Solutions Manual .
31 Income Summary ................... Insurance Expense ............ Salaries Expense ............... Depreciation Expense ....... Supplies Expense ..............
51,030
31 Income Summary ................... H. Duguay, Capital .............
62,830
31 H. Duguay, Capital.................. H. Duguay, Drawings .........
53,500
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120
113,860
4,340 39,400 2,780 4,510
62,830
53,500
Chapter 4
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-8 (a) 1.
2.
3.
4.
5.
Accounts Payable ($1,750 − $750) ............. Cash.........................................................
1,000
Supplies ....................................................... Accounts Payable ...................................
860
L. Choi, Drawings........................................ Salaries Expense ....................................
400
Service Revenue.......................................... Accounts Receivable ..............................
700
Unearned Revenue...................................... Service Revenue .....................................
350
1,000
860
400
700
350
(b)
1. 2. 3. 4. 5.
Balance Sheet Income Statement Owner's Assets Liabilities Equity Revenue Expenses Profit O O NE NE NE NE U U NE NE NE NE NE NE O/U NE O U O NE O O NE O NE O U U NE U
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-9 (a) 1.
2.
3.
4.
5.
Solutions Manual .
Cash ................................................... Supplies ......................................
625
Salaries Expense .............................. Cash ............................................
625
Cash ................................................... Short-Term Investments ............
2,000
Cash ................................................... T. D’Addario, Capital ..................
2,000
Accounts Receivable ........................ Cash ............................................
870
Cash ................................................... Accounts Receivable .................
780
Cash ................................................... Supplies ......................................
440
Accounts Payable ............................. Cash ............................................
440
Accounts Payable ............................. Equipment Expense ...................
3,500
Equipment ......................................... Notes Payable.............................
3,500
4-38
625
625
2,000
2,000
870
780
440
440
3,500
3,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 4-9 (Continued) (b) 1.
2.
3.
4.
5.
Solutions Manual .
Salaries Expense .............................. Supplies ......................................
625
Cash ................................................... Short-Term Investments ............ T. D’Addario, Capital ..................
4,000
Accounts Receivable ($870 − $780) . Cash ............................................
90
Accounts Payable ............................. Supplies ......................................
440
Accounts Payable ............................. Equipment ......................................... Equipment Expense ................... Notes Payable.............................
3,500 3,500
4-39
625
2,000 2,000
90
440
3,500 3,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 4-10 (a) DONATELLO COMPANY Income Statement Year Ended July 31, 2014
Revenues Service revenue ............................................. $75,000 Interest revenue ............................................. _ 320 Total revenues........................................... Expenses Depreciation expense.................................... 2,850 Rent expense ................................................. 18,550 Salaries expense ........................................... 36,050 Supplies expense .......................................... 20,850 Interest expense ............................................ 3,000 Total expenses .......................................... Loss ....................................................................
$75,320
81,300 $ 5,980
DONATELLO COMPANY Statement of Owner's Equity Year Ended July 31, 2014 B. Donatello, capital, August 1, 2013 ($28,285 – $5,000) Add: Investment ............................................................. Less: Loss .......................................................... $ 5,980 Drawings................................................... 16,500 B. Donatello, capital, July 31, 2014 ................................
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$23,285 5,000 28,285 22,480 $ 5,805
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 4-10 (Continued) (b) DONATELLO COMPANY Balance Sheet July 31, 2014
Assets Current assets Cash............................................................................. $ 4,650 Accounts receivable ................................................... 11,400 Supplies ...................................................................... 750 Prepaid rent .................................................................... 500 Total current assets ............................................... 17,300 Long-term investments Debt investment.......................................................... 8,000 Property, plant, and equipment Equipment ...................................................... $19,950 Less: Accumulated depreciation .................. 5,700 14,250 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 liability Notes payable.................................................................. 45,000 Total liabilities ........................................................ 52,045 Owner's equity B. Donatello, capital ........................................................ 5,805 Total liabilities and owner's equity ........................... $57,850
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-11 (a) JPC ENTERPRISES Balance Sheet December 31, 2014 Assets Current assets Cash............................................................................. $ 16,500 Accounts receivable ................................................... 197,000 Merchandise inventory............................................... 173,200 Supplies ...................................................................... 10,100 Prepaid expenses ....................................................... 6,900 Total current assets ............................................... 403,700 Long-term investments Equity investments ......................... $ 45,800 Debt investments ............................ 62,600 Notes receivable ............................. 34,700 Total long-term investments ...................................... 143,100 Property, plant, and equipment Land................................................. $105,600 Building ........................................... $256,300 Less: Accumulated depreciation ... 79,900 176,400 Equipment ........................................... 92,100 Less: Accumulated depreciation ... 71,100 21,000 303,000 Licences........................................................................... 58,300 Goodwill........................................................................... 36,000 Total assets................................................................. $944,100
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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-11 (Continued) (a) (Continued) Liabilities and Owner's Equity Current liabilities Accounts payable ..........................................................$210,100 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.......................................... 354,950 Long-term liabilities Mortgage payable ($230,000 – $17,250) ....................... 212,750 Total liabilities ............................................................ 567,700 Owner's equity J. Chrowder, capital ...................................................... 376,400 Total liabilities and owner's equity ......................... $944,100 (b) Working capital = Current Assets – Current Liabilities $403,700 − $354,950 = $48,750 Current Ratio = Current Assets ÷ Current Liabilities $403,700 ÷ $354,950 = 1.14:1 Acid-test ratio
= (Cash + Accounts receivable + Shortterm investments) ÷ Current liabilities = ($16,500 + $197,000) ÷ $354,950 = $213,500 ÷ $354,950 = 0.60:1
(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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Accounting Principles, Sixth Canadian Edition
EXERCISE 4-12 (a)
Working Capital = Current Assets − Current Liabilities Fiscal years ending: Jan. 2, 2010: $2,441,973 − $1,706,541 = $735,432 Jan. 1, 2011: $2,542,820 − $1,527,567 = $1,015,253 Dec. 31, 2011: $2,695,647 − $1,776,238 = $919,409 Current Ratio = Current Assets ÷ Current Liabilities Jan. 2, 2010: $2,441,973 ÷ $1,706,541 = 1.43:1 Jan. 1, 2011: $2,542,820 ÷ $1,527,567 = 1.66:1 Dec. 31, 2011: $2,695,647 ÷ $1,776,238 = 1.52:1 Acid-test ratio = (Cash + Accounts receivable) ÷ Current Liabilities Jan. 2, 2010: ($44,391 + $470,935) ÷ $1,706,541 = 0.30:1 Jan. 1, 2011: ($64,354 + $432,089) ÷ $1,527,567 = 0.32:1 Dec. 31, 2011: ($118,566 + $493,338) ÷ $1,776,238 = 0.34:1
(b) Shoppers Drug Mart’s short-term debt-paying ability (current ratio) has deteriorated in the fiscal year ending December 31, 2011 compared to the previous fiscal year. The immediately preceding year was a vast improvement from its preceding fiscal year ending January 2, 1010. On the other, Shopper’s immediate short-term liquidity (acidtest ratio) has improved steadily over the last two years. The excess of the current assets over the current liabilities (working capital) is substantial at each fiscal year-end.
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 4-13 GARDENS DESIGNS Work Sheet Month Ended April 30, 2014 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 Rent expense Depreciation expense Interest expense Totals Profit Totals
14,840 8,780 4,875 24,000
Solutions Manual
Cr.
Adjustments
Adjusted Trial Balance
Dr.
Dr.
Cr.
(2) 975 6,000 5,650 12,000 1,500
(1) 500 (4) 60
(1) 500
9,865 (2) 975 (3) 250 (4) 60 66,510 1,785
1,785
Dr.
6,250 5,650 12,000 1,000 60 25,960 4,150
15,900 9,865 975 250 60 66,820
Cr.
14,840 8,780 3,900 24,000
4,150 15,400
4-45 .
Cr.
Balance Sheet
6,250 5,650 12,000 1,000 60 25,960
25,960
66,510
Dr.
14,840 8,780 3,900 24,000
(3) 250
4,150
Cr.
Income Statement
66,820
15,900 9,865 975 250 60 11,150 4,750 15,900
15,900
55,670
15,900
55,670
50,920 4,750 55,670
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 4-14 SWIFT CREEK ENGINEERING Work Sheet Year Ended December 31, 2014 Unadjusted Trial Balance Account Titles Cash Accounts receivable Interest receivable Supplies Prepaid insurance Notes receivable Equipment Accum. deprec.— equip. Accounts payable H. Duguay, capital H. Duguay, draw. Service revenue Interest revenue Depr. expense Insurance expense Salaries expense Supplies expense Totals Profit Totals
Dr.
Cr.
8,450 6,250
Adjustments
Dr.
Adjusted Trial Balance
Cr.
Dr.
Dr.
Cr.
8,450 7,690 120 750 3,100 12,000 27,800
1,440 120
5,260 7,440 12,000 27,800
Cr.
Income Statement
4,510 4,340
Balance Sheet
Dr.
Cr.
8,450 7,690 120 750 3,100 12,000 27,800
8,340 2,780 4,560 34,900 53,500 1,440 120 2,780 4,340 39,400
Solutions Manual
4,560 34,900
4,560 34,900
160,100
4,510 13,190
13,190
53,500 113,740 120
2,780 4,340 39,400 4,510 164,440
4-46 .
11,120
53,500 112,300
160,100
11,120
164,440
113,740 120 2,780 4,340 39,400 4,510 51,030 62,830 113,860
113,860 113,410
50,580 62,830 113,860 113,410 113,410
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 4-15 (a) (1) Dec.31 Accounts Receivable .................... Service Revenue ....................... 31
(2) Dec.31
Interest Expense............................ Interest Payable ........................
4,400 4,400 1,500 1,500
Service Revenue............................ 96,400 Income Summary....................
31 Income Summary .......................... Interest Expense .......................
9,300 9,300
31 Income Summary .......................... 87,100 I. Masterson, Capital ................. (b) Jan. 1 Service Revenue............................ Accounts Receivable ................
4,400
1 Interest Payable ............................. Interest Expense .......................
1,500
(c) Jan. 10
1,500 6,200
31 Interest Expense............................ Cash...........................................
2,235
4-47
87,100
4,400
Cash ............................................... Service Revenue .......................
Solutions Manual .
96,400
6,200
2,235
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 4-15 (Continued) (a), (b) and (c)
Date
Explanation
Cash Ref.
Dec. 31 Unadjusted balance Jan. 10 31
Date
Accounts Receivable Explanation Ref. Debit
Interest Payable Explanation Ref. Debit
2,235
7,600 13,800 11,565
Credit
Balance
4,400
24,000 28,400 24,000
Credit
Balance
1,500
0 1,500 0
Credit
Balance
87,100
48,000 135,100
1,500
I. Masterson, Capital Explanation Ref. Debit
Dec. 31 Unadjusted balance 31 Closing entry
Solutions Manual .
Balance
4,400
Dec. 31 Unadjusted balance 31 Adjusting entry Jan. 1 Reversing entry
Date
Credit
6,200
Dec. 31 Unadjusted balance 31 Adjusting entry Jan. 1 Reversing entry
Date
Debit
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 4-15 (Continued) (a), (b), and (c) (Continued)
Date
Income Summary Explanation Ref. Debit
Dec. 31 Closing entry 31 Closing entry 31 Closing entry
Date Dec. 31 31 31 Jan. 1 10
Date Dec. 31 31 31 Jan. 1 31
Solutions Manual .
Credit
Balance
96,400
96,400 87,100 0
Credit
Balance
9,300 87,100
Service Revenue Explanation Ref. Debit Unadjusted balance Adjusting entry Closing entry Reversing entry
4,400 96,400 4,400 6,200
Interest Expense Explanation Ref. Debit Unadjusted balance Adjusting entry Closing entry Reversing entry
Credit
1,500 9,300 1,500 2,235
4-49
92,000 96,400 0 4,400 Dr. 1,800
Balance 7,800 9,300 0 1,500 Cr. 735
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 4-16 (a) It would be useful to prepare reversing entries for adjustment 1, 4, and 6. (b) (1)
(4)
(6)
May
May
May
1
1
Service Revenue .......................... Accounts Receivable ..............
600
Interest Payable ........................... Interest Expense......................
545
600
1 Property Tax Payable................... 1,304 Property Tax Expense ............. ($3,912 ÷ 12 × 4)
545
1,304
(c) 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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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 4-1A (a) Revenues Service revenue ............................................ $124,300 Interest revenue .......................................... 1,500 $125,800 Expenses Depreciation expense ................................. 9,850 Insurance expense ...................................... 4,500 Interest expense.......................................... 3,960 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, 2014
R. Falkner, capital, April 1, 2013 ($165,300 − $2,300).............................................. $ 163,000 Add: Investment ............................................... $ 2,300 Profit..................................................... 66,390 68,690 231,690 Less: Drawings .............................................................. 46,200 R. Falkner, capital, March 31, 2014................................. $ 185,490
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-1A (Continued) (c) MARINE FISHING CENTRE Balance Sheet March 31, 2014 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, Sixth Canadian Edition
PROBLEM 4-1A (Continued) (d) GENERAL JOURNAL Date
Account Titles and Explanation
Debit
Credit
Mar. 31
Service Revenue ............................... 124,300 Interest Revenue ................................ 1,500 Income Summary .........................
125,800
Income Summary .............................. 59,410 Depreciation expense ................... Insurance expense ........................ Interest expense ............................ Salaries expense ........................... Supplies expense .......................... Utilities expense ............................
9,850 4,500 3,960 30,000 5,700 5,400
Income Summary .............................. 66,390 R. Falkner, Capital ........................
66,390
R. Falkner, Capital ............................ 46,200 R. Falkner, Drawings ....................
46,200
31
31
31
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-1A (Continued) (e) Clos. Clos. Bal.
Income Summary 59,410 Clos. 125,800 Bal. 66,390 66,390 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 5,400 Clos. 5,400 0
Clos.
Clos.
Bal. Bal.
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Bal. Bal.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-1A (Continued) (f) MARINE FISHING CENTRE Post-Closing Trial Balance March 31, 2014 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 18,100 Accumulated depreciation—equipment .......... 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 adjusted 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, Sixth Canadian Edition
PROBLEM 4-1A (Continued) Taking It Further: When deciding how to present financial information on 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 likely have been titled Statement of Financial Position. The content of the balance sheet would have been the same as to amounts and key sub-totals as in part (c) above but the sequence of the major categories of the elements in the balance sheet would have changed. For the IFRS format, the presentation follows the following sequence: long-term assets, including properly plant and equipment and then intangible assets, current assets (in increasing liquidity order), shareholders’ equity, non-current liabilities and current liabilities.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-2A (a) GENERAL JOURNAL Date
Account Titles and Explanation
Debit
Jan. 31 Accounts Receivable ........................ Service Revenue ...........................
1,550
31 Insurance Expense ($6,420 × 11/12) . Prepaid Insurance ........................
5,885
31 Supplies Expense ($5,240 − $580) .... Supplies ........................................
4,660
31 Depreciation Expense ....................... Accumulated Depreciation— Building ($90,000 ÷ 45).................. Accumulated Depreciation— Equipment ($27,000 ÷ 15)..............
3,800
31
1,520
Salaries Expense .............................. Salaries Payable ...........................
Credit
1,550
5,885
4,660
2,000 1,800
1,520
31 Interest Expense ($102,000 × 6% × 1/12) 510 Interest Payable ............................
510
31 Unearned Revenue ........................... Service Revenue ...........................
850
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850
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-2A (Continued) (b) ELBOW CYCLE REPAIR SHOP Adjusted Trial Balance January 31, 2014
Debit Credit Cash ..................................................................... $ 3,200 Accounts receivable ($6,630 + $1,550) ............. 8,180 Prepaid insurance ($6,420 − $5,885) ................ 535 Supplies ($5,240 − $4,660) ................................ 580 Land .................................................................... 50,000 Building .............................................................. 90,000 Accumulated depreciation—building ($11,000 + $2,000) ........................................... $ 13,000 Equipment ......................................................... 27,000 Accumulated depreciation—equipment 6,300 ($4,500 + $1,800) ............................................. Accounts payable ............................................. 6,400 Interest payable ................................................. 510 Salaries payable................................................. 1,520 Unearned revenue ($1,950 − $850) ................... 1,100 Mortgage payable .............................................. 102,000 H. Dude, capital ................................................. 61,000 H. Dude, drawings ............................................ 101,100 Service revenue ($235,550 + $1,550 + $850) .... 237,950 Depreciation expense........................................ 3,800 Insurance expense ............................................ 5,885 Interest expense ($5,610 + $510) ...................... 6,120 Salaries expense ($115,200 + $1,520) ................ 116,720 Supplies expense .............................................. 4,660 Utilities expense ................................................ 12,000 $429,780 $429,780
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-2A (Continued) (c) ELBOW CYCLE REPAIR SHOP Income Statement Year Ended January 31, 2014
Service revenue ................................................................. $237,950 Expenses Salaries expense .......................................... $116,720 Utilities expense.......................................... 12,000 Interest expense.......................................... 6,120 Insurance expense ...................................... 5,885 Supplies expense ........................................ 4,660 Depreciation expense.................................... 3,800 Total expenses .......................................................... 149,185 Profit ................................................................................. $ 88,765
ELBOW CYCLE REPAIR SHOP Statement of Owner's Equity Year Ended January 31, 2014
H. Dude, capital, February 1, 2013 ($61,000 − $5,000) ... $ 56,000 Add: Investment............................................ $ 5,000 Profit..................................................... 88,765 93,765 149,765 Less: Drawings ................................................................. 101,100 H. Dude, capital, January 31, 2014 ..................................... $ 48,665
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PROBLEM 4-2A (Continued) (c) (Continued) ELBOW CYCLE REPAIR SHOP Balance Sheet January 31, 2014 Assets Current assets Cash ............................................................................... $ 3,200 Accounts receivable ..................................................... 8,180 Prepaid insurance ......................................................... 535 Supplies ......................................................................... 580 Total current assets.................................................. 12,495 Pr operty, plant, and equipment Land ................................................. $50,000 Building............................................ $90,000 Less: Accumulated depreciation ... 13,000 77,000 Equipment........................................ $27,000 Less: Accumulated depreciation .. 6,300 20,700 147,700 Total assets ........................................................................ $160,195 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 6,400 Salaries payable .......................................................... 1,520 Interest payable ........................................................... 510 Unearned revenue ....................................................... 1,100 Current portion of mortgage payable ........................ 4,500 Total current liabilities ........................................... 14,030 Long-term liabilities Mortgage payable ............................................................ 97,500 Total liabilities ............................................................. 111,530 Owner's equity H. Dude, capital.............................................................. 48,665 Total liabilities and owner's equity .......................... $160,195
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-2A (Continued) (d) GENERAL JOURNAL Date Jan
Account Titles and Explanation
Debit
Credit
31 Service Revenue ................................. 237,950 Income Summary ..........................
237,950
31 Income Summary ................................ 149,185 Salaries Expense........................... Utilities Expense ........................... Interest Expense............................ Insurance Expense........................ Supplies Expense.......................... Depreciation Expense ...................
116,720 12,000 6,120 5,885 4,660 3,800
31 Income Summary .................................. 88,765 H. Dude, Capital.............................
88,765
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 2013 is because during the year he withdrew $101,100 cash when the business’ profit was only $88,765. 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, Sixth Canadian Edition
PROBLEM 4-3A (a) GENERAL JOURNAL Date July
Account Titles and Explanation
J1 Debit
Credit
Cash.................................................... 20,000 L. Chang, Capital ...........................
20,000
Equipment .......................................... 25,000 Cash ............................................... Notes Payable ................................
5,000 20,000
Supplies.............................................. Accounts Payable..........................
2,100 2,100
5 Prepaid Insurance.............................. Cash ...............................................
1,800
12 Accounts Receivable ......................... Service Revenue............................
4,500
18 Accounts Payable .............................. Cash ...............................................
1,400
20 Salaries Expense ............................... Cash ...............................................
2,000
21
Cash.................................................... Accounts Receivable ....................
3,400
25 Accounts Receivable ......................... Service Revenue............................
9,000
1
1
3
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1,800
4,500
1,400
2,000
3,400
9,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (a) (Continued) July 31 Fuel Expense...................................... Cash ...............................................
550
31 L. Chang, Drawings ........................... Cash ...............................................
1,600
550
1,600
(a), (c), and (f) Cash Date July
Explanation
1 1 5 18 20 21 31 31
Ref.
Debit
J1 J1 J1 J1 J1 J1 J1 J1
20,000
Credit
Balance
550 1,600
20,000 15,000 13,200 11,800 9,800 13,200 12,650 11,050
Credit
Balance
5,000 1,800 1,400 2,000 3,400
Accounts Receivable Date July 12 21 25 31
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Explanation
Ref.
Debit 4,500
Adjusting
J1 J1 J1 J2
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3,400 9,000 1,500
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4,500 1,100 10,100 11,600
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (a), (c) and (f) (Continued) Supplies Date July 3 31
Explanation
Ref.
Debit 2,100
Adjusting
J1 J2
Credit
Balance
1,400
2,100 700
Credit
Balance
150
1,800 1,650
Prepaid Insurance Date July 5 31
Date July
Explanation
Ref.
Debit 1,800
Adjusting
J1 J2
Explanation 1
Equipment Ref. J1
Debit
Credit Balance
25,000
25,000
Accumulated Depreciation—Equipment Date
Explanation
Ref.
July 31
Adjusting
J2
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Debit
Credit
Balance
521
521
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (a), (c) and (f) (Continued) Accounts Payable Date July
Explanation
Ref.
3 18
J1 J1
Debit
Credit
Balance
2,100
2,100 700
Credit
Balance
800
800
Credit
Balance
1,400
Salaries Payable Date
Explanation
Ref.
July 31
Adjusting
J2
Debit
Interest Payable Date
Explanation
Ref.
July 31
Adjusting
J2
Debit
92
92
Notes Payable Date July
Explanation 1
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Ref. J1
4-65
Debit
Credit
Balance
20,000
20,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (a), (c) and (f) (Continued) L. Chang, Capital Date July
1 31 31
Explanation
Ref.
Closing Closing
J1 J3 J3
Debit
Credit 20,000 9,487
1,600
Balance 20,000 29,487 27,887
L. Chang, Drawings Date July 31 31
Explanation
Ref.
Debit 1,600
Closing
J1 J3
Credit
1,600
Balance 1,600 0
Income Summary Date
Explanation
Ref.
July 31 31 31
Closing Closing Closing
J3 J3 J3
Debit
Credit 15,000
5,513 9,487
Balance 15,000 9,487 0
Service Revenue Date July 12 25 31 31
Solutions Manual .
Explanation
Ref.
Adjusting Closing
J1 J1 J2 J3
4-66
Debit
15,000
Credit
Balance
4,500 4,500 9,000 13,500 1,500 15,000 0
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (a), (c) and (f) (Continued) Fuel Expense Date July 31 31
Explanation
Ref.
Debit 550
Closing
J1 J3
Credit
Balance
550
550 0
Credit
Balance
2,800
2,000 2,800 0
Credit
Balance
1,400
1,400 0
Credit
Balance
521
521 0
Salaries Expense Date July 20 31 31
Explanation
Ref.
Debit
Adjusting Closing
J1 J2 J3
2,000 800
Supplies Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
1,400
Depreciation Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
521
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (a), (c) and (f) (Continued) Insurance Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
150
Credit
Balance
150
150 0
Credit
Balance
Interest Expense Date
Explanation
Ref.
Debit
July 31 31
Adjusting Closing
J2 J3
92 92
(b) LEE’S WINDOW WASHING Trial Balance July 31, 2014 Debit Cash.................................................................... $11,050 Accounts receivable .......................................... 10,100 Supplies.............................................................. 2,100 Prepaid insurance.............................................. 1,800 Equipment .......................................................... 25,000 Accounts payable .............................................. Notes payable .................................................... L. Chang, capital ................................................ L. Chang, drawings............................................ 1,600 Service revenue ................................................. Fuel expense ...................................................... 550 Salaries expense................................................ 2,000 Totals ............................................................. $54,200
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Credit
$ 700 20,000 20,000 13,500
$54,200
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92 0
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (c) GENERAL JOURNAL
J2
Date
Account Titles and Explanation
Debit
July 31
Accounts Receivable ......................... Service Revenue............................
1,500
31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($25,000 ÷ 4 years) × 1/12
521
31 Insurance Expense ............................ Prepaid Insurance ......................... ($1,800 ÷ 12)
150
31 Supplies Expense .............................. Supplies ......................................... ($2,100 − $700)
1,400
31
1,500
521
150
1,400
Salaries Expense ............................... Salaries Payable ............................
800
31 Interest Expense ................................ Interest Payable ............................. ($20,000 × 5.5% × 1/12)
92
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Credit
800
92
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (d) LEE’S WINDOW WASHING Adjusted Trial Balance July 31, 2014
Debit Cash.................................................................... $11,050 Accounts receivable .......................................... 11,600 Supplies.............................................................. 700 Prepaid insurance.............................................. 1,650 Equipment .......................................................... 25,000 Accumulated depreciation—equipment........... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Chang, capital ................................................ L. Chang, drawings............................................ 1,600 Service revenue ................................................. Depreciation expense........................................ 521 Fuel expense ...................................................... 550 Insurance expense ............................................ 150 Interest expense ................................................ 92 Salaries expense................................................ 2,800 Supplies expense .............................................. 1,400 Totals ............................................................. $57,113
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Credit
$
521 700 800 92 20,000 20,000 15,000
$57,113
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (e) LEE’S WINDOW WASHING Income Statement Month Ended July 31, 2014 Revenues Service revenue ............................................................... $15,000 Expenses Depreciation expense ................................... $ 521 Fuel expense ................................................. 550 Insurance expense ........................................ 150 Interest expense............................................ 92 Salaries expense ........................................... 2,800 Supplies expense ............................................. 1,400 Total expenses........................................................ 5,513 Profit ................................................................................. $9,487 LEE’S WINDOW WASHING Statement of Owner's Equity Month Ended July 31, 2014 L. Chang, capital, July 1 .................................................. Add: Investments .............................................. $20,000 Profit......................................................... 9,487 Less: Drawings ............................................................... L. Chang, capital, July 31 ................................................
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$
0
29,487 29,487 1,600 $27,887
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (e) (Continued) LEE’S WINDOW WASHING Balance Sheet July 31, 2014 Assets Current assets Cash ............................................................................. Accounts receivable ................................................... Supplies ....................................................................... Prepaid insurance ....................................................... Total current assets................................................ plant, and equipment Pr operty, Equipment ....................................................... $25,000 Less: Accumulated depreciation .................. 521 Total assets.............................................................
$11,050 11,600 700 1,650 25,000
24,479 $49,479
Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ Salaries payable .......................................................... Interest payable ........................................................... Notes payable, current portion................................... Total current liabilities ........................................... Long term liabilities Notes payable .............................................................. Total liabilities.................................................................. Owner's equity L. Chang, capital ......................................................... Total liabilities and owner's equity........................
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$
700 800 92 5,000 6,592 15,000 21,592
27,887 $49,479
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (f) GENERAL JOURNAL
J3
Date
Account Titles and Explanation
Debit
Credit
July 31
Service Revenue ................................ 15,000 Income Summary ..........................
15,000
Income Summary ............................... Depreciation Expense .................. Fuel Expense ................................. Insurance Expense........................ Interest Expense............................ Salaries Expense........................... Supplies Expense..........................
5,513 521 550 150 92 2,800 1,400
Income Summary ............................... L. Chang, Capital ...........................
9,487
L. Chang, Capital ............................... L. Chang, Drawings.......................
1,600
31
31
31
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9,487
1,600
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3A (Continued) (g) LEE’S WINDOW WASHING Post-Closing Trial Balance July 31, 2014 Debit Cash .................................................................... $ 11,050 Accounts receivable .......................................... 11,600 Supplies.............................................................. 700 Prepaid insurance.............................................. 1,650 Equipment .......................................................... 25,000 Accumulated depreciation—equipment........... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Chang, capital ................................................ $50,000
Credit
$ 521 700 800 92 20,000 27,887 $50,000
Taking It Further: Lee’s Window Washing will need to record adjusting journal entries every month if it wishes to prepare financial statement each month. Closing entries, on the other hand, are done only at the end of the fiscal year.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-4A
(a) GENERAL JOURNAL Date
Account Titles and Explanation
J2 Debit
Oct. 31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($120,000 ÷ 10 years) Accumulated Depreciation —Vehicles ...................................... ($110,000 ÷ 8 years)
25,750
31 Supplies Expense .............................. Supplies ......................................... ($26,000 − $2,000)
24,000
31 Unearned Revenue ............................ Service Revenue............................ ($5,000 − $1,000)
4,000
31 Interest Receivable ............................ Interest Revenue ........................... ($20,000 × 4% × 6/12)
400
31
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Salaries Expense ............................... Salaries Payable ............................
4-75
Credit
12,000
13,750
24,000
4,000
400
2,550 2,550
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-4A (Continued) (a) (Continued) SILVER RIDGE PLUMBING Adjusted Trial Balance October 31, 2014 Debit Credit Cash.................................................................. $ 15,420 Interest receivable ........................................... 400 Supplies ($26,000 – $24,000)........................... 2,000 Debt investments ............................................. 20,000 Equipment ........................................................ 120,000 Accumulated depreciation—equipment......... $ 54,000 * Vehicles ............................................................ 110,000 61,875 ** Accumulated depreciation—vehicles............. Accounts payable ............................................ 7,950 Salaries payable............................................... 2,550 Unearned revenue ........................................... 1,000 Notes payable .................................................. 55,000 H. Burke, capital............................................... 75,750 H. Burke, drawings .......................................... 36,000 Service revenue ($200,125 + $4,000) .............. 204,125 Interest revenue ($400 + $400) ........................ 800 Depreciation expense...................................... 25,750 Fuel expense .................................................... 28,038 Insurance expense .......................................... 9,500 Interest expense .............................................. 3,392 Rent expense ................................................... 21,000 Salaries expense ($45,000 + $2,550) .............. 47,550 Supplies expense ............................................ 24,000 $463,050 $463,050 * $42,000 + $11,000 = $54,000 ** $48,125 + $13,750 = $61,875
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-4A (Continued) (b) Revenues Service revenue ............................................ $204,125 Interest ......................................................... 800 $204,925 Expenses Depreciation expense ................................. 25,750 Fuel expense ............................................... 28,038 Insurance expense ...................................... 9,500 Interest expense.......................................... 3,392 Rent expense............................................... 21,000 Salaries expense ......................................... 47,550 Supplies expense ........................................ 24,000 159,230 Profit ................................................................. $45,695 (c) SILVER RIDGE PLUMBING Statement of Owner's Equity Year Ended October 31, 2014 H. Burke, capital, November 1, 2013 ................................... $73,750 * Add: Investments ............................................... $ 2,000 Profit........................................................ 45,695 47,695 121,445 Less: Drawings .................................................................. 36,000 H. Burke, capital, October 31, 2014..................................... $85,445 * $75,750 – $2,000 = $73,750
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-4A (Continued) (c)
(Continued) SILVER RIDGE PLUMBING Balance Sheet October 31, 2014 Assets
Current assets Cash ...................................................................................... $ 15,420 Interest receivable................................................................ 400 Supplies .................................................................................... 2,000 Total current assets......................................................... 17,820 Debt investments ...................................................................... 20,000 Property, plant, and equipment Equipment ............................................ $120,000 Less: Accumulated depreciation ... 54,000 $66,000 Vehicles............................................... $ 110,000 Less: Accumulated depreciation ... 61,875 48,125 114,125 Total assets............................................................. $151,945 Liabilities and Owner's Equity Current liabilities Accounts payable................................................................. $ 7,950 Salaries payable ................................................................... 2,550 Unearned revenue ................................................................ 1,000 Current portion of notes payable .......................................... 10,000 Total current liabilities .................................................... 21,500 Long-term liabilities Notes payable ......................................................................... 45,000 Total liabilities.................................................................. 66,500 Owner's equity H. Burke, capital .................................................................... 85,445 Total liabilities and owner's equity .................................. $151,945
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-4A (Continued) (d) GENERAL JOURNAL Date
Account Titles and Explanation
Debit
Credit
Oct. 31 Service Revenue ................................. 204,125 Interest Revenue ................................ 800 Income Summary ..........................
204,925
31 Income Summary ................................ 159,230 Depreciation expense ................... Fuel expense ................................. Insurance expense ........................ Interest expense ............................ Rent expense ................................. Salaries expense ........................... Supplies expense ..........................
25,750 28,038 9,500 3,392 21,000 47,550 24,000
31 Income Summary .................................. 45,695 H. Burke, Capital ..........................
45,695
31 H. Burke, Capital ................................... 36,000 H. Burke, Drawings ......................
36,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-4A (Continued) (d) (Continued)
Clos. Clos. Bal.
Clos.
Income Summary 159,230 Clos. 204,925 Bal. 45,695 45,695 0
H. Burke, Capital Bal. 75,750 36,000 Clos. 45,695 Bal. 85,445
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 $85,445. 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, 2013 along with the profit for the year.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5A (a) (1)
INCORRECT ENTRY
(2)
CORRECT ENTRY
1. Salaries Expense 2,100 Salaries Expense Cash 2,100 Salaries Payable Cash
(3)
1,250 650
CORRECTING ENTRY
Salaries Payable Cash ($2,100 – $1,900) 1,900 Salaries Expense ($2,100–$1,250)
2. Salaries Expense 2,400 S. Morris, Drawings 2,400 S. Morris, Drawings Cash 2,400 Cash 2,400 Salaries Expense 3. Rent Payable Cash
950
4. Accounts Payable Cash
740
5. Miscellaneous Exp. Cash
95
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Rent Expense Cash 950
950
Accounts Payable Cash 740
470
Advertising Exp. Cash 95
195
4-81
650 200 850
2,400 2,400
Rent Expense 950 Rent Payable
950
Cash ($740–$470) 470 Accounts Payable
270
950
Advertising Exp. 195 195 Miscellaneous Expense Cash
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270
95 100
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5A (Continued) (a) Continued (1) INCORRECT ENTRY
(2) CORRECT ENTRY
6. Equipment 460 Accounts Payable
Repair Expense Cash
460
(3) CORRECTING ENTRY
460
Repair Expense 460 Equipment Accounts Payable Cash
460 460 460 460
7. Accounts Rec. 1,250 Accounts Receivable 1,250 Unearned Revenue 1,250 Unearned Revenue 1,250 Service Revenue 1,250 Service Revenue 1,250 8. No entry
Depr. Expense 183 Accum. Depr.—Equip [($11,460 − $460) ÷ 5 ÷ 12]
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Depr. Expense 183 183 Accum. Depr.—Equip 183
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5A (Continued) (b) EDGEMONT ENTERTAINMENT INSTALLATIONS Trial Balance April 30, 2014
Cash ($4,010 + $200 + $270 − $100 – $460) ...... Accounts receivable .......................................... Supplies .............................................................. Equipment ($11,460 − $460) ............................. Accumulated depreciation ($2,200 + $183) ..... Accounts payable ($2,275 + $270 − $460) ........ Salaries payable ($650 − $650) ......................... Rent payable (−$950 + $950).............................. Unearned revenue ($1,250 − $1,250) ................. S. Morris, capital ............................................... S. Morris, drawings ($0 + $2,400)...................... Service revenue ($7,950 + $1,250)..................... Salaries expense ($7,400 − $850 − $2,400) ...... Advertising expense ($585 + $195) ................... Depreciation expense ($0 + $183) ................... Miscellaneous expense ($595 – $95) ................ Rent expense ($0 + $950) .................................. Repair expense ($0 + $460) ..............................
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Debit $ 3,920 3,225 3,800 11,000
Credit
$ 2,383 2,085 0 0 0 17,700 2,400 9,200 4,150 780 183 500 950 460 $31,368 $31,368
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5A (Continued) Taking It Further: Error 2 would have the following effects statements:
on the financial
Income statement: Salary expense overstated by $2,400 Profit understated by $2,400 Statement of owner’s equity: Drawing understated by $2,400 Profit understated by $2,400 While it is true that S. Morris’ 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-6A (a)
Item
Income Statement Revenue Expenses Profit
1. 2. 3. 4. 5. 6. 7. 8.
NE O $400 NE U $850 U $600 NE O $300 NE
U $500 NE O $90 NE O $600 NE NE O $2,000
O $500 O $400 U $90 U $850 U $1,200 NE O $300 U $2,000
Balance Sheet Assets Liabilities Owner’s Equity NE U $500 O $500 O $400 NE O $400 U $90 NE U $90 NE O $850 U $850 O $1,200 NE U $1,200 NE NE NE NE U $ 300 O $300 U $2,000 NE U $2,000
(b) 1.
2.
3.
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
4-85
500
500
400
400
320
230
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-6A (Continued) (b) Continued 4.
5.
Unearned Revenue............................ Accounts Receivable .................
850
Accounts Receivable ........................ Service Revenue ........................
850
Interest Receivable ........................... Interest Expense ........................
600
Interest Receivable ........................... Interest Revenue ........................
600
850
850
600
600
6.
No error
7.
Service Revenue ............................... Cash ............................................
300
Cash ................................................... Unearned Revenue .....................
300
Accounts Payable ............................. Repair Expense ..........................
2,000
Equipment ......................................... Accounts Payable.......................
2,000
8.
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 4-7A (a) Although not required, the closing entries would be: GENERAL JOURNAL Date
Account Titles and Explanation
Debit
Credit
Dec. 31
Service Revenue................................. 65,000 Interest Revenue ................................ 1,100 Income Summary ..........................
66,100
Income Summary .............................. 16,700 Depreciation Expense ................... Insurance Expense ........................ Interest Expense ............................ Supplies Expense ..........................
10,000 1,500 2,800 2,400
Income Summary .............................. 49,400 F. Dunder, Capital .........................
49,400
F. Dunder, Capital .............................. 33,000 F. Dunder, Drawings .....................
33,000
31
31
31
Closing
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F. Dunder, Capital Dec. 31, 2013 July 18 33,000 Bal. Closing Dec. 31, 2014
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14,100 3,200 17,300 49,400 33,700
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PROBLEM 4-7A (Continued) (b) DUNDER TOUR COMPANY Balance Sheet December 31, 2014 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 4-7A (Continued)
(c) December 31, 2014
December 31, 2013
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, 2014
December 31, 2013
$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 2014 over 2013. In 2013, 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 2014, the company had a positive working capital amount of $2,300 and a current ratio of greater than 1. Dunder Tour Company’s liquidity has improved.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-8A (a) Amounts in thousands
Cash and cash equivalents Accounts receivable Acid-test assets Inventories Prepaid expenses Current assets
Dec. 24, 2011 $31,803 1,686 33,489 36,789 426 $70,704
June 25, 2011 $28,698 391 29,089 28,964 901 $58,954
Dec. 25, 2010 $25,406 385 25,791 41,163 381 $67,335
Payables and accruals $16,010 $11,024 $19,650 Income taxes payable 583 278 1,097 Other current liabilities 3,586 1,536 3,659 Current liabilities $20,179 $12,838 $24,406 (b) Amounts in thousands Dec. 24, 2011 June 25, 2011 Dec. 25, 2010 Working Capital
$70,704 − $20,179 = $50,525
$58,954 − $12,838 = $46,116
$67,335 − $24,406 = $42,929
Current Ratio
$70,704 ÷ $20,179 = 3.50:1
$58,954 ÷ $12,838 = 4.59:1
$67,335 ÷ $24,406 = 2.76:1
Acid-test Ratio
$33,489 ÷ $20,179 = 1.66:1
$29,089 ÷ $12,838 = 2.27:1
$25,791 ÷ $24,406 = 1.06:1
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-8A (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 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 25, 2011 to December 24, 2011, they remain very strong.
Taking It Further: The different points in time used in the ratio comparison will be affected by the seasonality of Danier’s retail operations. When considering the types of product sold by Danier Leather, one would expect to have reduced amounts of inventory in the summer months, as is revealed in the balances given in part (a). Correspondingly, the accounts payable would be reduced in the summer months as well. The current and acid-test ratios of June 25, 2011 are consequently stronger than those calculated at the December 25, 2010 and December 24, 2011 dates.
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 4-9A ELBOW CYCLE REPAIR SHOP Work Sheet Year Ended January 31, 2014 Account Titles Cash Accounts receivable Prepaid insurance Supplies Land Building Accum. deprec.— building Equipment Accum. deprec.— equipment Accounts payable Interest payable
Solutions Manual .
Trial Balance Debit Credit 3,200 6,630
Adjustments Debit Credit
(1) 1,550
6,420 5,240 50,000 90,000
(2) 5,885 (3) 4,660
11,000
Adjusted Trial Balance Debit Credit 3,200
8,180
535 580 50,000 90,000
535 580 50,000 90,000
13,000 27,000
4,500
13,000 27,000
(4) 1,800
6,300
6,300
(6)
6,400 510
6,400 510
6,400
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Balance Sheet Debit Credit 3,200
8,180
(4) 2,000
27,000
Income Statement Debit Credit
510
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 4-9A (Continued) Account Titles
Trial Balance Debit Credit
Adjustments Debit Credit
Adjusted Trial Balance Debit Credit
Income Statement Debit Credit
Balance Sheet Debit Credit
Salaries payable (5) 1,520 1,520 1,520 Unearned revenue 1,950 (7) 850 1,100 1,100 Mortgage payable 102,000 102,000 102,000 H. Dude, capital 61,000 61,000 61,000 H. Dude, drawings 101,100 101,100 101,100 Service (1) 1,550 235,550 237,950 237,950 revenue (7) 850 Deprec. exp. (4) 3,800 3,800 3,800 Insurance exp. (2) 5,885 5,885 5,885 Interest exp. 5,610 (6) 510 6,120 6,120 Salaries exp. 115,200 (5) 1,520 116,720 116,720 (3) 4,660 4,660 4,660 Supplies exp. Utilities exp. 12,000 _ 12,000 12,000 Totals 422,400 422,400 18,775 18,775 429,780 429,780 149,185 237,950 280,595 191,830 Profit 88,765 88,765 Totals 237,950 237,950 280,595 280,595 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 4-10A
Trial Balance Debit Credit 15,420
SILVER RIDGE PLUMBING Worksheet Year Ended October 31, 2014 Adjusted Trial Adjustments Balance Debit Credit Debit Credit 15,420
Account Titles Cash Interest receivable (4) 400 400 Supplies 26,000 (2)24,000 2,000 Debt 20,000 20,000 investments Equipment 120,000 120,000 Accum. deprec.– equipment 42,000 (1)12,000 54,000 Vehicle 110,000 110,000 Accum.deprec.– vehicle 48,125 (1)13,750 61,875 Accounts payable 7,950 7,950 Salaries payable (5)2,550 2,550 Unearned revenue 5,000 (3)4,000 1,000
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Income Statement Debit Credit
Balance Sheet Debit Credit 15,420 400 2,000 20,000 120,000 54,000 110,000 61,875 7,950 2,550 1,000
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 4-10A (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
Solutions Manual .
Trial Balance
Adjustments
Adjusted Trial Balance
Debit
Debit
Debit
Credit
Credit
55,000 75,750
Credit
Income Statement Debit
Credit
Balance Sheet Debit
55,000 75,750
36,000
55,000 75,750
36,000 200,125 400
(3)4,000 (4) 400
Credit
36,000 204,125 800
(1)25,750
204,125 800
25,750 25,750 28,038 28,038 28,038 9,500 9,500 9,500 3,392 3,392 3,392 21,000 21,000 21,000 45,000 (5) 2,550 47,550 47,550 ( 2)24,000 24,000 24,000 434,350 434,350 56,700 56,700 463,050 463,050 159,230 204,925 303,820 258,125 45,695 45,695 204,925 204,925 303,820 303,820
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*PROBLEM 4-10A (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 4-11A
(b) GENERAL JOURNAL Date
Account Titles and Explanation
Sept. 30 Interest Receivable ............................ Interest Revenue ........................... ($50,000 × 3.5% × 6/12) 30
J2 Debit 875 875
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
2,400
667
4,250
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*PROBLEM 4-11A (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 Bal. 4,250 4,250 Bal. 8,500
875 875
Salaries Expense Sept. 30 Bal. 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 4-11A (Continued) (c) (Continued) Interest Receivable Sept. 30 875 Bal. 875
Interest Revenue Sept. 30 Clos. 875 Bal. Bal.
Salaries Payable Sept. 30 2,400
Bal.
2,400
Interest Payable Sept. 30 Bal.
667 667
Accumulated Depreciation Sept. 30 Bal. 4,250 4,250 Bal. 8,500
875 875 0
Salaries Expense Sept. 30 Bal. 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. 4,250 Clos. 4,250 Bal. 0
(d) GENERAL JOURNAL Date Oct.
Account Titles and Explanation 1
1
1
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Debit
Interest Revenue ................................ Interest Receivable .......................
875
Salaries Payable................................. Salaries Expense...........................
2,400
Interest Payable ................................. Interest Expense............................
667
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Credit
875
2,400
667
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*PROBLEM 4-11A (Continued) (d) (Continued) Interest Receivable Sept. 30 875 Bal. 875 Rev. Bal. 0
875
Salaries Payable Sept. 30 2,400
Rev.
2,400 Bal.
0
Interest Payable Sept. 30 Rev.
667
667 Bal.
0
Interest Revenue Sept. 30 Clos. 875 Bal. Rev. 875
875 0
Salaries Expense Sept. 30 Bal. 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 and Explanation 1
Debit
Cash.................................................... Interest Revenue ...........................
875
2 Salaries Expense ............................... Cash ...............................................
3,000
31 Interest Expense ................................ Cash ...............................................
1,000
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Credit
875
3,000
4,000
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*PROBLEM 4-11A (Continued) (e) (Continued) Interest Receivable Sept. 30 875 Bal. 875 Rev. Bal. 0
875
Salaries Payable Sept. 30 2,400
Rev.
2,400 Bal.
Interest Payable Sept. 30 Rev.
0
667
667 Bal.
0
Interest Revenue Sept. 30 Clos. 875 Bal. Rev. 875 Oct. 1 Bal.
875 0 875 0
Salaries Expense Sept. 30 Bal. 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 4-12A (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 Accumulated Depreciation—Equipment 11,500 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
1 Service Revenue ..................................... Accounts Receivable .........................
750
1,390
300
800
(b) June
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 4-12A (Continued) (c) June
1 Interest Expense ($60,000 × 6% × 1/12) . Cash ....................................................
300
3 Salaries Expense .................................... Cash ....................................................
1,980
19
Cash ($750 + $1,150)............................... Service Revenue.................................
1,900
1 Interest Payable ...................................... Cash ($60,000 × 6% × 1/12) ................
300
300
1,980
1,900
(d) June
3
19
300
Salaries Expense .................................... Salaries Payable...................................... Cash ....................................................
590 1,390
Cash ($750 + $1,150)............................... Accounts Receivable ......................... Service Revenue.................................
1,900
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) 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, 2014 L. Massak, capital, February 1, 2013 * .............................. $147,000 Add: Investment................................................. $ 3,700 Profit........................................................ 42,625 46,325 193,325 Less: Drawings ............................................................. 52,500 L. Massak, capital, January 31, 2014 ................................ $140,825 *($150,700 − $3,700)
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PROBLEM 4-1B (Continued) (c) BOREAL ROCK CLIMBING CENTRE Balance Sheet January 31, 2014 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 4-1B (Continued) (d) GENERAL JOURNAL
J14
Date
Account Titles and Explanation
Debit
Credit
Dec. 31
Service Revenue ............................... 114,300 Income Summary .........................
114,300
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
Income Summary ............................... 42,625 L. Massak, Capital .........................
42,625
L. Massak, Capital.............................. 52,500 L. Massak, Drawings ....................
52,500
31
31
31
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PROBLEM 4-1B (Continued) (e) Income Summary 71,675 114,300 42,625 Bal. 42,625 Bal. 0 L. Massak, Capital 150,700 42,625 52,500 140,825
L. Massak, Drawings 52,500 52,500 0
Service Revenue 114,300 114,300 0 Depreciation Expense 10,025 10,025 0
Insurance Expense 5,625 5,625 0
Interest Expense 4,950
Salaries Expense 37,200 37,200 0
4,950 0 Supplies Expense 7,125
Utilities Expense 6,750 7,125
6,750
0
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0
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PROBLEM 4-1B (Continued) (f) BOREAL ROCK CLIMBING CENTRE Post-Closing Trial Balance January 31, 2014
Debit $ 9,650 9,375 1,780 20,000 58,500 165,000
Credit
Cash................................................................. Short-term investments................................... 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 4-1B (Continued) Taking It Further: When deciding how to present financial information on 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 subtotals but the sequence of the major categories of the elements in the balance sheet would have changed. For the IFRS format, the presentation follows the following sequence: long-term assets, including properly plant and equipment and then intangible assets, current assets (in increasing liquidity order), shareholders’ equity, non-current liabilities and current liabilities.
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PROBLEM 4-2B (a) GENERAL JOURNAL Date
Account Titles and Explanation
Debit
Credit
Sept. 30
Accounts Receivable ............................ 1,150 Service Revenue...............................
1,150
30 Insurance Expense ($4,140 × 10/12) .... 3,450 Prepaid Insurance ............................
3,450
30 Supplies Expense ($3,780 – $960) ....... 2,820 Supplies ............................................
2,820
30 Depreciation Expense .......................... 7,200 Accumulated Depreciation —Building ($98,000 ÷ 40) ................. Accumulated Depreciation —Equipment ($38,000 ÷ 8) ............... 30
Salaries Expense .................................. Salaries Payable ...............................
975
30 Interest Expense ................................... Interest Payable ................................ ($125,000 × 5.5% × 1/12)
573
4-110
4,750
975
30 Unearned Revenue ($3,300 × ¾) .......... 2,475 Service Revenue...............................
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2,450
573
2,475
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PROBLEM 4-2B (Continued) (b) EDGE SPORTS REPAIR SHOP Adjusted Trial Balance September 30, 2014
Account Titles Debit Credit Cash.................................................................... $ 6,750 Accounts receivable ($11,540 + $1,150) ........... 12,690 Prepaid insurance ($4,140 – $3,450)................. 690 Supplies ($3,780 – $2,820)................................. 960 Land .................................................................... 55,000 Building .............................................................. 98,000 Accumulated depreciation—building ($17,150 + $2,450) ............................................ $ 19,600 Equipment .......................................................... 38,000 Accumulated depreciation—equipment ($9,500 + $4,750) .............................................. 14,250 Accounts payable .............................................. 8,550 Interest payable ($0 + $573) .............................. 573 Salaries payable ($0 + $975) ............................. 975 Unearned revenue ($3,300 – $2,475) ................ 825 Mortgage payable .............................................. 125,000 R. Brachman, capital ......................................... 60,000 R. Brachman, drawings ..................................... 103,525 Service revenue ($189,550 + $1,150 + $2,475) . 193,175 Depreciation expense........................................ 7,200 Insurance expense ............................................ 3,450 Interest expense ($6,302 + $573) ...................... 6,875 Salaries expense ($75,900 + $975) ................... 76,875 Supplies expense .............................................. 2,820 Utilities expense ................................................ 10,113 $422,948 $422,948
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PROBLEM 4-2B (Continued) (c) EDGE SPORTS REPAIR SHOP Income Statement Year Ended September 30, 2014
Service revenue ...............................................................
$193,175
Expenses Depreciation expense ..................................... $ 7,200 Interest expense............................................ 6,875 Insurance expense ........................................ 3,450 Salaries expense .............................................. 76,875 Supplies expense .......................................... 2,820 Utilities expense .............................................. 10,113 Total expenses.......................................... 107,333 Profit ................................................................................. $ 85,842
EDGE SPORTS REPAIR SHOP Statement of Owner's Equity Year Ended September 30, 2014
R. Brachman, capital, October 1, 2013 ($60,000 − $4,000) ........................... Add: Investment....................................... Profit................................................
$56,000 $ 4,000 85,842
89,842 145,842 Less: Drawings ................................................................. 103,525 R. Brachman, capital, September 30, 2014 ......................... $42,317
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PROBLEM 4-2B (Continued) (c) (Continued) EDGE SPORTS REPAIR SHOP Balance Sheet September 30, 2014 Assets Current assets Cash ............................................................................. $ 6,750 Accounts receivable ................................................... 12,690 Prepaid insurance ....................................................... 690 Supplies ....................................................................... 960 Total current assets................................................ 21,090 Pr operty, plant, and equipment $55,000 Land .......................................................... Building ........................................... $98,000 78,400 Less: Accumulated depreciation 19,600 Equipment................................... 38,000 Less: Accumulated depreciation 14,250 23,750 157,150 Total assets ............................................................... $178,240 Liabilities and Owner's Equity Current liabilities Accounts payable........................................................ $ 8,550 Salaries payable .......................................................... 975 Interest payable ........................................................... 573 Unearned revenue ....................................................... 825 Current portion of mortgage payable ...................... 5,400 Total current liabilities ........................................... 16,323 Long-term liabilities Mortgage payable .......................................................... 119,600 Total liabilities ............................................................. 135,923 Owner's equity R. Brachman, capital ..................................................... 42,317 Total liabilities and owner's equity .......................... $178,240
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PROBLEM 4-2B (Continued) (d) GENERAL JOURNAL Date
Account Titles and Explanation
Debit
Credit
Sept. 30 Service Revenue ................................. 193,175 Income Summary ..........................
193,175
30 Income Summary ................................ 107,333 Depreciation Expense ................... Insurance Expense........................ Interest Expense............................ Salaries Expense........................... Supplies Expense.......................... Utilities Expense ...........................
7,200 3,450 6,875 76,875 2,820 10,113
30 Income Summary .................................. 85,842 R. Brachman, Capital ....................
85,842
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 2013 is because during the year he withdrew $103,525 cash when the business’ profit was only $85,842. 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 4-3B (a) GENERAL JOURNAL Date Mar.
Account Titles and Explanation
J1 Debit
Credit
Cash.................................................... 10,000 L. Eddy, Capital .............................
10,000
Equipment .......................................... Cash ............................................... Notes Payable ................................
6,500 1,500 5,000
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
1
1
3
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1,200
1,200
4,800
500
1,800
1,400
2,500
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (Continued) (a) (Continued) Mar. 31 Fuel Expense...................................... Cash ...............................................
375
31 L. Eddy, Drawings.............................. Cash ...............................................
900
375
900
(a), (c), and (f) 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
Solutions Manual .
Explanation
Ref.
Adjusting
J1 J1 J1 J2
4-116
Debit
Credit
Balance
4,800 1,400 2,500 500
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4,800 3,400 5,900 6,400
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (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
Explanation
Ref.
Debit 1,200
Adjusting
J1 J2
Explanation
Mar.
1
Equipment Ref. J1
Debit
Credit Balance
6,500
6,500
Accumulated Depreciation—Equipment Date
Explanation
Ref.
Mar. 31
Adjusting
J2
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Debit
Credit
Balance
108
108
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PROBLEM 4-3B (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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Ref. J1
4-118
Debit
Credit
Balance
5,000
5,000
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (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
Solutions Manual .
Explanation
Ref.
Adjusting Closing
J1 J1 J2 J3
4-119
Debit
Credit
Balance
4,800 2,500 500 7,800
Chapter 4
4,800 7,300 7,800 0
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (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
Salaries Expense Date Mar. 21 31 31
Solutions Manual .
Explanation
Ref.
Adjusting Closing
J1 J2 J3
4-120
Debit
Credit
Balance
1,800 500 2,300
Chapter 4
1,800 2,300 0
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (Continued) (a), (c) and (f) (Continued) Supplies Expense Date
Explanation
Ref.
Mar. 31 31
Adjusting Closing
J2 J3
Debit
Credit
Balance
800
800 0
800
Interest Expense Date
Explanation
Ref.
Mar. 31 31
Adjusting Closing
J2 J3
Debit
Credit
Balance
19 19
(b) EDDY’S CARPET CLEANERS Trial Balance March 30, 2014 Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 5,900 Supplies.............................................................. 1,200 Prepaid insurance.............................................. 1,200 Equipment .......................................................... 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
Chapter 4
19 0
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (Continued) (c) GENERAL JOURNAL Date
Account Titles and Explanation
J2 Debit
Mar. 31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($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
500
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Accounts Receivable ........................ Service Revenue............................
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Credit
108
100
800
500
19
500
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PROBLEM 4-3B (Continued) (d)
EDDY’S CARPET CLEANERS Adjusted Trial Balance March 31, 2014
Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 6,400 Supplies.............................................................. 400 Prepaid insurance.............................................. 1,100 Equipment .......................................................... 6,500 Accumulated depreciation—equipment........... 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
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (Continued) (e) EDDY’S CARPET CLEANERS Income Statement Month Ended March 31, 2014 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, 2014 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
Chapter 4
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PROBLEM 4-3B (Continued) (e) (Continued) EDDY’S CARPET CLEANERS Balance Sheet March 31, 2014 Assets Current assets Cash ............................................................................. $ 5,125 Accounts receivable ................................................... 6,400 Supplies ....................................................................... 400 Prepaid insurance ....................................................... 1,100 Total current assets................................................ 13,025 Pr operty, plant, and equipment $6,500 Equipment...................................................... 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 4-3B (Continued) (f) GENERAL JOURNAL
J3
Date
Account Titles and Explanation
Debit
Mar. 31
Service Revenue ................................ Income Summary ..........................
7,800
Income Summary ............................... Depreciation Expense .................. Fuel Expense ................................. Insurance Expense........................ Interest Expense............................ Salaries Expense........................... Supplies Expense..........................
3,702
Income Summary ............................... L. Eddy, Capital .............................
4,098
L. Eddy, Capital .................................. L. Eddy, Drawings .........................
900
31
31
31
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Credit
7,800
108 375 100 19 2,300 800
4,098
900
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow Accounting Principles, Sixth Canadian Edition
PROBLEM 4-3B (Continued) (g) EDDY’S CARPET CLEANERS Post-Closing Trial Balance March 31, 2014 Debit Cash.................................................................... $ 5,125 Accounts receivable .......................................... 6,400 Supplies.............................................................. 400 Prepaid insurance.............................................. 1,100 Equipment .......................................................... 6,500 Accumulated depreciation—equipment........... Accounts payable .............................................. Salaries payable................................................. Interest payable ................................................. Notes payable .................................................... L. Eddy, capital .................................................. $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 statement each month. Closing entries, on the other hand, are done only at the end of the fiscal year.
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PROBLEM 4-4B
(a) GENERAL JOURNAL Date
Account Titles and Explanation
J2 Debit
Aug. 31 Depreciation Expense ....................... Accumulated Depreciation —Equipment .................................. ($108,000 ÷ 12 years) Accumulated Depreciation —Vehicles ...................................... ($98,000 ÷ 8 years)
21,250
31 Supplies Expense .............................. Supplies ......................................... ($23,400 − $1,500)
21,900
31 Unearned Revenue ............................ Service Revenue............................ ($4,500 − $2,500)
2,000
31 Interest Receivable ............................ Interest Revenue ........................... ($18,000 × 4% × 6/12)
360
31
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Salaries Expense ............................... Salaries Payable ............................
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Credit
9,000
12,250
21,900
2,000
360
1,850 1,850
Chapter 4
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PROBLEM 4-4B (Continued) (a) (Continued) NAZARI ELECTRICAL SERVICES Adjusted Trial Balance August 31, 2014 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 Depreciation expense...................................... 21,250 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 4-4B (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, 2014 A. Nazari, capital, September 1, 2013 ................................ $ 65,175 * Add: Investments ............................................... $ 3,000 Profit........................................................ 42,115 45,115 110,290 Less: Drawings .................................................................. 32,400 A. Nazari, capital, August 31, 2014..................................... $ 77,890 * $68,175 – $3,000 = $65,175
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PROBLEM 4-4B (Continued) (c)
(Continued) NAZARI ELECTRICAL SERVICES Balance Sheet August 31, 2014 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 4-4B (Continued) (d) GENERAL JOURNAL Date
Account Titles and Explanation
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 4-4B (Continued) (d) (Continued)
Clos. Clos. Bal.
Clos.
Income Summary 140,720 Clos. 182,835 Bal. 42,115 42,115 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 N. 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, 2013 along with the profit for the year.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5B (a) (1)
INCORRECT ENTRY
(2)
CORRECT ENTRY
(3)
CORRECTING ENTRY
1. Supplies 1,200 Equipment 2,100 Equipment 2,100 Accounts Payable 1,200 Accounts Payable 2,100 Supplies 1,200 Accounts Payable 900 2. Misc. Expense Cash 3. Cash Service Revenue
1,150
Rent Expense 1,150 Cash
955
Solutions Manual .
Rent Expense 1,150 1,150 Miscellaneous Expense 1,150
Cash 955 Service Revenue 955 955 Accounts Receivable 955 Accounts Receivable 955
4. Cash 575 Accounts Payable Accounts Receivable 575 Cash
5. Salaries Payable Cash
1,150
3,000 Salaries Expense 3,000 Salaries Payable Cash
4-134
575
Accounts Receivable 575 575 Accounts Payable 575 Cash 1,150
2,250 750
Salaries Expense Salaries Payable 3,000
Chapter 4
2,250 2,250
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5B (Continued) (a) Continued (1) INCORRECT ENTRY
6. Equipment Cash
7. Salary Expense Cash 8. No entry
Solutions Manual .
(2) CORRECT ENTRY
620
Repair Expense 620 Accounts Payable
(3) CORRECTING ENTRY
260
Repair Expense 260 Accounts Payable 260 Cash 620 Equipment
1,800 M. Hubert, Drawings 1,800 1,800 Cash 1,800
Chapter 4
620
M. Hubert, Drawings 1,800 Salary Expense 1,800
Depreciation expense 235 Depreciation exp. 235 Accum. Depr.—Equip. 235 Accum. Depr.—Equip. [($12,620 − $620 + $2,100) ÷ 5 ÷ 12 = $235]
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260
235
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5B (Continued) (b) INTERACTIVE COMPUTER INSTALLATIONS Trial Balance March 31, 2014 Debit Cash ($6,680 − $1,150 + $620) ............................ $ 6,150 Accounts receivable ($3,850 − $955 + $575) ......... 3,470 Supplies ($3,900 − $1,200) ..................................... 2,700 Equipment ($12,620 + $2,100 − $620) .................. 14,100 Accumulated depreciation ($6,000 + $235) ...... Accounts payable ($5,330 + $900 − $575 + $260) Salaries payable (−$2,250 + $2,250) .................. Unearned revenue .............................................. M. Hubert, capital ............................................... M. Hubert, drawings ($0 + $1,800) ......................... 1,800 Service revenue ($7,800 − $955) ....................... Depreciation expense ($0 + $235) ..................... 235 Miscellaneous expense ($1,360 − $1,150) ........ 210 Rent expense ($0 + $1,150) .................................... 1,150 Repair expense ($0 + $260) ............................... 260 Salaries expense ($4,800 + $2,250 − $1,800) .... 5,250 $35,325
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Credit
$ 6,235 5,915 0 955 15,375 6,845
$35,325
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 4-5B (Continued) Taking It Further: Errors made that involve property, plant, and equipment or other depreciable assets cause secondary errors to be made in the depreciation of those assets. This is the reason why these types of errors are so important to correct. Error 6 would have the following effects on the financial statements: Balance sheet: Cash understated by $620 Property, plant, and equipment overstated by $610 Equipment overstated by $620 Accumulated depreciation overstated by $10 ($620 ÷ 5 ÷ 12 = $10) Accounts payable understated by $260 Owner’s equity overstated by $250 (see profit below) Income statement: Depreciation expense overstated by $10 Repair expense understated by $260 Profit overstated by $250
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Accounting Principles, Sixth Canadian Edition
PROBLEM 4-6B (a) Income Statement Item Revenue 1. NE 2. NE 3. U $350 4. NE 5. NE 6. NE 7. NE 8. NE
Expenses O $700 NE NE U $540 NE U $750 NE O $950
Profit U $700 NE U $350 O $540 NE O $750 NE U $950
Balance Sheet Owner’s Assets Liabilities Equity U $700 NE U $700 O $1,200 O $1,200 NE U $575 U $225 U $350 O $540 NE O $540 U $650 U $650 NE O $750 NE O $750 NE NE NE NE NE NE
(b) 1.
2.
3.
Solutions Manual .
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
4-138
700
700
600
600
350
575
Chapter 4
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 4-6B (Continued) (b) Continued 4.
5.
6.
7.
8.
Solutions Manual .
Accumulated Depreciation ............... Depreciation Expense................
1,280
Depreciation Expense....................... Accumulated Depreciation ........
1,820
Service Revenue ............................... Unearned Revenue .....................
650
Accounts Receivable ........................ Service Revenue ........................
650
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
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1,280
1,820
650
650
750
750
500
500
950
950
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PROBLEM 4-6B (Continued) 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 the owner’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 4-7B (a) Although not required, the closing entries would be: GENERAL JOURNAL Date
Account Titles and Explanation
Debit
Credit
Mar. 31
Service Revenue................................. 79,800 Interest Revenue ................................ 400 Income Summary ..........................
80,200
Income Summary .............................. 29,500 Advertising Expense ..................... Depreciation Expense ................... Insurance Expense ........................ Interest Expense ............................ Supplies Expense ..........................
12,000 8,000 4,000 1,800 3,700
Income Summary .............................. 50,700 N. Anderson, Capital .....................
50,700
N. Anderson, Capital ......................... 57,700 N. Anderson, Drawings ................
57,700
31
31
31
Closing
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N. Anderson, Capital Mar. 31, 2013 Sept. 20 Bal. 57,700 Closing Mar. 31, 2014
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32,700 3,800 36,500 50,700 29,500
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PROBLEM 4-7B (Continued) (b) MATRIX CONSULTING SERVICES Balance Sheet March 31, 2014 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 ................................... 10,000 Total current liabilities........................................... 23,000 Long-term liabilities Notes payable ($30,000 – $10,000) ................................. 20,000 Total liabilities ........................................................ 43,000 Owner's equity N. Anderson, capital ....................................................... 29,500 Total liabilities and owner's equity ........................... $72,500
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PROBLEM 4-7B (Continued) (c) March 31, 2014
March 31, 2013
Working Capital
$18,500 − $23,000 = ($4,500)
$30,700 − $15,950 = $14,750
Current Ratio
$18,500 ÷ $23,000 = 0.80:1
$30,700 ÷ $15,950 = 1.92:1
March 31, 2014
March 31, 2010
$11,800* ÷ $23,000 = 0.51:1
$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 2014. This means that there are insufficient current assets to pay off current liabilities. This also explains why the current ratio of 2014 is less than 1. There was a substantial decline in all ratios from 2013 to 2014; indicating a severe weakening in the company’s liquidity from 2013 to 2014.
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PROBLEM 4-8B (a) Amounts in thousands
Cash Accounts receivable Acid test assets Inventories Prepaid expense Current assets Acc. payable and accr. liabilities Dividends payable Cur. portion of long-term debt Current liabilities
Dec. 30, 2011 $655 2,788 3,443 4,429 217 $8,089
Dec. 31, 2010 $769 1,789 2,558 3,951 397 $6,906
Jan. 1, 2010 $728 3,617 4,345 3,333 305 $7,983
$3,663 1,212 700 $5,575
$3,016 606 700 $4,322
$4,725 0 0 $4,725
(b) Amounts in thousands Dec. 30, 2011 Working Capital
Dec. 31, 2010
Jan. 1, 2010
$8,089 – $5,575 $6,906 – $4,322 $7,983 – $4,725 = $2,514 = $2,584 = $3,258
Current Ratio
$8,089 ÷ $5,575 = 1.45:1
$6,906 ÷ $4,322 = 1.60:1
$7,983 ÷ $4,725 = 1.69:1
Acid-test Ratio
$3,443 ÷ $5,575 = 0.62:1
$2,558 ÷ $4,322 = 0.59:1
$4,345 ÷ $4,725 = 0.92:1
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PROBLEM 4-8B (Continued) (b) 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 is fairly steady but the measure of short-term liquidity and short-term debt-paying ability is slowly deteriorating with time. In comparison, a current ratio in excess of 2:1 or acid-test ratio in excess of 1:1 would be 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. In the case of WestJet Airlines, the differences between the acid-test and current ratios should be much smaller, since West Jet has no merchandise inventory. 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 an airline. 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 4-9B
Account Titles Cash Accounts receivable Prepaid insurance Supplies Land Building Accum. deprec.— bldg Equipment Accum. deprec.— equip. Accounts payable Interest payable Salaries payable
Solutions Manual .
Trial Balance Debit Credit 6,750
EDGE SPORTS REPAIR SHOP Worksheet Year Ended September 30, 2014 Adjusted Trial Income Adjustments Balance Statement Debit Credit Debit Credit Debit Credit 6,750
Balance Sheet Debit Credit 6,750
11,540
(1) 1,150
12,690
12,690
690 960 55,000 98,000
690 960 55,000 98,000
4,140 3,780 55,000 98,000
(2) 3,450 (3) 2,820
17,150
(4) 2,450
38,000
19,600 38,000
9,500
38,000
(4) 4,750
14,250
14,250
(6) (5)
8,550 573 975
8,550 573 975
8,550
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19,600
573 975
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*PROBLEM 4-9B (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) 1,150 revenue 189,550 (7) 2,475 193,175 193,175 Deprec. expense (4) 7,200 7,200 7,200 Insurance expense (2) 3,450 3,450 3,450 Interest expense 6,302 (6) 573 6,875 6,875 Salaries expense 75,900 (5) 975 76,875 76,875 Supplies expense (3) 2,820 2,820 2,820 Utilities expense 10,113 10,113 10,113 Totals 413,050 413,050 18,643 18,643 422,948 422,948 107,333 193,175 315,615 229,773 Profit 85,842 85,842 Totals 193,175 193,175 315,615 315,615 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 4-10B
Trial Balance Debit Credit 13,870
NAZARI ELECTRICAL SERVICES Worksheet Year Ended September 30, 2014 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 18,000 18,000 Investments 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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 4-10B (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
Solutions Manual .
Trial Balance
Adjustments
Adjusted Trial Balance
Debit
Debit
Debit
Credit
Credit
48,000 68,175
Credit
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 4-10B (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 4-11B
(b) GENERAL JOURNAL Date
Account Titles and Explanation
Oct. 31 Interest Receivable............................. Interest Revenue ............................ ($60,000 × 3.75% × 6/12) 31
Debit 1,125
1,125
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
3,200
750
5,500
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*PROBLEM 4-11B (Continued) (a) and (b) 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 Bal. 1,125
750 750
Accumulated Depreciation Oct. 31 Bal. 16,500 5,500 Bal. 22,000
Salaries Expense Oct. 31 Bal. 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 and Explanation
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 4-11B (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 Bal. 16,500 5,500 Bal. 22,000
Salaries Expense Oct. 31 Bal. 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. 5,500 Clos. 5,500 Bal. 0
(d) GENERAL JOURNAL Date Nov.
Account Titles and Explanation Debit 1 Interest Revenue ................................ 1,125 Interest Receivable ........................ 1
1
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Salaries Payable ................................. Salaries Expense ...........................
3,200
Interest Payable.................................. Interest Expense ............................
750
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Credit 1,125
3,200
750
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*PROBLEM 4-11B (Continued) (d) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125 Rev. 1,125 Bal. 0
Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 0 Rev. 1,125
Salaries Payable Oct. 31
3,200
3,200 Bal. Bal.
3,200 0
Salaries Expense Oct. 31 Bal. 156,000 2,400 Bal. 159,200 Clos. 159,200 Bal. 0 Rev. 3,200
Rev.
Interest Payable Oct. 31 Rev.
750
750 Bal.
0
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 and Explanation
Debit
Cash .................................................... Interest Revenue ............................
1,125
6 Salaries Expense................................ Cash................................................
6,000
1 Interest Expense................................. Cash................................................
1,125
1
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Credit
1,125
6,000
1,125
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*PROBLEM 4-11B (Continued) (e) (Continued) Interest Receivable Oct. 31 1,125 Bal. 1,125 Rev. 1,125 Bal. 0
Interest Revenue Oct. 31 1,125 Clos. 1,125 Bal. 0 Rev. 1,125 Nov. 1 1,125 Bal. 0
Salaries Payable Oct. 31
Salaries Expense Oct. 31 Bal. 156,000 3,200 Bal. 159,200 Clos. 159,200 Bal. 0 Rev. 3,200 Nov. 6 6,000 Bal. 2,800
Rev.
3,200
3,200 Bal.
Interest Payable Sept. 30 Rev.
0
750
750 Bal.
0
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 4-12B (a) Apr. 30
Accounts Receivable ............................. Fees Earned .......................................
550
30 Supplies Expense ($4,270 – $480)......... Supplies..............................................
3,790
30 Depreciation Expense ($130,000 ÷ 10) .. Accumulated Depreciation —Equipment.......................................
13,000
30
Salaries Expense.................................... Salaries Payable ................................
1,150
30 Interest Expense ($90,000 × 5% × 1/12) Interest Payable .................................
375
30
550
3,790
13,000
1,150
375
Unearned Revenue ................................. Fees Earned .......................................
1,165
Fees Earned............................................ Accounts Receivable .........................
550
Salaries Payable ..................................... Salaries Expense ...............................
1,150
Interest Payable...................................... Interest Expense ................................
375
1,165
(b) May
1
1
1
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550
1,150
375
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*PROBLEM 4-12B (Continued) (c) May
1 Interest Expense ($90,000 × 5% × 1/12) Cash....................................................
375
8 Salaries Expense................................... Cash....................................................
2,290
21
Cash ($1,250 + $550) .............................. Fees Earned .......................................
1,800
1 Interest Payable ($90,000 × 5% × 1/12).. Cash....................................................
375
375
2,290
1,800
(d) May
8
21
375
Salaries Expense.................................... Salaries Payable ..................................... Cash....................................................
1,140 1,150
Cash ........................................................ Accounts Receivable ......................... Fees Earned .......................................
1,800
2,290
550 1,250
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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CONTINUING COOKIE CHRONICLE (a) COOKIE CREATIONS Income Statement Two Months Ended December 31, 2013
Revenue ..............................................................
$ 1,225
Expenses Advertising expense...................................... $ 325 Telephone expense ....................................... 174 Supplies expense .......................................... 103 Depreciation expense.................................... 78 Salaries expense ........................................... 48 Interest expense ............................................ 8 Total expenses ....................................................... Profit.................................................................................
736 $ 489
(b) COOKIE CREATIONS Statement of Owner's Equity Two Months Ended December 31, 2013
N. Koebel, capital, November 1 ...................................... Add: Investments.......................................................... Profit ..................................................................... Less: Drawings .............................................................. N. Koebel, capital, December 31 ....................................
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$
0 1,450 489 1,939 0 $1,939
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CONTINUING COOKIE CHRONICLE (Continued) (b) (Continued) COOKIE CREATIONS Balance Sheet December 31, 2013
Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies ...................................................................... Total current assets ............................................... Pr operty, plant, and equipment Equipment ...................................................... $1,550 Less: Accumulated depreciation ................. 78 Total assets ...............................................
$2,929 675 95 3,699
1,472 $5,171
Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... Salaries payable.......................................................... Interest payable .......................................................... Unearned revenue ...................................................... Notes payable ............................................................. Total current liabilities........................................... Owner's equity N. Koebel, capital........................................................ Total liabilities and owner's equity .......................
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$
76 48 8 100 3,000 3,232
1,939 $5,171
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CONTINUING COOKIE CHRONICLE (Continued) (c) 1. Working Capital 2.
Current Ratio
$3,699 – =
$3,232
$3,699
=
$ 467
=
1.14:1
=
1.12:1
$3,232 3.
Acid-test ratio =
$2,929 + $675 $3,232
Cookie Creation’s liquidity at December 31, 2013 is moderately strong. (d) GENERAL JOURNAL Date
Account Titles and Explanation
2013 Dec. 31
31
31
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J4 Debit
Revenue ............................................. Income Summary ..........................
1,225
Income Summary .............................. Advertising Expense .................... Depreciation Expense .................. Interest Expense ........................... Salaries Expense .......................... Supplies Expense ......................... Telephone Expense ......................
736
Income Summary .............................. N. Koebel, Capital .........................
489
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Credit
1,225
325 78 8 48 103 174
489
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (e) COOKIE CREATIONS Post-Closing Trial Balance December 31, 2013
Account Cash .................................................................... Accounts receivable .......................................... Supplies .............................................................. Equipment........................................................... Accumulated depreciation—equipment ........... Accounts payable............................................... Salaries payable ................................................. Interest payable .................................................. Unearned revenue .............................................. Notes payable ..................................................... N. Koebel, capital ...............................................
Debit $2,929 675 95 1,550
Credit
$
_ $5,249
78 76 48 8 100 3,000 1,939 $5,249
(f) Expenses would have been overstated by $1,472 ($1,550 - $78). Profit would be understated by $1,472. Assets and N. Koebel, capital would be understated by $1,472.
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CUMULATIVE COVERAGE–CHAPTERS 2 TO 4 (b) GENERAL JOURNAL Date
Account Titles and Explanation
Sept. 1 Cash .................................................... Notes Payable ................................ 2
J1 Debit 10,000 10,000
Rent Expense ..................................... Cash................................................
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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Credit
500
1,050
1,500
5,700
1,300
2,300
200
1,050
900
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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)
Sept. 30
J. Alou, Capital Aug. 31 Sept. 30 16,400 Bal.
Aug. 31 Sept. 30 Bal. Bal.
J. Alou, Drawings 15,600 800 16,400 Sept. 30 0
Sept. 30 Sept. 30 Bal.
Income Summary 46,372 Sept. 30 10,328 0
Sept. 30
Aug. 31 Sept. 2 Bal. Bal.
Solutions Manual .
Service Revenue Aug. 31 Sept. 15 Sept. 27 Bal. Sept. 30 56,700 Bal. Bal. Rent Expense 5,500 500 6,000 Sept. 30 0
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21,200 10,328 15,128
16,400
56,700
49,600 5,700 900 56,200 500 56,700 0
6,000
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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 Sept. 30 0
Aug. 31 Sept. 21 Bal. Bal.
Telephone Expense 2,230 200 2,430 Sept. 30 0
Sept. 30 Bal.
Supplies Expense 8,800 Sept. 30 0
8,800
Sept. 30 Bal.
Depreciation Expense 1,800 Sept. 30 0
1,800
Sept. 30 Bal.
Interest Expense 42 Sept. 30 0
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27,300
2,430
42
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (d) ALOU EQUIPMENT REPAIR Unadjusted Trial Balance September 30, 2014
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
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (e) GENERAL JOURNAL Date
Account Titles and Explanation
J2 Debit
Credit
Sept. 30 Supplies Expense ................................... 8,800 Supplies.......................................... ($9,800 – $1,000)
8,800
30 Salaries Expense................................ Salaries Payable ............................
630 630
30 Depreciation Expense ............................ 1,800 Accumulated Depreciation —Equipment................................... ($9,000 ÷ 5 years) 30 Unearned Revenue ............................. Service Revenue ............................ ($950 – $450)
500
30 Interest Expense................................. Interest Payable ............................. ($10,000 × 5% × 1/12)
42
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1,800
500
42
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (f) ALOU EQUIPMENT REPAIR Adjusted Trial Balance September 30, 2014
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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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (g) ALOU EQUIPMENT REPAIR Income Statement Year Ended September 30, 2014 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 46,372 Total expenses ....................................................... Profit................................................................................. $10,328
ALOU EQUIPMENT REPAIR Statement of Owner's Equity Year Ended September 30, 2014 J. Alou, capital, Oct. 1, 2013 ........................................ Add: Profit................................................................... Less: Drawings............................................................ J. Alou, capital, Sept. 30, 2014 ....................................
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$21,200 10,328 31,528 16,400 $15,128
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (g) (Continued) ALOU EQUIPMENT REPAIR Balance Sheet September 30, 2014 Assets Current assets Cash............................................................................. Accounts receivable ................................................... Supplies ...................................................................... Total current assets ............................................... Pr operty, 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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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (h) GENERAL JOURNAL
J3
Date
Account Titles and Explanation
Debit
Credit
Sept. 30
Service Revenue................................. 56,700 Income Summary ...........................
56,700
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
Income Summary ............................... 10,328 J. Alou, Capital ...............................
10,328
J. Alou, Capital ................................... 16,400 J. Alou, Drawings...........................
16,400
30
30
30
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CUMULATIVE COVERAGE—CHAPTERS 2 TO 4 (Continued) (i) ALOU EQUIPMENT REPAIR Post-Closing Trial Balance September 30, 2014 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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Accounting Principles, Sixth Canadian Edition
BYP 4-1 FINANCIAL REPORTING PROBLEM
(a)
Reitman’s balance sheet 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, capital assets are shown before intangible assets such as goodwill and future income taxes. Current liabilities appear to be listed in order of liquidity and non-current liabilities are listed after deferred items. (c)
Under International Financial Reporting Standards (IFRS), the company has the choice of presenting the non-current assets first, followed by the current assets, then equity, non-current liabilities, and finally the current liabilities on its balance sheet.
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Accounting Principles, Sixth Canadian Edition
BYP4-1 (Continued) (d) (Amounts in thousands) Working Capital Current ratio
=
Acid-test ratio
=
Working Capital
2012 $366,983 –
$89,132
$366,983 $89,132 $271,310 $89,132
2011 $356,924 – $83,743
=
$277,851
=
4.12 : 1
=
3.04 : 1
=
$273,181
Current ratio
=
$356,924 $83,743
=
4.26 : 1
Acid-test ratio
=
$230,034 + $70,413 + $2,866 $83,743
=
3.62 : 1
The current ratio and acid-test ratio weakened very slightly in 2012 but remain extremely strong.
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Accounting Principles, Sixth Canadian Edition
BYP 4-2 INTERPRETING FINANCIAL STATEMENTS (a)
Total assets are 5.3% lower in 2012 than they were in 2008 ($7,422 – $7,838) ÷ $7,838 Year to year change in total assets: 2012 2011 Total assets
5.1%
–11.5%
2010
2009
5.6%
–3.5%
(b)
Gap’s liquidity deteriorated during the year ended Jan. 29, 2011 but had somewhat recovered by Jan. 28, 2012. Liquidity ratios peaked at the Jan. 30, 2010 year end. Working capital and 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.
(c)
Creditors lend money to companies with the expectation that they will be repaid at a specified point in time in the future. In 2008 to 2010, the current ratio was somewhat comfortable, in spite of exceeding 2:1 only once. This strength was resumed with a current ratio of 2.02:1 by the end of the Jan. 28, 2012 fiscal year. Liquidity remains strong when compared to earlier years. 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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Accounting Principles, Sixth Canadian Edition
BYP 4-3 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, Sixth Canadian Edition
BYP 4-4 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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Accounting Principles, Sixth Canadian Edition
BYP 4-5 ETHICS CASE
(a)
The error caused last year’s balance sheet to have an inflated amount of accounts receivable. Including these receivables at that time caused the current ratio to be higher than it should have been. Since there is no error concerning the upcoming ending balance sheet of the current year, no misstatements would be reported on the balance sheet and the current ratio would be correct.
(b) The stakeholders in this case are: You, as controller. Eddy Lieman, president. Users of the company's financial statements (particularly the owners, the banks and other creditors to whom the statements were issued). The ethical issue is the continued circulation of significantly misstated financial statements. As controller, you have just issued misleading financial statements. You have acted ethically by telling the company's president. The president has reacted unethically by allowing the misleading financial statements to continue to circulate. (c)
As controller, you should impress upon the president the consequences of having those misleading financial statements detected by some user or the regulatory body (especially if you are a public company). Also stress upon him that you have a professional obligation to correct the statements or to resign.
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Accounting Principles, Sixth Canadian Edition
BYP 4-6 “ALL ABOUT YOU” ACTIVITY (a)
Student Personal Balance Sheet Date Assets Current assets Cash.............................................................................
$ 1,200
Long-term assets Automobile ............................................. Computer and accessories ................... Clothes and furniture ............................
13,200
$8,000 1,200 4,000
Total assets ................................................................ $14,400 Liabilities and Personal Equity (Deficit) Current liabilities Automobile loan.......................................................... Credit cards balance .................................................. Total current liabilities........................................... Long-term liabilities Student loan........................................... $10,000 Automobile loan..................................... 3,600 Total liabilities ................................................................. Personal equity (deficit).................................................. Total liabilities and personal deficit......................
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$ 2,400 1,000 3,400
13,600 17,000 (2,600) $14,400
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Accounting Principles, Sixth Canadian Edition
BYP4-6 (Continued) (b)
If the tuition fees are considered an asset, an additional student loan will add to the liabilities and will add an equivalent amount to assets with no effect on the Personal Equity (Deficit). On the other hand, if the tuition fees are considered an expense, then the Personal Equity (Deficit) will be reduced by the amount of the expense. Because it is a deficit, the deficit will be larger.
(c)
By earning income during the summer, and avoiding having to borrow an additional student loan, you will have succeeded in increasing your assets (cash in chequing account) by $2,000 while not increasing liabilities, and so the Personal Equity will be increased or (Deficit) will be reduced by $2,000.
(d)
Paying liabilities (automobile loan) with assets (cash in chequing account) does not affect your Personal Equity (Deficit).
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Accounting Principles, Sixth Canadian Edition
CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION TABLE Study 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
Brief Exercises 1
Exercises 1
Problems Set A 1
Problems Set B 1
5, 6, 7, 8, 9, 11, 12
2, 3, 4, 5, 6
1, 2, 4, 5, 6, 7
2, 3, 4, 5
2, 3, 4, 5
7, 10, 11, 12, 13, 14
7, 8, 9
1, 3, 4, 5, 6, 7
2, 3, 4, 5
2, 3, 4, 5
15, 16, 17
10, 11
1, 6, 7, 9
6, 7
6, 7
18, 19, 20, 21,
12, 13
1, 8, 9, 10
5, 6, 7
5, 6, 7
22, 23
14
1, 10, 11
6, 7, 8
6, 7, 8
*7. Prepare the entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A)
*24, *25, *26
*15, *16, *17
*12, *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, Sixth 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. Calculate net sales and gross profit.
Moderate
30-40
3A
Record inventory transactions– perpetual system.
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
60-70
6A
Prepare adjusting and closing entries and single-step and multiple-step income statements – perpetual system. Calculate ratios.
Moderate
50-60
7A
Prepare adjusting and closing entries and financial statements – perpetual system. Calculate ratios.
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. Calculate net sales and gross profit.
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
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Chapter 5
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Accounting Principles, Sixth 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
60-70
6B
Prepare adjusting and closing entries and single-step and multiple-step income statements – perpetual system. Calculate ratios.
Moderate
50-60
7B
Prepare adjusting and closing entries and financial statements – perpetual system. Calculate ratios.
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
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Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study Objective Describe the differences between service and merchandising companies.
Knowledge E5-1
Comprehension Q5-1 Q5-2 Q5-3 Q5-4 P5-1A P5-1B
Application BE5-1 E5-4 E5-5 E5-7 P5-2A P5-2B
2.
Prepare entries for purchases under a perpetual inventory system.
E5-1
Q5-5 Q5-6 Q5-7 Q5-8 Q5-9 Q5-10 Q5-11 BE5-4
3.
Prepare entries for sales under a perpetual inventory system.
E5-1
Q5-7 Q5-11 Q5-12 Q5-13 Q5-14 BE5-7
4.
Perform the steps in the accounting cycle for a merchandising company.
E5-1 Q5-17
Q5-15 Q5-16
BE5-2 BE5-3 BE5-5 BE5-6 E5-2 E5-4 E5-5 E5-6 E5-7 P5-2A P5-3A P5-4A P5-5A P5-2B P5-3B P5-4B P5-5B BE5-8 BE5-9 E5-3 E5-4 E5-5 E5-6 E5-7 P5-2A P5-3A P5-4A P5-5A P5-2B P5-3B P5-4B P5-5B BE5-10 BE5-11 E5-6 E5-7 E5-9 P5-6A P5-7A P5-6B P5-7B
1.
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Analysis
Synthesis
Evaluation
Chapter 5
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Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued)
Study Objective Prepare single-step and multiple-step income statements.
Knowledge Q5-18 Q5-19 E5-1
Comprehension Q5-20 Q5-21
6.
Calculate the gross profit margin and profit margin.
E5-1
Q5-22 Q5-23
*7.
Prepare the entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A)
*Q5-24 *Q5-25
*Q5-26
5.
Application BE5-12 BE5-13 E5-8 E5-9 E5-10 P5-5A P5-6A P5-7A P5-5B P5-6B P5-7B BE5-14 E5-10 P5-6A P5-7A P5-6B P5-7B *BE5-15 *BE5-16 *BE5-17 *E5-12 *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 Continuing Cookie Chronicles Cumulative Coverage Chapters 2-5 BYP5-3
Broadening Your Perspective
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Analysis
Synthesis
Evaluation
E5-11 P5-8A P5-8B
BYP5-1 BYP5-2
BYP5-4 BYP5-5 BYP5-6
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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, salaries expense, etc.
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 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 than 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 of sale system that is integrated with the inventory system. In a periodic system this not required.
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Chapter 5
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 5.
Disagree. An inventory subsidiary ledger is used to organize and track individual inventory items. It is used in addition to the inventory account in the general ledger. Using a subsidiary ledger means that the general ledger is not as detailed and it allows the company to determine the balance of individual inventory categories.
6.
Agree and disagree. Sales taxes include the federal Goods and Services Tax (GST), the Provincial Sales Tax (PST), and the Harmonized Sales Tax (HST). GST and HST (which is a combination of GST and PST) are paid by merchandising companies on inventory purchases but this tax is reimbursed by being offset against GST and HST collected from customers or by filing a claim with the government. It is very important to keep careful records of all GST and HST paid so that the correct amount can be claimed. Failure to separately record the payment of these taxes may result in not recovering the sales tax, which would cause an economic loss to the merchandising company. Companies conducting business in provinces that are subject to PST do not pay PST on merchandise purchased for resale.
7.
The letters FOB mean free on board. FOB shipping point means that the goods are placed free on board the carrier by the seller, and the buyer pays the freight costs. FOB destination means that the goods are placed free on board to the buyer’s place of business, and the seller pays the freight. 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.
Willow Ridge’s accountant is wrong. The Merchandise Inventory account shows the cost of the merchandise. If a purchase allowance is received, the cost of the merchandise is lower so the Merchandise Inventory account needs to be reduced to reflect the decreased cost of inventory. It doesn’t matter if the merchandise was physically returned or not. This is consistent with the cost principle. The lower invoice amount reflects an objective measurement of the cost of the inventory when the merchandise received does not exactly match the purchaser’s specifications.
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Chapter 5
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Accounting Principles, Sixth 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. 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 Sales Discount account.
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Chapter 5
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 12.
Most sales returns are recorded as they occur and not based on the date of the original sale to the customer. The timing of the sales return entry is based on the assumption that returns are not significant. In this case the company accepts returns up to six months following the original sale, and returns may happen in a subsequent fiscal year. If the company experiences substantial returns, it has to account for them in the same time period as the related sale in order to properly reflect the gross profit for that period’s sale. The company faces the uncertainty of having to estimate the amount of sales returns at December 31, in order to properly report net sales.
13.
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.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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 yearend.
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.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 20.
Interest expense is a non-operating expense because it relates to how a company’s operations are financed. This is not always within the company’s control and is usually not a decision of the general manager, but rather of the chief financial officer.
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.
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.
23.
Yes there is. The gross profit margin measures the percentage of net sales remaining after the cost of goods sold has been deducted to cover operating expenses and to contribute to profit. The profit margin measures the percentage of net sales that is left after covering all of the expenses (including the cost of goods sold). A company could have a positive gross profit margin and a negative profit margin if expenses other than cost of goods sold exceed gross profit. In addition, the gross profit margin may show a positive trend of increasing profitability, but if operating expenses have an increasing trend, this may yield decreased overall profitability for the company.
*24. In a periodic inventory system, purchases are recorded 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 when a sale occurs. This does not happen in a periodic system.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) *25. Renata would record revenues from the sale of merchandise when sales are made, in the same way as in a perpetual inventory system, but on the date of sale the cost of the merchandise sold is not recorded. Instead, the cost of goods sold during the period is calculated at the end of the period by taking a physical inventory count and deducting the cost of this inventory from the cost of the merchandise available for sale during the period. The gross profit would be then be calculated by deducting the cost of goods sold from the sales revenue.
*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).
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) & (b) Company A Gross profit = $80,000 ($250,000 – $170,000) Profit = $30,000 ($80,000 – $50,000) (c) & (d) Company B Gross profit = $38,000 ($108,000 – $70,000) Operating expenses = $8,500 ($38,000 – $29,500) (e) & (f) Company C Cost of goods sold = $45,000 ($75,000 – $30,000) Operating expenses = $19,200 ($30,000 – $10,800) (g) & (h) Company D Sales = $170,000 ($75,000 + $95,000) Loss = $(20,000) ($95,000 – $115,000)
BRIEF EXERCISE 5-2 Inventory Item Bubble gum Jelly beans Lollipops
Solutions Manual .
Quantity Cost per Package 600 $0.95 400 $1.25 350 $1.60
5-13
Total Cost $ 570 500 560 $1,630
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 5-3 Total Merchandise Inventory cost: Invoice cost (500 × $5.50) $2,750 Plus: Freight in 75 Less: Purchase discount (55) Total cost $2,770 Cost per unit = Total cost ÷ 500 packages = $2,770 ÷ 500 = $5.54 per package Balance in Merchandise Inventory account: Balance from BE5-2 $1,630 Cost of Canada Mints 2,770 Total $4,400
BRIEF EXERCISE 5-4 (a) Mar. 16
(b) Date Mar. 16 18 25
Solutions Manual .
Merchandise Inventory.................... 15,000 Accounts Payable ....................... 15,000
18 Accounts Payable............................ Merchandise Inventory ...............
750
25 Accounts Payable ($15,000 – $750) Merchandise Inventory ($14,250 × 2%) ............................. Cash .............................................
14,250
Assets Inventory + $15,000 Inventory – $750 Inventory – $285 Cash – $13,965
Liabilities Accounts Payable + $15,000 Accounts Payable – $750 Accounts Payable – $14,250
5-14
750
285 13,965 Owner’s Equity NE NE NE
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 5-5 Jan. 2
Merchandise Inventory.................... 20,000 Accounts Payable ....................... 20,000
Jan. 4 Merchandise Inventory.................... Cash .............................................
215
Jan. 6 Accounts Payable............................ Merchandise Inventory ...............
1,500
Accounts Payable............................ Cash .............................................
18,500
Feb. 1
215
1,500 18,500
BRIEF EXERCISE 5-6 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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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 5-7 (a) Mar. 16 Accounts Receivable ...................... Sales ............................................
15,000
Cost of Goods Sold ......................... Merchandise Inventory ...............
8,700
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
17
15,000
8,700
170
750
14,250
(b) Date Mar.16 16 17 18 25
Solutions Manual .
Assets Accounts Receivable + $15,000 Inventory – $8,700 Cash – $170 Accounts Receivable – $750 Cash + $13,965 Accounts Receivable – $14,250
5-16
Liabilities
Owner’s Equity + $15,000 – $8,700 – $170 – $750 – $285
Chapter 5
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 5-8 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
1,500
590
Cash ($20,000 – $1,500)................... 18,500 Accounts Receivable .................. 18,500
BRIEF EXERCISE 5-9 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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25,000
13,250
265
2,000
23,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 5-10 June 30
Cost of Goods Sold.............................. Merchandise Inventory ($89,000 – $86,500) ..........................
2,500 2,500
BRIEF EXERCISE 5-11 Sept. 30 Sales ................................................. Income Summary ........................
218,750 218,750
30 Income Summary ............................. 171,000 Sales Returns and Allowances .. Sales Discounts .......................... Cost of Goods Sold .................... Freight Out .................................. Salaries Expense ........................ Merchandise Inventory and Supplies are (permanent) accounts and are not closed.
balance
3,150 950 125,000 1,900 40,000 sheet
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 = $36,300 ($154,000 – $115,500 + $8,800 – $11,000)
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 5-13
Cost of goods sold Depreciation expense Freight out Insurance expense Interest expense Interest revenue Rent revenue Rent expense Sales revenue Sales returns and allowances
Solutions Manual .
(a) (b) Single-step income Multiple-step statement income statement Expenses Gross profit Expenses Operating expenses Expenses Operating expenses Expenses Operating expenses Expenses Other expenses Revenues Other revenues Revenues Other revenues Expenses Operating expenses Net Sales Revenues (Net Sales) Net Sales Revenues (Net Sales)
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 5-14 2014 Gross profit margin = 36.84% [($950,000 – $600,000) ÷ $950,000] Profit margin = 7.37% [$70,000 ÷ $950,000] 2013 Gross profit margin = 37.50% [($800,000 – $500,000) ÷ $800,000] Profit margin = 8.13% [$65,000 ÷ $800,000] Red River’s profitability has deteriorated since both its gross profit margin and its profit margin have decreased from the previous year.
*BRIEF EXERCISE 5-15 Feb. 5
Purchases .......................................12,000 Accounts Payable ...................... 6 Freight In ......................................... Cash ............................................
Solutions Manual .
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
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Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 5-16 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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Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 5-17 (a) Purchases ........................................................................ Less: Purchase returns and allowances .........$9,350 Purchase discounts .............................. 6,800 Net purchases .................................................................
$340,000 16,150 $323,850
(b) Net purchases (above) .................................................... Add: Freight in................................................................. Cost of goods purchased ...............................................
$323,850 13,600 $337,450
(c) Beginning inventory....................................... Add: Cost of goods purchased (above)........ Cost of goods available for sale....................
$ 51,000 337,450 $388,450
(d) Cost of goods available for sale (above) ...... Less: Ending inventory.................................. Cost of goods sold.........................................
$388,450 68,000 $320,450
(e) Net sales ......................................................... Less: Cost of goods sold (above) ................. Gross profit.....................................................
$531,250 320,450 $210,800
Note: Freight-out is not included; it is an operating expense.
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 5-1 (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 discount
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-2 (a) Mar. 1
Merchandise Inventory ...................... Accounts Payable...........................
9,000
2 Merchandise Inventory ....................... Cash ................................................
155
3
21
Accounts Payable ............................... Merchandise Inventory...................
9,000
155 1,000 1,000
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, Sixth Canadian Edition
EXERCISE 5-2 (Continued) (b) Merchandise Inventory Mar. 1 9,000 1,000 2 155 Mar. 3 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, Sixth Canadian Edition
EXERCISE 5-3 (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
Freight Out........................................... Cash ................................................
170
23 Sales Returns and Allowances ......... Accounts Receivable.....................
400
Cash ($9,000 – $1,000) ........................ Accounts Receivable......................
8,000
22
30 31
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13,000
5,720
170
400
8,000
Cash ..................................................... 12,348 Sales Discount ($12,600 × 2%) ........... 252 Accounts Receivable ($13,000 – $400)
12,600
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-3 (Continued)
(b) Sales ($9,000 + $13,000) Less: Sales return ($1,000 + $400) Less: Sales discount Net sales 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
Solutions Manual .
$22,000 1,400 252 $20,348
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EXERCISE 5-4 (a) Apr. 5
Merchandise Inventory................ 12,000 Accounts Payable ...................
6 Merchandise Inventory................ Cash .........................................
300
8 Accounts Payable........................ Merchandise Inventory ...........
1,800
12,000
300
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, Sixth Canadian Edition
EXERCISE 5-5 (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 Discount ($30,200 × 2%) ... 604 Accounts Receivable ($32,000 – $1,800).................... (b) Dec. 3
Merchandise Inventory................ 32,000 Accounts Payable ...................
30,200
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) Gross profit = $12,586 = ($32,000 – $18,000 – $1,800 + $990 – $604)
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EXERCISE 5-6 (a) June 10 Merchandise Inventory................. Accounts Payable ....................
4,000
11 Merchandise Inventory................. Cash ..........................................
375
12 Accounts Payable......................... Merchandise Inventory ............
200
4,000
375
200
20 Accounts Payable ($4,000 – $200) 3,800 Merchandise Inventory ($3,800 × 2%) ............................ Cash ($3,800 × 98%)................. July 15
Cash .............................................. Sales .........................................
15 Cost of Goods Sold ($4,000 + $375 – $200 – $76) ........ Merchandise Inventory ............
Solutions Manual .
9,275 9,275
4,099 4,099
15 Freight Out .................................... Cash ..........................................
350
17 Sales Returns and Allowances.... Cash ..........................................
500
(b) July 31
76 3,724
350
500
Sales.............................................. Income Summary .....................
9,275
31 Income Summary.......................... Cost of Goods Sold.................. Freight Out ............................... Sales Returns and Allowances
4,949
9,275 4,099 350 500
31 Income Summary ($9,275 – $4,949) 4,326 Pele, Capital .............................
4,326
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-7 (a) Beginning inventory Inventory purchase Freight in Cost of goods available for sale Number of tables available for sale Average cost per table
$ 0 13,500 450 $13,950 150 $ 93.00
(b) Beginning inventory, in units Tables purchased, Nov. 3 Tables sold, Nov. 19 Tables returned, Nov. 21 Ending balance in inventory subledger, in units Number of tables per the inventory count Adjustment required
0 150 (45) 5 110 109 1
Nov. 30 Cost of Goods Sold ................. Merchandise Inventory ............
93
Nov. 1: Beginning balance Nov. 3: Purchase of merchandise Freight in Nov. 19: Sale of merchandise (45 tables × $93) Nov. 21:Return of merchandise (5 tables × $93) Nov. 30:Balance before adjustment Nov. 30:Adj. for missing table Nov. 30:Balance (c) Cost of goods available for sale (above) Less: Ending inventory (109 tables × $93) Cost of goods sold
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5-31
93 $ 0 13,500 450 (4,185) 465 10,230 (93) $10,137 $13,950 10,137 $ 3,813
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-7 (Continued)
(d) Sales (45 tables × $170) Less: Sales return (5 tables × $170) Less: Sales discount (2% × [$7,650 – $850]) Net sales
Net sales (above) Less: Cost of goods sold (above) Gross profit (loss)
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$7,650 850 136 $6,664
$6,664 3,813 $2,851
Chapter 5
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-8
Sales Sales returns and allowances Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Other expenses Profit
Natural Mattar 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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EXERCISE 5-8 (Continued) (f)
Net sales................................................................... *Cost of goods sold................................................. Gross profit ..............................................................
(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 ......................................................................... Less : Sales returns................................................. *Net sales .................................................................
$275,000 (20,000) $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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$335,000 (140,000) $195,000
$55,000 (14,000) $41,000
Chapter 5
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-9 (a) LEFEBVRE COMPANY Income Statement Year Ended December 31, 2014 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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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-9 (Continued) (b) LEFEBVRE COMPANY Income Statement Year Ended December 31, 2014 Sales.............................................................................. $1,980,000 Less: Sales returns and allowances .............. $59,400 Sales discounts .................................... 9,900 69,300 Net sales ....................................................................... 1,910,700 Cost of goods sold....................................................... 851,500 Gross profit................................................................... 1,059,200 Operating expenses Salaries expense ....................................... $650,000 Advertising expenses............................... 55,000 Depreciation expense............................... 45,000 Freight-out................................................. 25,000 Insurance expense.................................... 15,000 Total operating expenses ............................................ 790,000 Profit from operations ............................................. 269,200 Other revenues Interest revenue ........................... $10,000 Rent revenue ............................... 24,000 34,000 Other expenses Interest expense ....................................... 10,500 23,500 Profit.............................................................................. $ 292,700
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EXERCISE 5-9 (Continued) (c) 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 C. Lefebvre, Capital..................
292,700
31 C. Lefebvre, Capital ........................... 150,000 C. Lefebvre, Drawings .............
150,000
LEFEBVRE COMPANY Post-closing Trial Balance December 31, 2014 Debit Cash ................................................................ $ 75,700 Notes receivable .............................................. 100,000 Merchandise inventory ............................... 70,000 Equipment ........................................................ 450,000 Accumulated depreciation—equipment .... Unearned revenue ....................................... Notes payable.............................................. C. Lefebvre, 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, Sixth Canadian Edition
EXERCISE 5-10 (a) RIKARD’S Income Statement Year Ended August 31, 2014 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 RIKARD’S Statement of Owner’s Equity Year Ended August 31, 2014 R. Smistad, capital September 1, 2013* ............................ $ 62,250 Add: Investment.............................................. $ 3,500 Profit ....................................................... 84,200 87,700 149,950 Less: Drawings .................................................................... 80,000 R. Smistad, capital, August 31, 2014 .................................. $69,950 *($65,750 – $3,500)
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-10 (Continued) (a) (Continued) RIKARD’S Balance Sheet August 31, 2014
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 sales revenue............................................. 2,600 Current portion of non-current notes payable ............. 6,000 Total current liabilities ........................................... 26,875 Long-term liabilities Notes payable ($42,000 – $6,000) .................................. 36,000 Total liabilities ........................................................ 62,875 Owner’s Equity R. Smistad, capital ........................................................ 69,950 Total liabilities and owner’s equity.......................... $132,825
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Accounting Principles, Sixth Canadian Edition
EXERCISE 5-10 (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, Sixth Canadian Edition
EXERCISE 5-11 (a) Gross profit margin 2012 = 35.7% [($13,909 – $8,939) ÷ $13,909] 2011 = 35.5% [($13,864 – $8,939) ÷ $13,864] 2010 = 35.2% [($13,568 – $8,790) ÷ $13,568] Profit margin 2012 = 1.1% [$149 ÷ $13,909] 2011 = 1.2% [$168 ÷ $13,864] 2010 = 2.3% [$312 ÷ $13,568] (b) Profit margin (Profit from operations) 2012 = 4.2% [$582 ÷ $13,909] 2011 = 4.7% [$646 ÷ $13,864] 2010 = 5.8% [$784 ÷ $13,568] (c) The gross profit margin has increased slightly from 2010 to 2012, from 35.2% to 35.7%. The profit margin has decreased from 2.3% in 2010 to 1.1% in 2012. The profit margin based on profit from operations also weakened from 5.8% in 2010 to 4.2% in 2012.
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*EXERCISE 5-12 (a) Apr. 5
6
Purchases .................................... 12,000 Accounts Payable ................... Freight In ...................................... Cash .........................................
300
8 Accounts Payable........................ Purchase Returns and Allowances ..............................
1,800
May 4 Accounts Payable ($12,000 – $1,800) ........................ Cash .........................................
12,000
300
1,800
10,200 10,200
(b) Apr. 5 Accounts Receivable .................. 12,000 Sales .........................................
12,000
6 No entry required. 8 Sales Returns and Allowances... Accounts Receivable .............. May 4
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1,800
Cash ($12,000 – $1,800)............... 10,200 Accounts Receivable ..............
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1,800 10,200
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 5-13 (a) Dec. 3 Accounts Receivable .................. 32,000 Sales ........................................ 4
Freight Out ................................... Cash .........................................
650
8 Sales Returns and Allowances... Accounts Receivable ..............
1,800
650
1,800
13 Cash ($30,200 × 98%) .................. 29,596 Sales Discount ($30,200 × 2%) ... 604 Accounts Receivable ($32,000 – $1,800).................... (b) Dec. 3
32,000
Purchases .................................... 32,000 Accounts Payable ...................
30,200
32,000
4 No entry required.
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8 Accounts Payable........................ Purchase Returns and Allowances ..............................
1,800
13 Accounts Payable........................ Purchase Discounts ($30,200 × 2%) ......................... Cash .........................................
30,200
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1,800
604 29,596
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 5-14 (a)
July 2
3
4
8
11
15 25
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Purchases ..................................... 15,000 Accounts Payable ....................
15,000
Accounts Payable......................... Purchase Returns and Allowances ...............................
1,200 1,200
Freight In ....................................... Cash ..........................................
500
Cash .............................................. Sales .........................................
2,000
500
2,000
Accounts Payable......................... 13,800 Purchase Discounts ($13,800 × 2%) .......................... Cash ($13,800 × 98%)...............
276 13,524
Accounts Receivable ................... Sales .........................................
6,000 6,000
Cash ($6,000 × 99%) ..................... Sales Discounts ($6,000 × 1%) .... Accounts Receivable ...............
5,940 60
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6,000
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Accounting Principles, Sixth Canadian Edition
*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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Accounting Principles, Sixth Canadian Edition
*EXERCISE 5-15 Company 1: (a) $1,420 ($1,500 – $50 – $30) (b) $1,530 ($1,420 + $110) (c) $1,780 ($1,530 + $250) (d) $300 ($1,780 – $1,480) (e) $300 (from (d)) (f) $2,000 ($1,850 + $100 + $50) (g) $150 ($2,000 from (h) – $1,850) (h) $2,000 ($2,300 – $300 from (e)) (i) $1,900 ($2,300 – $400) Company 2: (j) $7,660 ($7,210 + $300 + $150) (k) $690 ($7,900 – $7,210) (l) $8,900 ($7,900 + $1,000) (m) $7,450 ($8,900 from (l) – $1,450) (n) $1,450 (from year 1 ending inventory) (o) $9,050 ($9,550 – $400 – $100) (p) $9,600 ($9,050 from (o) + $550) (q) $11,050 ($9,600 from (p) + $1,450 from (n)) (r) $9,800 ($11,050 from (q) – $1,250)
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*EXERCISE 5-16 (a) OKANAGAN COMPANY Income Statement Year Ended January 31, 2014
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 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 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, Sixth 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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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, to when you sell it, and to when you 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 you do not know what 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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PROBLEM 5-2A (a)
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
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
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
10
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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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Accounting Principles, Sixth Canadian Edition
PROBLEM 5-2A (Continued) (a) (Continued) Apr. 25 Accounts Receivable (60 × $90) ......... Sales................................................
5,400
Cost of Goods Sold (60 × $40) ........... Merchandise Inventory...................
2,400
29 Sales Returns and Allowances .......... Accounts Receivable (25 × $90) ....
2,250
Merchandise Inventory (25 × $40) ...... Cost of Goods Sold .......................
1,000
5,400
2,400
2,250 1,000
(b) Apr. 1 2 6 12 29 Bal.
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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
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3,800
Sales Returns and Allowances Apr. 6 1,350 12 900 17 900 29 2,250 Bal. 5,400
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Accounting Principles, Sixth Canadian Edition
PROBLEM 5-2A (Continued) (c) Sales Less: Sales returns and allowances Net sales Net sales (from above) Less: Cost of goods sold Gross profit
$13,050 5,400 $7,650 $7,650 3,800 $3,850
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 5-3A GENERAL JOURNAL Date
Account Titles and Explanation
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 ............... 16
3,000
70,000 42,000 42,000
Freight-Out ....................................... Cash .............................................
1,800
17 Sales Returns and Allowances ...... Accounts Receivable ..................
5,000
Merchandise Inventory.................... Cost of Goods Sold.....................
3,000
Sales Discounts ($65,000 × 2%)...... Cash ($65,000 – $1,300)................... Accounts Receivable ($70,000 – $5,000)........................
1,300 63,700
25
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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1,500
82,000
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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% ÷ 15 × 365). 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% ÷ 20 × 365). 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 and Explanation
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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150
2,475
1,350
275
150
1,650 150
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Accounting Principles, Sixth Canadian Edition
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 (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.
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PROBLEM 5-4A (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 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 5-5A (a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1 Debit
Credit
June 1 Merchandise Inventory ........................... 9,000 Accounts Payable...........................
9,000
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...................
7,540
6 Sales Returns and Allowances .......... Accounts Receivable......................
950
Merchandise Inventory ....................... Cost of Goods Sold ........................
595
Freight Out........................................... Cash ................................................
290
Supplies ............................................... Cash ................................................
800
Merchandise Inventory ....................... Accounts Payable...........................
4,300
10 Merchandise Inventory ....................... Cash ................................................
100
12
300
6
7
10
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Accounts Payable ............................... Merchandise Inventory...................
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12,000
7,540
950
595
290
800
4,300
100 300
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PROBLEM 5-5A (Continued) (a) (Continued) June 14 Accounts Payable.................................... 9,000 Merchandise Inventory ($9,000 × 1%) Cash ($9,000 − $90) ........................
90 8,910
15 Cash ($11,050 − $221) ......................... 10,829 Sales Discounts ($11,050 × 2%) ......... 221 Accounts Receivable ($12,000 – $950)
11,050
19 Cash ......................................................... 7,250 Sales................................................
7,250
Cost of Goods Sold ................................. 4,570 Merchandise Inventory...................
4,570
20 Accounts Payable ($4,300 − $300) ........... 4,000 Merchandise Inventory ($4,000 × 2%) Cash ($4,000 − $80) ........................
80 3,920
25 Sales Returns and Allowances .......... Cash ................................................
500
30 Accounts Receivable .............................. 4,280 Sales................................................
4,280
Cost of Goods Sold ................................. 2,700 Merchandise Inventory...................
2,700
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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 J1 9,000 J1 J1 595 J1 4,300 J1 100 J1 J1 J1 J1 J1
Balance
300 90 4,570 80 2,700
Credit
Balance
12,000 7,250 4,280
12,000 19,250 23,530
Sales Returns and Allowances Explanation Ref. Debit Credit
Balance
Explanation
Sales Ref.
J1 J1
.
J1
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7,540
950 500
Sales Discounts Explanation Ref. Debit
June 15
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Debit
J1 J1 J1
June 6 25
Date
Balance 5,000 14,000 6,460 7,055 11,355 11,455 11,155 11,065 6,495 6,415 3,715
June 5 19 30
Date
Credit
221
950 1,450
Credit
Balance 221
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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
7,540 595 4,570 2,700
Balance 7,540 6,945 11,515 14,215
(c) WILLINGHAM DISTRIBUTING COMPANY Income Statement (Partial) Month Ended June 30, 2014
Sales revenues Sales ................................................................................ $23,530 Less: Sales returns and allowances......................... 1,450 Sales discounts ................................................... 221 Net sales...................................................................... 21,859 Cost of goods sold .............................................................. 14,215 Gross profit...................................................................... $ 7,644 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 ......................... 2,440 Merchandise Inventory ($57,440 − $55,000).....................
2,440
(b) WOLCOTT WAREHOUSE STORE Income Statement Year Ended August 31, 2014 Revenues Net sales ($703,360 – $3,700 – $14,440)..... $685,220 Interest revenue ......................................... 960 $686,180 Expenses Cost of goods sold ($569,680 + $2,440) ..... $572,120 Depreciation expense ................................. 6,680 Freight out ................................................... $4,720 Insurance expense ...................................... 2,895 Interest expense.......................................... 2,160 Rent expense............................................... 16,000 Supplies expense........................................ 5,840 610,415 Profit................................................................ $ 75,765
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PROBLEM 5-6A (Continued) (c) WOLCOTT WAREHOUSE STORE Income Statement Year Ended August 31, 2014 Sales................................................................................. $703,360 Less: Sales returns and allowances............. $14,440 Sales discounts ................................... 3,700 18,140 Net sales...................................................................... 685,220 Cost of goods sold ($569,680 + $2,440) ......................... 572,120 Gross profit...................................................................... 113,100 Operating expenses Depreciation expense................................ $ 6,680 Freight out.................................................. $44,720 Insurance expense .................................... 2,895 Rent expense ............................................. 16,000 Supplies expense ...................................... 5,840 Total operating expenses ...................................... 36,135 Profit from operations..................................................... 76,965 Other revenues and expenses Interest revenue ......................................... $ 960 1,200 Interest expense ........................................ 2,160 Profit................................................................................. $ 75,765 (d) Gross profit margin = $113,100 ÷ $685,220 = 16.5% Profit margin = $75,765 ÷ $685,220 = 11.1% The gross profit margin has deteriorated significantly from 20% in 2013 to 16.5% in 2014. The profit margin has improved slightly from 10% in 2013 to 11.1% in 2014.
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PROBLEM 5-6A (Continued) (e) Aug. 31
Interest Revenue ............................... 960 Sales .................................................. 703,360 Income Summary..........................
704,320
Income Summary .............................. 628,555 Sales Returns and Allowances .... Sales Discounts ............................ Cost of Goods Sold ...................... Depreciation Expense ................ Freight Out .................................. Insurance Expense ..................... Interest Expense........................... Rent Expense.............................. Supplies Expense.......................
14,440 3,700 572,120 6,680 4,720 2,895 2,160 16,000 5,840
Income Summary .............................. V. Wolcott, Capital ........................
75,765 75,765
V. Wolcott, Capital............................. V. Wolcott, Drawings ....................
60,640
31
31
31
60,640
Income Summary 704,320 628,555 Bal.* 75,765 75,765 Bal. 0 * Check $75,765 = Profit
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PROBLEM 5-6A (Continued) Taking It Further: Both income statements result in the same amount of profit. The multiple-step income statement provides the user with much more information than the single-step income statement. The multiple-step income statement provides information on gross profit and profit from operations which is not included on the single-step income statement. On the other hand, the single-step method is quick and easy to understand if final profit is all that is required by users of the financial statements.
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PROBLEM 5-7A (a) Dec. 31 Supplies Expense .............................. Supplies ($2,950 − $750) ............... 31
2,220
Insurance Expense ............................ Prepaid Insurance ......................... $3,000 × 10/12
2,500
31 Depreciation Expense ....................... Accumulated Depreciation —Equipment.................................. Accumulated Depreciation —Furniture.....................................
14,500
31
31
31
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2,500
10,000 4,500
Interest Expense................................ Interest Payable ............................
675
Unearned Revenue ............................ Sales ($4,000 − $975) ....................
3,025
Cost of Goods Sold ........................... Merchandise Inventory .................
1,750
31 Cost of Goods Sold [($37,050 − $1,750) − $32,750] ........... Merchandise Inventory .................
.
2,200
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675
3,025
1,750
2,550 2,550
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PROBLEM 5-7A (Continued) (b) WORLD ENTERPRISES Income Statement Year Ended December 31, 2014 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
WORLD ENTERPRISES Statement of Owner’s Equity Year Ended December 31, 2014 S. Kim, capital, January 1, 2014 ($46,200 − $5,000) ...... Add: Investment................................................ $ 5,000 Profit .......................................................... 37,650 Less: Drawings ............................................................... S. Kim, capital, December 31, 2014 ................................
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$41,200 42,650 83,850 48,000 $35,850
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PROBLEM 5-7A (Continued) (b) (Continued) WORLD ENTERPRISES Balance Sheet December 31, 2014 Assets Current assets Cash ................................................................................ $ 15,000 Accounts receivable .................................................. 19,200 Merchandise inventory ($37,050 – $1,750 – $2,550) . 32,750 Prepaid insurance....................................................... 500 Supplies ($2,940 – $2,190).......................................... 750 Total current assets ............................................... 68,200 Property, plant, and equipment Equipment ..................................... $150,000 Less: Accumulated depreciation ($35,000 + $10,000)........... 45,000 105,000 Furniture .......................................... $45,000 Less: Accumulated depreciation ($18,000 + $4,500)............. 22,500 22,500 Total property, plant, and equipment ........................ 127,500 Total assets .......................................................... $195,700 Liabilities and Owner's Equity Current liabilities Accounts payable ......................................................... $ 33,200 Interest payable ............................................................ 675 Unearned sales revenue ($4,000 − $3,025).................. 975 Current portion of mortgage payable ........................... 8,500 Total current liabilities ................................................. 43,350 Long-term liabilities Mortgage payable ($125,000 − $8,500).......................... 116,500 Total liabilities ............................................................ 159,850 Owner's equity S. Kim, capital ............................................................... 35,850 Total liabilities and owner's equity .......................... $195,700
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PROBLEM 5-7A (Continued) (c) 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
(d) Gross profit margin = $104,950 ÷ $262,250 = 40.0% Profit margin = $37,650 ÷ $262,250 = 14.4% The gross profit margin has improved significantly from 35% in 2013 to 40% in 2014. The profit margin has also improved significantly from 10% in 2013 to 14.4% in 2014. The increasing trend for both the gross profit margin and the profit margin shows an improvement of the company’s profitability. Taking It Further: A multiple-step income statement for a service company would show service revenue rather than net sales. There would not be any cost of goods sold or gross profit. The operating expenses and other revenues and expenses would be shown in the same way as for a merchandising company.
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PROBLEM 5-8A (a) 2011
2010
2009
Gross profit margin
11.64%
12.82%
($28,748 – $25,401) ÷ $28,748
($23,465 – ($16,876 – $20,456) ÷ $23,465 $15,387) ÷ $16,876
Profit margin
3.54%
4.27%
(2.68)%
$1,018 ÷ $28,748
$1,003 ÷ $23,465
$(453) ÷ $16,876
1.51:1
1.47:1
$7,485 ÷ $4,968
$6,233 ÷ $4,232
Current 1.42:1 ratio $8,146 ÷ $5,724
8.82%
(b) Magna International’s gross profit margin and profit margin have improved over the three years from 2009 to 2011. Both ratios showed a significant increase from 2009 to 2010 and a slight decrease from 2010 to 2011 for an overall increase in profitability over the three year period. The current ratio increased in 2010 but subsequently decreased in 2011 below the 2009 level 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 the cause for the loss in 2009 and determine whether this is of a recurring nature. 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.
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*PROBLEM 5-9A GENERAL JOURNAL Date
Account Titles and Explanation
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)........................
65,000
30 Accounts Payable ($45,000 − $3,000) 42,000 Cash .............................................
42,000
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*PROBLEM 5-9A (Continued) Oct.
1
2
Purchases ........................................ Accounts Payable .......................
52,000
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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1,500
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 and Explanation 1
Purchases (50 × $30) ........................ Accounts Payable ........................
Debit
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
2,475
275
Purchases (60 × $27.50) .................... Accounts Payable ........................
1,650
Freight In ............................................ Cash ..............................................
150
21 Accounts Receivable (54 × $55) ...... Sales .............................................
2,970
23 Sales Returns and Allowances ........ Accounts Receivable ...................
110
18
30
31
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150
1,650
150
2,970
110
Accounts Payable.............................. Cash ($1,500 – $150) .....................
1,350
Cash ($2,475 − $275) ......................... Accounts Receivable ....................
2,200
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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 cost 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. 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)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1 Debit
Credit
June 1 Purchases ................................................ 9,000 Accounts Payable ..........................
9,000
2 (FOB destination means the seller pays the freight, therefore no entry required here.) 5 Accounts Receivable ......................... Sales ...............................................
12,000
6 Sales Returns and Allowances .......... Accounts Receivable .....................
950
6
Freight Out .......................................... Cash ...............................................
290
Supplies .............................................. Cash ...............................................
800
Purchases............................................ Accounts Payable ..........................
4,300
Freight In ............................................. Cash ...............................................
100
Accounts Payable .............................. Purchase Returns and Allowances
300
7
10
10
12
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12,000
950
290
800
4,300
100 300
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*PROBLEM 5-11A (Continued) (a) (Continued) June 14 Accounts Payable ............................... Purchase Discounts ($9,000 × 1%) Cash ($9,000 − $90) ........................
9,000 90 8,910
15 Cash ($11,050 − $221) ........................ 10,829 Sales Discounts ($11,050 × 2%) ......... 221 Accounts Receivable ($12,000 - $950) 19
Cash .................................................... Sales ...............................................
7,250
20 Accounts Payable ($4,300 − $300) ..... Purchase Discounts ($4,000 × 2%) Cash ($4,000 − $80) ........................
4,000 80
25 Sales Returns and Allowances ......... Cash ................................................
500
30 Accounts Receivable ......................... Sales................................................
4,280
11,050
7,250
3,920
500
4,280
(b)
Date
Merchandise Inventory Explanation Ref. Debit
June 1
Balance
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Credit
Balance 5,000
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*PROBLEM 5-11A (Continued) (b) (Continued)
Date
Explanation
Sales Ref.
Credit
Balance
12,000 7,250 4,280
12,000 19,250 23,530
Sales Returns and Allowances Explanation Ref. Debit Credit
Balance
June 5 19 30
Date
J1 J1 J1
June 6 25
Date
Debit
J1 J1
950 500
Sales Discounts Explanation Ref. Debit
June 15
950 1,450
Credit
Balance
J1
221
Purchases Ref.
Debit
J1 J1
9,000 4,300
9,000 13,300
Purchases Discounts Date Explanation Ref. Debit June 14 J1 20 J1
Credit Balance 90 90 80 170
Date
Explanation
June 1 10
221
Credit
Balance
Purchases Returns and Allowances Date Explanation Ref. Debit Credit Balance June 12 J1 300 300
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*PROBLEM 5-11A (Continued) (b) (Continued) Freight In Ref.
Debit
June 10
J1
100
Date
Freight Out Ref. Debit
Date
Explanation
Explanation
June 6
J1
Credit
Balance 100
Credit
290
Balance 290
(c) WILLINGHAM DISTRIBUTING COMPANY Income Statement (Partial) Month Ended June 30, 2014
Sales revenues Sales ................................................................................ $23,530 Less: Sales returns and allowances......................... 1,450 Sales discounts ................................................... 221 Net sales...................................................................... 21,859 Cost of goods sold Merchandise inventory, June 1 ....................... $5,000 Purchases........................................ $13,300 Less: Purchase discounts .......... $ 170 Purchase returns and allowances ................. 300 470 Net purchases ............................. 12,830 Add: Freight in ............................ 100 Cost of goods purchased......................... 12,930 Cost of goods available for sale .............. 17,930 Merchandise inventory, June 30.............. 3,715 Cost of goods sold ..................................................... 14,215 Gross profit...................................................................... $ 7,644
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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.
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*PROBLEM 5-12A NEW WEST COMPANY Income Statement Year Ended December 31, 2014 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, 2014 ....................... $ 30,000 Purchases................................... $232,000 Less: Purchase discounts ... $3,480 Purchase returns and allowances........ 4,000 7,480 Net purchases ............................ $224,520 229,020 Freight in ..................................... 4,500 Goods available for sale........................... 259,020 Inventory, December 31, 2014.................. 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, 2014 L. Oliver, capital, January 1, 2014 .................................. Add: Investment............................................................. Profit ...................................................................... Less: Drawings................................................................ L. Oliver, capital, December 31, 2014.............................
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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, 2014
Assets Current assets Cash ................................................................................ $ 16,780 Accounts receivable ................................................... 7,800 Inventory.......................................................................... 24,000 Total current assets ............................................... 48,580 Long-term investments Long-term debt 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 provide information that is valuable to the company`s owners and managers 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, 2014 Sales ................................................................................... $872,000 Less: Sales discounts ................................... $8,250 Sales returns and allowances........... 9,845 18,095 Net sales .......................................................................... 853,905 Cost of goods sold Inventory, December 1, 2013 ................... $ 34,360 Purchases................................... $634,700 Less: Purchase discounts ... $6,300 Purchase returns and allowances........ 13,315 19,615 Net purchases ............................ $615,085 620,145 Freight in ..................................... 5,060 Goods available for sale........................... 654,505 Inventory, November 30, 2014 ................. 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 (2,500) Interest expense ...................................... (5,300) 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, 2014 B. Hachey, capital, December 1, 2013............................ Add: Profit........................................................................ Less: Drawings................................................................ B. Hachey, capital, November 30, 2014..........................
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$104,480 57,750 162,230 12,000 $150,230
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*PROBLEM 5-13A (Continued) (a) (Continued) BUD’S BAKERY Balance Sheet November 30, 2014
Assets Current assets Cash............................................................................. $ 8,500 Accounts receivable ................................................... 13,770 Inventory ..................................................................... 37,350 Prepaid insurance....................................................... 4,500 Total current assets ............................................... 64,120 Pr operty, 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 ............................................... Purchase Discounts ...................... Purchase Returns and Allowances Rent Revenue................................. Inventory (Nov. 30, 2014) .............. Income Summary ...................... 30
30
30
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872,000 6,300 13,315 2,800 37,350 931,765
Income Summary........................... Purchases.................................. Freight In ................................... Sales Discounts ........................ Sales Returns and Allowances Salaries Expense ...................... Freight Out................................. Depreciation Expense............... Utilities Expense ....................... Property Tax Expense .............. Insurance Expense ................... Interest Expense ....................... Inventory (Dec. 1, 2013) ............
874,015
Income Summary........................... B. Hachey, Capital.....................
57,750
B. Hachey, Capital ......................... B. Hachey, Drawings.................
12,000
5-90
634,700 5,060 8,250 9,845 122,000 8,200 14,000 19,800 3,500 9,000 5,300 34,360
57,750 12,000
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*PROBLEM 5-13A (Continued) (c) Inventory Ref.
Date
Explanation
Debit
Dec. 1 Nov. 30 30
Balance Closing entry Closing entry
Date
B. Hachey, Capital Explanation Ref. Debit
Dec. 1 Nov. 30 30
Balance Closing entry Closing entry
Credit
Balance
34,360
34,360 0 37,350
Credit
Balance
37,350
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 5-1B (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, to when you sell it, and to when you 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 you do not know what 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.
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PROBLEM 5-2B (a) GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Debit
Credit
Apr. 2
Merchandise Inventory ....................... 16,000 Accounts Payable...........................
16,000
4 Accounts Payable [5 × ($16,000 ÷ 100)] Merchandise Inventory...................
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
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
10
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800
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) Apr. 1 2 6 12 29 Bal.
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Inventory 3,200 16,000 4 5 1,280 10 1,600 25 4,000 10,080
800 3,200 4,800 7,200
Cost of Goods Sold Apr. 5 3,200 6 1,280 10 4,800 12 1,600 25 7,200 29 4,000
Bal.
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PROBLEM 5-2B (Continued) (b) (Continued) Sales Apr. 5 10 25
5,300 7,950 11,925
Bal.
25,175
(c) Sales Less: Sales returns and allowances Net sales Net sales (from above) Less: Cost of goods sold Gross profit
Sales Returns and Allowances Apr. 6 2,120 12 2,650 17 2,650 29 6,625 Bal. 14,045
$25,175 14,045 $11,130 $11,130 8,320 $ 2,810
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 and Explanation
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
Accounts Payable.............................. Merchandise Inventory .................
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......................... Sales ..............................................
62,500
62,500
Cost of Goods Sold ........................... 28,420 Merchandise Inventory ................. 18
No entry as FOB shipping means purchaser pays freight.
19
Sales Returns and Allowances ......... Accounts Receivable ....................
2,500
Sales Discounts ($60,000 × 2%)........ Cash ($60,000 − $1,200)..................... Accounts Receivable ($62,500 − $2,500)..........................
1,200 58,800
27
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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% ÷ 20 × 365). 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% ÷ 15 × 365). 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 and Explanation
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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2,280
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 balance in the merchandise inventory account is: $7 per book × 255 books = $1,785.
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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, as shown in the June 20th transaction. 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
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PROBLEM 5-5B (a) GENERAL JOURNAL
J1
Date Account Titles and Explanation Debit Sept. 2 Merchandise Inventory ........................ 13,500 Accounts Payable .........................
Credit 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......................... Sales ..............................................
18,000 18,000
Cost of Goods Sold ........................... 11,310 Merchandise Inventory .................
11,310
Sales Returns and Allowances ......... Accounts Receivable ...................
1,425 1,425
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
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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 ($16,575 − $331) ....................... 16,244 331 Sales Discount (2% × $16,575).......... Accounts Receivable .................... ($18,000 – $1,425)
135 13,365
16,575
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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120 5,880
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 J1 13,500 J1 J1 890 J1 6,450 J1 150 J1 J1 J1 J1 J1
Balance
450 135 6,855 120 4,050
Credit
Balance
18,000 10,875 6,420
18,000 28,875 35,295
Sales Returns and Allowances Explanation Ref. Debit Credit
Balance
Explanation
Sales Ref.
J1 J1
.
J1
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11,310
1,425 750
Sales Discounts Explanation Ref. Debit
Sept.15
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Debit
J1 J1 J1
Sept. 6 25
Date
Balance 7,500 21,000 9,690 10,580 17,030 17,180 16,730 16,595 9,740 9,620 5,570
Sept. 5 19 30
Date
Credit
331
1,425 2,175
Credit
Balance 331
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PROBLEM 5-5B (Continued) (b) (Continued)
Date
Cost of Goods Sold Explanation Ref. Debit
Sept. 5 6 19 30
J1 11,310 J1 J1 6,855 J1 4,050
Credit
890
Balance 11,310 10,420 17,275 21,325
(c) STOJANOVIC DISTRIBUTING COMPANY Income Statement (Partial) Month Ended September 30, 2014 Sales revenues Sales ................................................................................ $35,295 Less: Sales returns and allowances ............. $2,175 Sales discounts.................................. 331 2,506 Net sales .......................................................................... 32,789 Cost of goods sold .............................................................. 21,325 Gross profit .......................................................................... $11,464 Taking It Further: Stojanovic would face uncertainty about the amount of sales recorded in June 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 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 5-6B (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, 2014 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
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PROBLEM 5-6B (Continued) (c) WESTERN LIGHTING WAREHOUSE Income Statement Year Ended July 31, 2014 Sales................................................................................. $450,000 Less: Sales returns and allowances ............. $11,250 Sales discounts ...................................... 4,500 15,750 Net sales...................................................................... 434,250 Cost of goods sold ($247,500 + $1,250) ......................... 248,750 Gross profit...................................................................... 185,500 Operating expenses Depreciation expense ....................................... $ 8,350 Freight out......................................................... 6,055 Insurance expense ........................................... 3,195 Rent expense .................................................... 62,000 Salaries expense .............................................. 45,000 Utilities expense ............................................... 12,600 Total operating expenses ...................................... 137,200 Profit from operations..................................................... 48,300 Other revenues and expenses Interest revenue ............................................... $3,000 700 Interest expense............................................... 2,300 Profit................................................................................. $ 49,000 (d) 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 2013 to 42.7% in 2014. The profit margin has also improved slightly from 10% in 2013 to 11.3% in 2014.
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PROBLEM 5-6B (Continued) (e) July 31
Interest Revenue ............................... 3,000 Sales .................................................. 450,000 Income Summary..........................
453,000
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
Income Summary .............................. A. Jamal, Capital ...........................
49,000 49,000
A. Jamal, Capital ............................... A. Jamal, Drawings.......................
39,600
31
31
31
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: Both income statements result in the same amount of profit. The multiple-step income statement provides the user with much more information than the single-step income statement. The multiple-step income statement provides information on gross profit and profit from operations which is not included on the single-step income statement.
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PROBLEM 5-7B (a) Dec. 31 Supplies Expense .............................. Supplies ($1,650 − $700) ...............
950 950
31 Depreciation Expense ........................... 9,560 Accumulated Depreciation —Furniture..................................... Accumulated Depreciation —Equipment.................................. 31
31
Interest Expense................................ Interest Payable ............................
1,750
Interest Receivable ............................ Interest Revenue ...........................
720
31 Unearned Revenue ($3,000 − $1,600) ................................ Sales .............................................. 31
Cost of Goods Sold ........................... Merchandise Inventory .................
31 Cost of Goods Sold [($37,500 − $755) − $35,275] .............. Merchandise Inventory .................
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5,360 4,200
1,750
720
1,400 1,400 755 755
1,470 1,470
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PROBLEM 5-7B (Continued) (b) GLOBAL ENTERPRISES Income Statement Year Ended December 31, 2014 Sales revenues Sales ($245,000 + $1,400) ........................................... $246,400 Less: Sales returns and allowances .............. $6,670 9,120 Sales Discounts .................................. 2,450 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
GLOBAL ENTERPRISES Statement of Owner’s Equity Year Ended December 31, 2014
I. Rochefort, capital, January 1 ($45,500 − $5,500)........ $ 40,000 Add: Investment ................................................. $ 5,500 Profit .......................................................... 51,715 57,215 97,215 Less: Drawings................................................................ 35,500 I. Rochefort, capital, December 31 ................................. $61,715
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PROBLEM 5-7B (Continued) (b) (Continued) GLOBAL ENTERPRISES Balance Sheet December 31, 2014 Assets Current assets Cash ................................................................................ $ 16,400 Short-term investments................................................ 18,000 Accounts receivable ..................................................... 15,700 Interest receivable ........................................................ 720 Merchandise inventory ($37,500 − $755 − $1,470) ...... 35,275 Supplies ($1,650 − $950) .............................................. 700 Total current assets ................................................. 86,795 Pr operty, plant, and equipment $26,800 Furniture...................................... Less: Accumulated depreciation 10,720 16,080 ($10,720 + $5,360)............. Equipment ................................... $42,000 Less: Accumulated depreciation 12,600 29,400 40,120 ($8,400 + $4,200)............... Total assets .............................................................. $126,915 Liabilities and Owner's Equity Current liabilities Accounts payable ....................................................... $ 26,850 Unearned sales revenue ($3,000 − $1,400)................ 1,600 Interest payable .......................................................... 1,750 Current portion of note payable .................................... 5,000 Total current liabilities ........................................... 35,200 Long-term liabilities Note payable ($35,000 − $5,000)..................................... 30,000 Total liabilities ........................................................ 65,200 Owner's equity I. Rochefort, capital ....................................................... 61,715 Total liabilities and owner's equity .......................... $126,915
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PROBLEM 5-7B (Continued) (c) 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
31 I. Rochefort, Capital .............................. 35,500 I. Rochefort, Drawings....................
35,500
(d) Gross profit margin = $102,755 ÷ $237,280 = 43.31% Profit margin = $51,715 ÷ $237,280 = 21.79% The gross profit margin has increased, indicating an increase in profitability and the profit margin has decreased, indicating a deterioration in profitability. There is no clear trend since the two ratios are fluctuating in opposite directions. Since the profit margin is decreasing, there is a general deterioration of the company’s profitability. Taking It Further: A multiple-step income statement for a service company would show service revenue rather than net sales. There would not be any cost of goods sold or gross profit. The operating expenses and other revenues and expenses would be shown in the same way as for a merchandising company. Solutions Manual .
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PROBLEM 5-8B (a) 2011
2010
2009
Gross profit margin
54.74%
52.84%
45.35%
($157,621 − $71,333) ÷ $157,621
($164,217 − $77,438) ÷ $164,217
($162,106 − $88,589) ÷ $162,106
Profit margin
4.85%
4.40%
–1.42%
$7,638 ÷ $157,621
$7,219 ÷ $164,217
$(2,309) ÷ $162,106
4.75:1
3.09:1
4.38:1
$59,370 ÷ $12,495
$55,241 ÷ $17,905
$48,056 ÷ $10,967
Current ratio
(b) Danier Leather’s gross profit margin has increased substantially in 2010 and increased more modestly in 2011 for an overall increase. The profit margin has increased substantially in 2010 and increased again in 2011 for an overall increase in profitability. The current ratio deteriorated in 2010 but improved in 2011 above the 2009 level for an overall increase in liquidity.
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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 and to help an investor assess the cause for the loss in 2009 and determine whether this is of a recurring nature. 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.
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*PROBLEM 5-9B GENERAL JOURNAL Date Oct.
Account Titles and Explanation 2
Credit
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 2,500 Accounts Receivable ....................
27
Nov. 1
Solutions Manual .
Debit
Sales Discounts ($60,000 × 2%)........ Cash ($60,000 − $1,200)..................... Accounts Receivable ($62,500 − $2,500)..........................
2,500 1,200 58,800 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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-10B GENERAL JOURNAL Date
Account Titles and Explanation
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
Solutions Manual .
5-118
2,280
70
48
910
70
1,200
180
1,120 2,232
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Accounting Principles, Sixth Canadian Edition
*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 cost 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. 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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-11B (a) GENERAL JOURNAL
J1
Date
Account Titles and Explanation
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 ...................
1,425 1,425
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
Solutions Manual .
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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-11B (Continued) (a) (Continued) Sept.15
19
20
25
30
Cash ($16,575 − $331) ....................... 16,244 331 Sales Discount (1% × $16,575).......... Accounts Receivable .................... ($18,000 - $1,425)
16,575
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
Solutions Manual .
Credit
J1 J1 J1
5-121
Balance 7,500
Debit
Credit
Balance
18,000 10,875 6,420
18,000 28,875 35,295
Chapter 5
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-11B (Continued) (b) (Continued)
Date
Sales Returns and Allowances Explanation Ref. Debit Credit
Sept. 6 25
Date
J1 J1
1,425 750
Sales Discounts Explanation Ref. Debit
Sept.15
J1
Date Sept. 2 10
Purchases Ref. Debit J1 13,500 J1 6,450
Explanation
Balance 1,425 2,175
Credit
331
Balance 331
Credit
Balance 13,500 19,950
Date Sept. 12
Purchase Returns and Allowances Explanation Ref. Debit Credit Balance J1 450 450
Date Sept. 15 20
Purchase Discounts Explanation Ref. Debit J1 J1
Date Sept. 10
Date Sept. 6
Solutions Manual .
Explanation
Freight In Ref. J1
Explanation
Freight Out Ref. Debit J1 420
5-122
Debit 150
Credit Balance 135 135 120 255
Credit Balance 150
Credit
Balance 420
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 5-11B (Continued) (c) STOJANOVIC DISTRIBUTING COMPANY Income Statement (Partial) Month Ended September 30, 2014 Sales revenues Sales ................................................................................ $35,295 Less: Sales returns and allowances ............. $2,175 Sales discounts.................................. 331 2,506 Net sales .......................................................................... 32,789 Cost of goods sold Inventory, September 1, 2014 ............................. $7,500 Purchases ........................................ $19,950 Less: Purchase returns and allowances ................ $450 Purchase discounts ......... 255 705 Net purchases .................................. 19,245 Add: Freight in ................................. 150 Cost of goods purchased .................................. 19,395 Cost of goods available for sale .........................26,895 Inventory, September 30, 2014 .......................... 5,570 21,325 Cost of goods sold................................................. Gross profit .......................................................................... $11,464 Taking It Further: The gross profit should be the equal 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.
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-12B UP NORTH COMPANY Income Statement Year Ended December 31, 2014 Sales ................................................................................... $474,000 Less: Sales discounts ................................... $3,480 Sales returns and allowances........... 9,000 12,480 Net sales .......................................................................... 461,520 Cost of goods sold Inventory, January 1, 2014 ....................... $ 36,000 Purchases................................... $278,400 Less: Purchase discounts ... $4,175 Purchase returns and allowances........ 4,800 8,975 Net purchases ............................ $269,425 274,825 Freight in ..................................... 5,400 Goods available for sale........................... 310,825 Inventory, December 31, 2014.................. 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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-12B (Continued) UP NORTH COMPANY Statement of Owner’s Equity Year Ended December 31, 2014 J. Prideaux, capital, January 1, 2014 ............................. $ 90,000 Add: Investment............................................................. 4,200 Profit ...................................................................... 73,895 168,095 Less: Drawings................................................................ 57,600 J. Prideaux, capital, December 31, 2014 ........................ $110,495
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-12B (Continued) UP NORTH COMPANY Balance Sheet December 31, 2014
Assets Current assets Cash ................................................................................ $ 20,135 Accounts receivable ................................................... 9,360 Inventory.......................................................................... 28,800 Total current assets ............................................... 58,295 Long-term investments Long-term debt 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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-12B (Continued) Taking It Further: The balance sheet reports the assets, liabilities, and owner’s equity at December 31, 2014. The beginning inventory is no longer an asset at December 31, 2014 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 GAAP, 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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-13B (a) TSE’S TATOR TOTS Income Statement Year Ended December 31, 2014 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 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 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 10,295 Interest expense............................................. 11,345 Loss ................................................................................. $(7,095)
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-13B (Continued) (a) (Continued) TSE’S TATOR TOTS Statement of Owner’s Equity Year Ended December 31, 2014 H. Tse, capital, January 1, 2014...................................... Less: Loss ....................................................................... Less: Drawings................................................................ H. Tse, capital, December 31, 2014 ...............................
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$143,600 7,095 136,505 14,450 $122,055
Chapter 5
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-13B (Continued) (a) (Continued) TSE’S TATOR TOTS Balance Sheet December 31, 2014
Assets Current assets Cash............................................................................... $ 17,000 Accounts receivable ......................................................... 44,200 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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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-13B (Continued) (b) GENERAL JOURNAL Date
Account Titles and Explanation
J2 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
31 H. Tse, Capital.................................. Income Summary ........................
7,095
31
14,450
Solutions Manual .
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 ..........................
H. Tse, Capital.................................. H. Tse, Drawings .........................
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40,500 441,600 5,600 127,500 18,000 23,400 9,600 4,800 7,500 11,345 11,900 12,700
7,095 14,450
Chapter 5
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 5-13B (Continued) (c) Date
Explanation
Jan. 1 Dec. 31 Dec. 31
Balance Closing entry Closing entry
Date
Explanation
Jan. 1 Dec. 31 Dec. 31
Balance Closing entry Closing entry
Inventory Ref.
Debit
Credit
Balance
J2 34,600 J2
40,500
40,500 75,100 34,600
H. Tse, Capital Ref. Debit
Credit
Balance
J2 7,095 J2 14,450
143,600 136,505 122,055
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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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (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 high value items, you should use the perpetual system. Also because you are dealing with low volume 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 Date
Account Titles and Explanation
Jan. 6
7
8
9
13
Solutions Manual .
J1 Debit
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
5-133
Credit
1,575
60
545
500 2,100
Chapter 5
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (b) (Continued) Jan. 13
14
14
15
20
21
21
21
28
29
31
Solutions Manual .
Cost of Goods Sold [($1,575 + $60) ÷ 3 × 2]....................... Merchandise Inventory .................
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 ............................... Salaries Payable ................................ Cash ...............................................
240 48
Accounts Payable.............................. Telephone Expense ........................... Cash ...............................................
76 78
Accounts Payable.............................. Cash ...............................................
3,130
5-134
75
2,100
125
1,000
80
2,100
1,090
288
154 3,130
Chapter 5
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (b) and (d)
Date
Explanation
Jan. 1 7 9 14 15 20 21 21 28 29 31
Balance
Date Jan. 1 9 13
Date Jan. 6 7 8 13 14 21 21
Solutions Manual .
Cash Ref. J1 J1 J1 J1 J1 J1 J1 J1 J1 J1
Debit
J1 J1
J1 J1 J1 J1 J1 J1 J1
5-135
288 154 3,130
Credit
Balance
500
675 175 2,275
Credit
Balance
500 75 125 1,000 80 2,100
2,100
Merchandise Inventory Explanation Ref. Debit
Balance 2,929 2,869 3,369 3,294 3,419 4,419 4,339 6,439 6,151 5,997 2,867
60
Accounts Receivable Explanation Ref. Debit Balance
Credit
1,575 60 545 1,090 2,100 80 1,090
1,575 1,635 1,090 0 2,100 2,180 1,090
Chapter 5
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (b) and (d) (Continued) Supplies Ref.
Date
Explanation
Jan. 1
Balance
Date
Explanation
Equipment Ref. Debit
Jan. 1
Balance
Date
Accumulated Depreciation—Equipment Explanation Ref. Debit Credit
Jan. 1 31
Balance Adjusting entry
Date
Accounts Payable Explanation Ref. Debit
Jan. 1 6 8 14 29 31
Date Jan. 1 28
Solutions Manual .
Balance
Debit
J1
5-136
Credit
Balance 1,550
43
Credit
Balance
545 2,100 76 3,130
48
Balance 78 121
1,575
Salaries Payable Explanation Ref. Debit Balance
Balance 95
J2
J1 J1 J1 J1 J1
Credit
Credit
76 1,651 1,106 3,206 3,130 0
Balance 48 0
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (b) and (d) (Continued)
Date Jan. 1 15
Unearned Revenue Explanation Ref. Debit J1
Balance
Date
Interest Payable Explanation Ref. Debit
Jan. 1 31
Balance Adjusting entry
J2
Date
Explanation
Notes Payable Ref. Debit
Jan. 1
Balance
Date
N. Koebel, Capital Explanation Ref. Debit
Jan. 1 20
Date Jan. 13 21
Date Jan. 13 21
Solutions Manual .
Balance
Explanation
Debit
J1 J1 Cost of Goods Sold Explanation Ref. Debit J1 J1
5-137
Balance
125
100 225
Credit
Balance
8
8 16
Credit
Balance 3,000
J1 Sales Ref.
Credit
1,090 1,090
Credit
Balance
1,000
1,939 2,939
Credit
Balance
2,100 2,100
2,100 4,200
Credit
Balance 1,090 2,180
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (b) and (d) (Continued)
Date
Salaries Expense Explanation Ref. Debit
Jan. 28
Date
J1
240
Telephone Expense Explanation Ref. Debit
Jan. 29
J1
Date Jan. 31
Adjusting entry
Date
Explanation
Jan. 14
J1
Date Jan. 31
Adjusting entry
Solutions Manual .
5-138
8
Balance 78
Credit
Balance 43
Credit
75
Interest Expense Explanation Ref. Debit J2
Credit
43
Freight Out Ref. Debit
Balance 240
78
Depreciation Expense Explanation Ref. Debit J2
Credit
Balance 75
Credit
Balance 8
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (c) COOKIE CREATIONS Trial Balance January 31, 2014
Cash .................................................................... Accounts receivable ......................................... Merchandise inventory ..................................... Supplies ............................................................. Equipment .......................................................... Accumulated depreciation—equipment .......... Unearned revenue ............................................. Interest payable ................................................. Notes payable .................................................... N. Koebel, capital .............................................. Sales ................................................................... Cost of goods sold ............................................ Salary expense .................................................. Telephone expense ............................................ Freight out .........................................................
Debit $ 2,867 2,275 1,090 95 1,550
Credit
$
2,180 240 78 75 $10,450
78 225 8 3,000 2,939 4,200
$10,450
(d) GENERAL JOURNAL Date
Account Titles and Explanation
J2 Debit
Jan. 31 Depreciation Expense ....................... Accumulated Depreciation— Equipment ..................................... ($1,550 ÷ 36 months)
43
31 Interest Expense................................ Interest Payable ............................ ($3,000 × 3% × 1/12)
8
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Credit
43
8
Chapter 5
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (e) COOKIE CREATIONS Adjusted Trial Balance January 31, 2014
Cash .................................................................... Accounts receivable .......................................... Merchandise inventory ...................................... Supplies .............................................................. Equipment........................................................... Accumulated depreciation—equipment ........... Unearned revenue .............................................. Interest payable .................................................. Notes payable..................................................... N. Koebel, capital ............................................... Sales.................................................................... Cost of goods sold............................................. Salary expense ................................................... Telephone expense ............................................ Depreciation expense ........................................ Freight out .......................................................... Interest expense.................................................
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Debit $ 2,867 2,275 1,090 95 1,550
Credit
$
2,180 240 78 43 75 8 $10,501
121 225 16 3,000 2,939 4,200
_ $10,501
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (f) COOKIE CREATIONS Income Statement Month ended January 31, 2014
Sales................................................................................. Cost of goods sold.......................................................... Gross profit...................................................................... Operating expenses Salaries expense............................................ $240 Telephone expense ....................................... 78 Depreciation expense.................................... 43 Freight out...................................................... 75 Total operating expenses ...................................... Profit from operations..................................................... Other expenses Interest expense ......................................................... Profit.................................................................................
$4,200 2,180 2,020
436 1,584 8 $1,576
(g) Gross profit margin = 48.1% ($2,020 ÷ $4,200) Profit margin = 37.5% ($1,576 ÷ $4,200)
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Accounting Principles, Sixth Canadian Edition
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
Solutions Manual .
Debit
Credit
3,100 8,918 4,800
Credit
Balance
750 15,000
0 15,750 15,000 0
12,260 500 425 12,250 3,100 14,700 525
15,750
5-142
Balance 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
1,650 6,500
Accounts Receivable Explanation Ref. Debit
Date Aug.
Balance
Cash Ref.
Chapter 5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
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 .
800 182 2,325 2,223
Credit
Balance
3,340
3,750 4,095 755
Credit
Balance
24,500 500 265 9,765 465 9,900
Adjusting entry Adjusting entry Supplies Ref.
Debit
345 Adjusting entry
Explanation
Equipment Ref. Debit
Balance
Balance Adjusting entry
70,800
8,850
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Balance 64,125 56,225 80,725 81,225 81,490 71,725 72,190 82,090 81,290 81,108 78,783 76,560
Accumulated Depreciation—Equipment Explanation Ref. Debit Credit
Date Aug.
7,900
Explanation
Date Aug.
Balance
Credit
Balance 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
Aug.
1 24 31
Date Aug.
1
1 31
1 31 31
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24,500 345 12,250 9,900 800 9,100
Adjusting entry
Explanation Balance
Balance Adjusting entry
Balance Closing entry Closing entry
525
4,680 5,205 1,455
Credit
Balance 42,000
Credit
Balance
175
0 175
Credit
Balance
70,442
58,400 128,842 71,242
57,600 5-144
12,650 6,150 30,650 30,995 18,745 28,645 27,845 18,745
Balance
3,750
Notes Payable Ref. Debit
Balance
Credit
Balance
A. John, Capital Explanation Ref. Debit
Date Aug.
6,500
Interest Payable Explanation Ref. Debit
Date Aug.
Balance
Unearned Revenue Explanation Ref. Debit
Date
Credit
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Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (a), (b), (d) and (g) (Continued) A. John, Drawings Explanation Ref. Debit
Date
Credit
Balance
Closing entry
57,600
52,800 57,600 0
Date
Income Summary Explanation Ref. Debit
Credit
Balance
Aug. 31 31 31
Closing entry Closing entry Closing entry
518,460
518,460 70,442 0
Credit
Balance
12,260 15,750 3,750
485,500 497,760 513,510 517,260 0
Aug.
1 31 31
Date Aug.
1 4 10 31 31
Balance
448,018 70,442 Sales Ref.
Debit
Adjusting entry Closing entry
517,260
Sales Returns and Allowances Explanation Ref. Debit Credit 1 9 12 31
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4,800
Explanation
Date Aug.
Balance
Balance
425 750
Closing entry
12,595
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Balance 11,420 11,845 12,595 0
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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.
Aug.
1 4 9 10 12 31 31 31
Aug.
1 15 30 31
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Closing entry Rent Revenue Ref. Debit
Balance Closing entry
Credit
Balance
1,200
1,200 0
Credit
Balance
Balance
322,493
301,010 308,910 308,645 318,410 317,945 320,270 322,493 0
Credit
Balance
74,400
68,200 71,300 74,400 0
7,900 265 9,765 465 Adjusting entry Adjusting entry Closing entry
2,325 2,223
Salaries Expense Explanation Ref. Debit
Date
300
0 300 0
300
Cost of Goods Sold Explanation Ref. Debit
Date
Balance
Balance
Explanation 1 31
Credit
Balance
3,100 3,100
Closing entry
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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 31
1 31
1 31 31
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3,340
0 3,340 0
Credit
Balance
Closing entry
19,800
18,150 19,800 0
Interest Expense Explanation Ref. Debit
Credit
Balance
2,100
1,925 2,100 0
Credit
Balance
4,140
4,140 0
Credit
Balance
8,850
0 8,850 0
Balance Adjusting entry Closing entry
3,340
Explanation
Rent Expense Ref. Debit
Balance
1,650
Balance Adjusting entry Closing entry
175
Balance Closing entry
Depreciation Expense Explanation Ref. Debit
Date Aug.
Balance
Insurance Expense Explanation Ref. Debit
Date Aug.
Credit
Balance Adjusting entry Closing entry
8,850
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CUMULATIVE COVERAGE (Continued) (b) GENERAL JOURNAL Date
Account Titles and Explanation
Aug. 1
2
4
4
5
5
8
9
9
10
10
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Debit
Rent Expense..................................... Cash ...............................................
1,650
Accounts Payable.............................. Cash ...............................................
6,500
Credit
1,650
6,500
Cash ................................................... 12,260 Sales ..............................................
12,260
Cost of Goods Sold ........................... Inventory........................................
7,900
7,900
Inventory ............................................ 24,500 Accounts Payable ......................... Inventory ............................................ Cash ...............................................
500
Supplies ............................................. Accounts Payable .........................
345
Sales Returns and Allowances ......... Cash ...............................................
425
Inventory ............................................ Cost of Goods Sold.......................
265
24,500
500
345
425
265
Accounts Receivable......................... 15,750 Sales ..............................................
15,750
Cost of Goods Sold ........................... 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.............................. Cash ...............................................
12,250
Sales Returns and Allowances ......... Accounts Receivable ....................
750
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
Inventory ................................................ 9,900 Accounts Payable .........................
9,900
Accounts Payable.............................. Inventory........................................
800
Cash ................................................... Unearned Revenue........................
525
800
525
Salaries Expense ................................... 3,100 Cash ...............................................
3,100
Accounts Payable ($9,900 − $800).......... 9,100 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, 2014
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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CUMULATIVE COVERAGE (Continued) (d) GENERAL JOURNAL Date
Account Titles and Explanation
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 ..............................................
3,570
Cost of Goods Sold .......................... 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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3,570
2,325
175
2,223 2,223
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CUMULATIVE COVERAGE (Continued) (e) THE BOARD SHOP Adjusted Trial Balance August 31, 2014 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, 2014 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, 2014 A. John, capital, September 1, 2013............................... Add: Profit........................................................................ Less: Drawings................................................................ A. John, capital, August 31, 2014...................................
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$ 58,400 70,442 128,842 57,600 $ 71,242
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CUMULATIVE COVERAGE (Continued) (f) (Continued) THE BOARD SHOP Balance Sheet August 31, 2014 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 and Explanation
Debit
Credit
Aug. 31
Sales ................................................... 517,260 1,200 Rent revenue...................................... 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, 2014
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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BYP 5-1 FINANCIAL REPORTING PROBLEM (a) Reitmans is merchandising company, involved in the retail sale of women’s apparel. The retail activities are conducted under various trade names such as Reitmans, Smart Set, RW & CO., Thyme Maternity, Penningtons, Addition Elle and Cassis. (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 Reitmans most likely uses a perpetual inventory system. In its annual information the company discloses that it uses a merchandise information system through which merchandise can be followed from the placement of the order to the actual sale. This allows managers to make decisions such as re-order, markdowns and changes in buying plans. (c) They use a multiple-step income statement format. (d) Non-operating items reported on the income statement are finance income and finance costs. Finance income includes: 1) dividend income from available-for-sale financial assets, 2) interest income from loans and receivables, 3) realized gain on disposal of available-forsale financial assets and 4) foreign exchange gain. Finance costs includes: 1) interest expense on the mortgage, 2) net change in fair value of derivatives, and 3) impairment loss on available-for-sale financial assets.
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BYP 5-1 (Continued) (e) Reitmans does not show the amount of sales returns on the income statement. The company’s accounting policies state that sales are reported net of returns and estimated possible returns. The returns do not need to be shown separately since the purpose of the sales return is to adjust the sales and show the net sales. Detailed information on sales returns is important for internal decision making, however it is not relevant for decisions made by external users of the financial statements. (f)
Note 2 (d): “Sales Returns: The Company provides for the possibility that merchandise already sold may be returned by customers. To this end, the Company has made certain assumptions based on the quantity of merchandise returned in the past.” Note 3 (l): “Revenue: Revenue is recognized from the sale of merchandise when a customer purchases and takes delivery of the merchandise. Reported sales are net of returns and estimated possible returns and exclude sales taxes.” The company records estimated possible returns because they are significant and the company needs to show sales returns in the same period as the related sale in order to properly measure profit. As a merchandiser of clothes, Reitmans’ peak selling period is the holiday period. Estimated returns at January 28, 2012, based on holiday sales would still impact yearend profitability. It is appropriate to use an estimate because the company can reasonably estimate the amount based on past experience and current management knowledge.
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BYP 5-1 (Continued) (g) Reitmans’ estimated amount of sales returns at January 28, 2012 is $770,000. The journal entry to record this amount would be: Estimated Sales Returns ............................ 770,000 Provision for Sales Returns.............. 770,000 The debit account would be shown as a contra account to sales whereas the credit account would be shown as a current liability on the company’s balance sheet. (h) Freight on purchases is included in the cost of inventory. This is consistent with material in the chapter. Transportation-in is part of the cost of purchasing the merchandise.
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BYP 5-2 INTERPRETING FINANCIAL STATEMENTS (a) Gross profit 2011 = $23,798 [$45,183 − $21,385] 2010 = $24,395 [$45,130 − $20,735] 2009 = $26,016 [$46,232 − $20,216] Profit from operations 2011 = $3,343 [$23,798 − $20,455] 2010 = $4,133 [$24,395 − $20,262] 2009 = $6,836 [$26,016 − $19,180] Profit 2011 = $2,533 [$3,343 + $147 − $957] 2010 = $(8,198) [$4,133 − $12,989 + $658] 2009 = $7,429 [$6,836 + $304 + $289] (b) Percentage change in net revenue: 2010 to 2011: 0.1% [($45,183 − $45,130) ÷ $45,130] 2009 to 2010: −2.4% [($45,130 − $46,232) ÷ $46,232] Percentage change in profit from operations: 2010 to 2011: −19.1% [($3,343 − $4,133) ÷ $4,133] 2009 to 2010: −39.5% [($4,133 − $6,836) ÷ $6,836] (c) Gross profit margin 2011 = 52.7% [$23,798 ÷ $45,183] 2010 = 54.1% [$24,395 ÷ $45,130] 2009 = 56.3% [$26,016 ÷ $46,232] Gross profit margin decreased each year from 2009 to 2011.
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BYP 5-2 (Continued) (d) Profit margin 2011 = 5.6% [$2,533 ÷ $45,183] 2010 = (18.2)% [$(8,198) ÷ $45,130] 2009 = 16.1% [$7,429 ÷ $46,232] Profit margin decreased significantly from 2009 to 2010 and then increased substantially in 2011, but not to the same level as in 2009. (e) Profit margin using profit from operations 2011 = 7.4% [$3,343 ÷ $45,183] 2010 = 9.2% [$4,133 ÷ $45,130] 2009 = 14.8% [$6,836 ÷ $46,232] Profit margin (using profit from operations) showed a significant decrease from 2009 to 2010, and an additional, but smaller, decrease from 2010 to 2011. (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 which 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. Management’s statement indicates that they believe these non-operating items to be non-recurring and therefore not meaningful to a comparison of profitability. Their statement is supported by the large non-operating expenses in 2010 which caused a loss in that year. Both the gross profit margin and the profit margin (using profit from operations) showed a similar declining trend. This is contrasted by the profit margin which went from 16.1% in 2009 to (18.2)% in 2010 and back up to 5.6% in 2011.
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BYP 5-3 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 5-4 COMMUNICATION ACTIVITY (a) and (b) MEMORANDUM TO:
President, Great Canadian Snowboards
FROM: SUBJECT: Revenue and Expense Recognition Criteria DATE:
Revenue should be 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 they 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, you have 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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BYP 5-5 ETHICS CASE
(a) Rita Pelzer, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue delaying payments to creditors. Delaying payment is not an unethical practice. Companies can pay their bills late, but they risk incurring interest charges, impairing their credit ratings, or losing a discount. What is unethical is taking the discount for early payment even if the payment is made after the discount period, and lying by blaming the late payment on the post office. Rita’s dilemma is to decide whether to (1) delay payments and place inappropriate blame for these late payments on the mail room and / or post office, or (2) risk offending her boss and possibly lose the job she just assumed. (b) The stakeholders (affected parties) are: Rita Pelzer, the assistant controller. Jamie Caterino, the controller. Liu Stores, the company. Creditors of Liu Stores (suppliers). Mail room / post office employees (those assigned the blame). (c) Rita’s alternatives: 1. Tell the controller (her boss) that she will prepare and mail creditors’ cheques to take advantage of the full credit period but will not delay mailing the cheques beyond their due dates. This may offend her boss and may jeopardize her continued employment.
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BYP 5-5 (Continued) (c) (Continued) 2. Tell the controller (her boss) that she will be happy to delay the payment four days but will not blame others for this delay when asked. This is contrary to current practice and may also offend her boss and jeopardize her continued employment. 3. Join the team and continue the practice of delaying payments and laying blame on others for the delay. 4. Go over her boss’s head and take the chance of receiving just and reasonable treatment from an officer superior to Jamie. The company may not condone this practice. Rita definitely has choices, but probably not without consequences. To continue the practice of claiming discounts and lying is definitely unethical. If Rita submits to this request, she may be asked to perform other unethical tasks. If Rita stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things— if she isn’t fired. Maybe nobody has ever challenged Jamie’s unethical behaviour and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.
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BYP 5-6 “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 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 the suspicious person and ask if he/she is finding everything okay. Mention that you’ll be nearby should he/she need your help. Make the shoplifter feel watched.
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BYP 5-6 (Continued) (e) Controls to reduce employee theft: - have an updated policies and procedures manual - prevent employees 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 consists of 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 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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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, 4
1, 2
1, 2
1, 7
1, 7
2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using specific identification, FIFO, and average methods of cost determination.
5, 6, 7, 8
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.
9, 10, 11
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.
12, 13
11, 12
8, 9
3, 7, 8
3, 7, 8
14, 15, 16
13, 14
10, 11
6, 9
6, 9
17, 18, 19
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 average inventory cost formulas (Appendix 6A).
*20, *21, *22
*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).
*23, *24, *25, *26
*19, *20
*17, *18
*14, *15
*14, *15
Study Objectives
Solutions Manual .
6-1
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 average and answer questions.
Moderate
20-25
5A
Apply perpetual FIFO and average. Answer questions about financial statement effects.
Moderate
35-45
6A
Record transactions using perpetual 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 average.
Simple
20-25
*12A
Apply periodic and perpetual FIFO.
Moderate
20-25
*13A
Apply periodic and perpetual 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 average. Record sales and inventory adjustment and calculate gross profit.
Moderate
20-25
4B
Apply perpetual FIFO and answer questions.
Moderate
20-25
5B
Apply perpetual FIFO and average. Answer questions about financial statement effects.
Moderate
35-45
Solutions Manual .
Difficulty Level
6-2
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Time Allotted (min.)
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 gross profit.
Complex
35-45
9B
Apply LCNRV and prepare adjustment.
Moderate
20-25
10B
Calculate ratios.
Simple
15-20
*11B
Apply periodic FIFO and average.
Simple
20-25
*12B
Apply periodic and perpetual 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
Solutions Manual .
Difficulty Level
6-3
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material 1.
Study Objective Describe the steps in determining inventory quantities.
Knowledge BE6-1 E6-1
Comprehension Q6-1 Q6-2 Q6-3 Q6-4
Application BE6-2 E6-2 P6-1A P6-1B 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
2.
Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination.
Q6-5 Q6-6 Q6-7 Q6-8
3.
Determine the financial statement effects of inventory cost determination methods.
Q6-9 Q6-10 Q6-11 BE6-9 BE6-10
4.
Determine the financial statement effects of inventory errors.
Q6-12 Q6-13
Solutions Manual .
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
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued) Study Objective Value inventory at the lower of cost and net realizable value.
Knowledge
Comprehension Q6-14 Q6-15 Q6-16
Application BE6-13 BE6-14 E6-10 E6-11 P6-6A P6-6B P6-9A P6-9B
Analysis
6.
Demonstrate the presentation and analysis of inventory.
Q6-19
BE6-16
BE6-15 E6-11 E6-12
Q6-17 Q6-18 P6-8A P6-10A P6-8B P6-10B
*7
Calculate ending inventory and cost of goods sold in a periodic inventory system using FIFO and average inventory cost formulas (Appendix 6A).
*Q6-20 *Q6-21 *Q6-22
*8.
Estimate ending inventory using the gross profit and retail inventory methods (Appendix 6B)
*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
5.
*Q6-23
*Q6-24 *Q6-25 *Q6-26
Broadening Your Perspective
Solutions Manual .
BYP6-3 BYP6-4 BYP6-5
6-5
BYP6-1 BYP6-2 BYP6-6
Synthesis
Evaluation
Continuing Cookie Chronicle
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 prenumbered 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 terms. When the terms are FOB (free on board) 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. The transfer of ownership also means that the sales revenue is recorded at that point.
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.
(1) include. (2) do not include. (3) include (it is assumed legal ownership remains with the store).
5.
Actual physical flow may be impractical because many items are indistinguishable from one another. And, even if the items are individually identifiable, it may be too costly and too complex to track the physical flow of each inventory item. Actual physical flow may also be inappropriate because management may be able to manipulate profit through specific identification of items sold.
6.
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.
Solutions Manual .
6-6
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 7.
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. The FIFO cost formula assumes that the first goods purchased are the first goods sold. The average cost formula determines the cost using a weighted average of the cost of the items purchased. Both the FIFO and the average cost formulas assume a flow of goods that may not exactly match the actual flow of physical goods. These cost formula can be used in both a periodic and perpetual inventory systems, whereas the specific identification method can only be used in a perpetual system. This has the advantage of making the bookkeeping simpler and less expensive. An example of merchandise that would be valued using the FIFO basis is electronic products, whereas merchandise such as clothing might be valued on an average basis.
8.
The 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 average cost per unit. Sales of product mean that items of inventory are removed from the cost “pool” at the average cost. This does not change the average cost.
9.
(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; 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 average cost. (d) Profit: Because of the effect on the cost of goods sold, profit will be higher under FIFO and lower under average cost.
Solutions Manual .
6-7
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 10.
The 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 balance sheet 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.
11. (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. 12.
(a) Mila Company's 2013 profit will be understated (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 2014profit will be overstated (U) $5,000 since the ending inventory of 2013 becomes the beginning inventory of 2014. 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 2013 and U $5,000 in 2014). 13.
It is necessary to correct the error because users of the financial statements look at the results for individual years and also look at any trends.
Solutions Manual .
6-8
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 14.
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 write down 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.
15.
Net realizable value is the selling price of an inventory item, less any estimated costs required to make the item saleable.
16.
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.
17.
An inventory turnover ratio that is too high may indicate that the company is losing sales opportunities because of inventory shortages. Inventory outages may also cause customer ill will and result in lost future sales. An inventory turnover ratio that is too low may indicate that the company has excess inventory which is not being sold and may be obsolete and, as a result, the company may be spending too much to carry its inventory.
18.
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.
19.
There are no significant differences in the valuation and reporting of inventory between IFRS and ASPE.
*20. 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 and cost of goods sold. *21.
No, he is not correct. The FIFO cost formula assumes that the goods that were purchased the earliest are the first ones to be sold. The cost of the oldest units is used first to calculate cost of goods sold, not ending inventory.
Solutions Manual .
6-9
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) *22. 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 average is calculated after each purchase (goods available for sale in dollars ÷ goods available for sale in units). A new average must be calculated with each purchase and thus the average becomes a moving average. *23. 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 actual inventory when a physical count is done. *24. 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. *25. The gross profit method uses an average gross profit margin based on previous year’s results and applies it to net sales to estimate the cost of goods sold. The estimated cost of goods is subtracted from the goods available for sale to arrive at the estimated ending inventory. The retail inventory method calculates an average cost-to-retail percentage. This percentage is determined by dividing goods available for sale at cost, by goods available for sale at retail. This ratio is then applied to the ending inventory at retail to estimate the ending inventory at cost. The retail inventory method approximates results that would have occurred had the average cost formula been used. *26. 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 average cost formula and would not be appropriate if the company is using a FIFO approach.
Solutions Manual .
6-10
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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) Merchandise on hold for customers 0 (b) Inventory held for alterations (1,200) (c) Inventory held on consignment (4,250) (d) Goods shipped FOB shipping point prior to Dec. 31 2,875 Freight on inventory purchase 310 (e) Goods shipped FOB destination prior to Dec. 31 0 Freight on inventory purchase 0 Correct inventory cost at December 31 $53,235
Solutions Manual .
6-11
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-3 Cost of Goods Sold Painting 3 4 Total
Total Cost $3,000 4,000 $7,000
Ending Inventory Painting 1 2 Total
Total Cost $1,000 2,000 $3,000
BRIEF EXERCISE 6-4 (a) (b) (c) (d) (e) (f) (g) (h)
2 2 1 3 3 3 1 1
Solutions Manual .
FIFO FIFO Specific identification Average Average Average Specific identification Specific identification
6-12
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-5 Date
Units
PURCHASES Cost Total
COST OF GOODS SOLD Units Cost Total
June 1 7
400
$22.00
$8,800.00
18 200 150 26
350
$20.00
Solutions Manual © 2013John Wiley & Sons Canada, Ltd.
(d) $25.00 $22.00
7,000.00
6-13
Units
BALANCE Cost Total
200
$25.00
$5,000.00
(a) 200 400
(b) $25.00 $22.00
(c) 13,800.00
(f) 250 (i) 250 350
(g) $22.00 (j) $22.00 $20.00
(e) 8,300.00
(h) 5,500.00 (k) 12,500.00
Chapter 6 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-6 Date
Units
PURCHASES Cost Total
COST OF GOODS SOLD Units Cost Total
June 1 7
400
$22.00
$8,800.00
18 26
350 350
$20.00
(d) $23.00
7,000.00
(e) 8,050.00
BALANCE Cost
Total
200
$25.00
$5,000.00
(a) 600
(b) $23.00
(c) 13,800.00
(f) 250
(g) $23.00
(h) 5,750.00
(i) 600
(j) $21.25
(k) 12,750.00
Units
(a) 600 = 200 + 400 (b) ($5,000.00 + $8,800.00) ÷ (200 + 400) (c) $13,800.00 = $5,000.00 + $8,800.00 (d) see (b) above (e) $8,050.00 = 350 × $23.00 (f) 250 = 600 – 350 (g) see (b) above (h) $5,750.00 = 250 × $23.00 (i) 600 = 250 + 350 (j) $21.25 = ($5,750.00 + $7,000.00) ÷ (250 + 350) (k) $12,750.00 = 600 × $21.25
Solutions Manual © 2013John Wiley & Sons Canada, Ltd.
6-14
Chapter 6 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-7 (a)
Date Nov. 1 4 7
FIFO Purchases Units Cost Total 20
$5.50
$110
20
6.00
120
10
Cost of Goods Sold Units Cost Total
10
$5.00
20 10 Total 40 $230 40 Check: $50 + $230 – $220 = $60
5.50 6.00
12
Balance Units Cost Total 10 $5.00 $50 10 5.00 20 5.50 160 10 5.00 20 5.50 20 6.00 280 50 20 5.50 20 6.00 230
170 $220
10 10
6.00
60 $60
(b) Average Purchases Units Cost Total
Cost of Goods Sold Units Cost Total
Date Nov. 1 4 20 $5.50 $110 7 20 6.00 120 10 10 $5.600 12 30 5.600 Total 40 $230 40 Check: $50 + $230 – $224 = $56
Balance Units Cost Total 10 $5.000 $50 30 5.333 160 50 5.600 280 $ 56 40 5.600 224 168 10 5.600 56 $224 10 $56
Recap: Cost of goods sold Ending inventory Goods available for sale
Solutions Manual .
6-15
FIFO $220 60 $280
Average $224 56 $280
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-8 (a)
FIFO
Date
Account Titles and Explanation
Nov. 4
Inventory (20 × $5.50) ......................... Accounts Payable .........................
110
Accounts Receivable ......................... Sales (30 × $8.00)...........................
240
Nov. 12
Debit
110
240
Cost of Goods Sold ............................ 170 Inventory ([20 × $5.50] + [10 × $6.00]) (b)
Credit
170
Average
Date
Account Titles and Explanation
Nov. 4
Inventory (20 × $5.50) ......................... Accounts Payable .........................
110
Accounts Receivable ......................... Sales (30 × $8.00)...........................
240
Cost of Goods Sold ............................ Inventory (30 × $5.60) ....................
168
Nov. 12
Debit
Credit
110
240 168
BRIEF EXERCISE 6-9 (a) (b) (c) (d)
FIFO Average cost Average cost FIFO
Solutions Manual .
6-16
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-10 (a)
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.
Solutions Manual .
6-17
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-11
2013 2014
Assets =
Liabilities +
Owner’s Equity
No Effect No Effect
No Effect No Effect
No Effect No Effect
2013 Beginning inventory + Purchases Cost of goods available for sale - Ending inventory Cost of goods sold
O $23,000
Sales - Cost of goods sold O $23,000
O $23,000
Gross profit/Profit
U $23,000
O $23,000
Note that the inventory error first occurred in 2012 and that 2012 profit and owner’s equity would be overstated by $23,000. The 2013 profit is understated $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 2013 is correct. The ending inventory is also correct at the end of 2013. 2014 Since the 2013 error reverses the impact of an error originally occurring in 2012, there would be no impact on the 2014 financial statements. 2014 profit, owner’s equity and ending inventory would all be correctly stated (assuming no new errors have occurred).
Solutions Manual .
6-18
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 2013 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 2013, if left uncorrected, will flow through in 2014. The 2013 error will affect the 2014 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 2014 ending inventory is correct. The 2013 error causes an understatement of 2013 profit of $7,000 and an overstatement of 2014 profit of $7,000, causing the total profit for the two-year period to be correct. This causes owner’s capital in 2014 to be correctly stated. Solutions Manual .
6-19
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-13 (a)
(b)
Inventory Categories
Cost
NRV
LCNRV
Computers Office equipment Printers Total
$24,000 19,000 14,000 $57,000
$21,500 19,500 10,600 $51,600
$21,500 19,000 10,600 $51,100
The entry to record the adjustment would be: Cost of goods sold ............................. 5,900 Merchandise inventory ............. 5,900 ($57,000 – $51,100)
BRIEF EXERCISE 6-14 The correct ending inventory should be $51,100. The correct cost of goods sold should be $424,400 ($418,500 + $5,900).
BRIEF EXERCISE 6-15 Inventory turnover = 8.4 times {$1,150,000 ÷ [($132,000 + $143,000) ÷ 2]} Days sales in inventory = 43.5 days (365 ÷ 8.4)
Solutions Manual .
6-20
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 6-16 The company’s inventory management has deteriorated in 2014. The inventory turnover ratio went from 9.1 in 2013 to 8.4 in 2014. The decrease in this ratio means that the company is selling its inventory fewer times in 2014 than in 2013. 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 2013 to 43.5 days in 2014. *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 Total 400
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
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Total Cost $1,600 1,050 $2,650
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 6-17 (Continued) (b) Average 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 average cost per unit to the nearest penny introduces a slight rounding difference).
*BRIEF EXERCISE 6-18 (a) and (b) FIFO Periodic and Average Periodic Date
Account Titles and Explanation
Debit
Jan. 3
Accounts Receivable ........................ Sales (550 × $6) ............................
3,300
Purchases (1,000 × $4) ...................... Accounts Payable ........................
4,000
15 Cash ................................................... Sales (850 × $7) ............................
5,950
9
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Credit
3,300
4,000 5,950
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 6-19 Net sales ............................................................................ $350,000 Less: Estimated gross profit (40% × $350,000) .............. 140,000 Estimated cost of goods sold ........................................... $210,000 Cost of goods available for sale ($60,000 + $250,000).. $310,000 Less: Estimated cost of goods sold ................................ 210,000 Estimated cost of ending inventory ................................. $100,000
*BRIEF EXERCISE 6-20 Goods available for sale Net sales Ending inventory at retail
At Cost
At Retail
$25,000
$40,000 30,000 $10,000
Cost-to-retail ratio = $25,000 ÷ $40,000 = 62.5% Estimated cost of ending inventory = $10,000 × 62.5% = $6,250
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Chapter 6
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 6-1 1.
Do not include in inventory – Shippers does not own items held on consignment for another company.
2.
Include in inventory – Shippers still owns the items as they were only shipped on consignment.
3.
Include in inventory – Because the shipping terms are FOB destination, Shippers owns the goods until they arrive at the customer’s premises.
4.
Do not include in inventory – Shipping terms FOB shipping point means that ownership transferred at the time of shipping and therefore, the customer owns the goods in transit.
5.
Do not include in inventory – Shipping terms FOB destination means that Shippers does not own the items until they reach them.
6.
Include in inventory – Because the shipping terms are FOB shipping point, Shippers owns the goods in transit.
7.
Include in inventory – Because the shipping terms are FOB shipping point, ownership has transferred to Shippers and Shipper pays the freight charges.
8.
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.
9.
Do not include in inventory – record as supplies on the balance sheet.
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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. No effect: Title passes to purchaser upon shipment when terms are FOB shipping point........ 0 4. Add to inventory: Consignor (Moghul) own goods. 30,500 5. Add to inventory: Title passed to Moghul when goods were shipped .................................................. 28,000 6. No effect: Title does not transfer to Moghul until goods are received.................................................... 0 $469,500
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Chapter 6
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Accounting Principles, Sixth Canadian Edition
EXERCISE 6-3 (a) Paul’s Paintings should use the specific identification instead of one of the cost formulas. Specific identification is required when a company sells items that are not interchangeable. In the case of paintings, these items are not interchangeable. Each painting, along with its cost, is identifiable from the name of the artist. (b) Painting 1 2 3 4 5
Cost $1,000 800 1,100 700 1,200 $4,800
Cost of Goods Sold $1,000
Ending Inventory $800 1,100 700
1,200 $2,200
$2,600
(c) Date
Account Titles and Explanation
Debit
Dec. 22
Cash or Accounts Receivable .......... Sales ($2,500 × 2)..........................
5,000
Cost of Goods Sold ........................... Merchandise Inventory ................ ($1,000 + $1,200)
2,200
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Credit
5,000
2,200
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-4 (a)
FIFO
Date May 1 3 4 14
Purchases Units Cost Total
300 1,300 700
$4.10 $4.40
Total
4.75
2,500
$1,200
3,080
100 900 400 500
$4.00
5,330
16 18 29
Cost of Goods Sold Units Cost Total
4.00 4.10 4.10
4,090 1,640
2,375 $10,785
1,700
$6,930
Units 400 100 100 1,300 100 1,300 700 400 700 700 700 500 1,200
Balance Cost $4.00 4.00 4.00 4.10 4.00 4.10 4.40 4.10 4.40 4.40 4.40 4.75
Total $1,600 400 5,730
8,810 4,720 3,080 5,455 $5,455
Check: $1,600 + $10,785 – $6,930 = $5,455
Solutions Manual © 2013John Wiley & Sons Canada, Ltd.
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Chapter 6 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-4 (Continued) (b) Date May
3
4
16
Account Titles and Explanation
Debit
Accounts Receivable ......................... Sales (300 × $7.00).........................
2,100
Cost of Goods Sold ............................ Inventory (300 × $4.00) ..................
1,200
Inventory (1,300 × $4.10) .................... Accounts Payable .........................
5,330
Accounts Receivable ......................... Sales (1,000 × $7.00)......................
7,000
Cost of Goods Sold ............................ Inventory ........................................ [(100 × $4.00) + (900 × $4.10)]
4,090
Credit
2,100
1,200
5,330
7,000
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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Accounting Principles, Sixth Canadian Edition
EXERCISE 6-5 (a)
Average
Purchases Cost Total
Cost of Goods Sold Units Cost Total
Date Units Jan. 1 Feb. 15 2,000 $18.00 $36,000 Apr. 24 2,500 16.000 Jun. 6 3,500 23.00 80,500 Oct. 18 2,000 22.125 Dec. 4 1,400 26.00 36,400 Total 6,900 $152,900 4,500 Check: $12,000 + $152,900 – $84,250 = $80,650
Units 1,000 3,000 40,000 500 4,000 44,250 2,000 3,400 $84,250 3,400
Balance Cost $12.000 (1) 16.000 16.000 (2) 22.125 22.125 (3) 23.721
Total $12,000 48,000 8,000 88,500 44,250 80,650 $80,650
(1) ($12,000 + $36,000) ÷ (1,000 + 2,000) (2) ($8,000 + $80,500) ÷ (500 + 3,500) (3) ($44,250 + $36,400) ÷ (2,000 + 1,400)
Solutions Manual © 2013John Wiley & Sons Canada, Ltd.
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Chapter 6 .
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-5 (Continued) (b) Date
Account Titles and Explanation
Debit
Credit
June 6
Inventory (3,500 × $23) ....................... 80,500 Accounts Payable .........................
80,500
Accounts Receivable ......................... 66,000 Sales (2,000 × $33).........................
66,000
Cost of Goods Sold ............................ 44,250 Inventory (2,000 × $22.125) ...........
44,250
Oct. 18
(c) Sales ([2,500 × $30] + $66,000) Cost of goods sold Gross profit
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6-30
$141,000 84,250 $56,750
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-6 (a)
(1) FIFO
Date July 1 July 12
Purchases Cost of Goods Sold Units Cost Total Units Cost Total 230
$6 $1,380
July 15 July 16 July 23
150 100 490
7
175
8
3,430 1,400
July 27 Total
895
$5 6 $1,350
$6,210
130 440 820
6 7
3,860 $5,210
Balance Units Cost Total 150 $5 $ 750 150 5 230 6 2,130 130 130 490 130 490 175 50 175 225
6 6 7 6 7 8 7 8
780 4,210
5,610 1,750 $1,750
Check: $750 + $6,210 – $5,210 = $1,750 (2) Average Purchases July 1 July 12 July 15 July 16 July 23 July 27 Total
230 490 175 _ 895
$6 7 8
Cost of Goods Sold
$1,380 3,430 1,400 _ $6,210
250 $5.605
$1,401
570 820
3,986 $5,387
6.993
150 380 130 620 795 225 225
Balance $5.000 $ 750 5.605 2,130 5.605 729 6.708 4,159 6.993 5,559 6.993 1,573 $1,573
Check: $750 + $6,210 – $5,387 = $1,573
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-6 (Continued) (b)
FIFO—Perpetual
Cost of Goods Sold Ending Inventory $5,210 $1,750
Average—Perpetual
$5,387
$1,573
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 $1,750 compared to $1,573 under average cost. (c) The average cost formula will produce the higher cost of goods sold for Dene Company. Under the 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 $5,387 compared to $5,210 under FIFO.
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-7 (a)
(1) FIFO
Date May 1 May 4
Purchases Cost of Goods Sold Units Cost Total Units Cost Total 480
$7 $3,360
May 11 May 12 May 17 May 22
350 160 (10) 150 475
6 5
May 29
Total
900 2,375
330 150 _200 $6,635 1,180
_ 1,105
$8 7 $3,920 7 (70)
7 6 5 _4,210 $8,060
Balance Units Cost Total 350 $8 $2,800 350 8 480 7 6,160 320 330 330 150 330 150 475
7 7 7 6 7 6 5
2,240 2,310
275 275
5 _1,375 $1,375
350 830 320 330 480 955 275 275
Balance $8.000 $2,800 7.422 6,160 7.422 2,375 7.422 2,449 6.977 3,349 5.994 5,724 5.994 _1,648 $1,648
3,210
5,585
Check: $2,800 + $6,635 – $8,060 = $1,375 (2) Average Purchases May 1 May 4 May 11 May 12 May 17 May 22 May 29 Total
480
150 475 1,105
Cost of Goods Sold
$7 $3,360
6 5
510 $7.422 (10) 7.422
$3,785 (74)
_680 5.994 $6,635 1,180
_4,076 $7,787
900 2,375
Check: $2,800 + $6,635 – $7,787 = $1,648
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-7 (Continued) (b)
FIFO $17,700 8,060 $ 9,640
Sales ($15 × 1,180) Cost of goods sold Gross profit
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 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. (c) The choice of inventory cost formula does not affect cash flow. It is an allocation of costs between inventory and cost of goods sold.
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-8 (a)
Ending inventory, incorrect Error Ending inventory, correct Cost of goods sold, incorrect Error – beginning inventory 2013 Error – ending inventory 2013 Error – ending inventory 2014 Cost of goods sold, correct (b)
2014 $30,000 $4,000 U $34,000
2013 $30,000 $5,500 O $24,500
$170,000 $5,500 O
$175,000 $5,500 U
$4,000 O $160,500
$180,500
In 2013 profit is overstated by $5,500, the amount of the error in ending inventory. This error flows through to owner’s equity in 2013 to produce an overstatement of $5,500. In 2014 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 2014 would show only an understatement of $4,000. The $5,500 overstatement of 2013 would be offset by the $5,500 understatement in profit caused by the impact on beginning inventory in 2014. 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.
(c)
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Chapter 6
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Accounting Principles, Sixth Canadian Edition
EXERCISE 6-9 (a) MARRAKESH COMPANY Income Statement (Partial) December 31 2014 2013 Sales................................................................. $500,000 $500,000 Cost of goods sold* ........................................ 430,000 390,000 Gross profit...................................................... $ 70,000 $110,000 * Cost of goods sold (2013) = $410,000 – $20,000 = $390,000 Cost of goods sold (2014) = $410,000 + $20,000 = $430,000 (b) The cumulative effect on total gross profit for the two years is zero, as shown below: 2014 2013 Incorrect gross profits: $90,000 + $90,000 = $180,000 Correct gross profits: $70,000 + $110,000 = 180,000 Difference $ 0 (c) Original Corrected
Solutions Manual .
2014 $90,000 ÷ $500,000 = 18% $70,000 ÷ $500,000 = 14%
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2013 $90,000 ÷ $500,000 = 18% $110,000 ÷ $500,000 = 22%
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-10 (a) Cost $67,450 19,800 2,585 16,800 $106,635
Laptop computers Monitors External hard drives Tablets Total inventory (b)
NRV $64,600 15,120 3,760 21,840 $105,320
LCNRV $64,600 15,120 2,585 16,800 $99,105
Cost of Goods Sold ....................................... 7,530 Inventory ($106,635 – $99,105) ..........
7,530
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
$ 9,000 6,800 15,800
2,970 4,300 7,270
2,728 4,400 7,128
2,728 4,300 7,028
$24,195
$23,353
$22,828
Cost of Goods Sold ....................................... 1,367 Inventory ($24,195 – $22,828) ............
1,367
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 ($22,828); (4) the cost of goods sold; and (5) the amount of the writedown to net realizable value ($1,367).
Solutions Manual .
Cost
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 6-12 (a) Inventory turnover
2014 2.00 times =
2013 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 (b)
($128,000 – $51,200) $128,000
Inventory turnover has increased from 1.60 (2013) to 2.00 (2014). As well, days sales in inventory has decreased from 228 days (2013) to 183 days (2014). 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 60.0%. The sales volume and cost of goods sold have also remained relatively constant from 2013 to 2014. 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.
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Chapter 6
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Accounting Principles, Sixth 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 Average 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
Average Check of Cost of Goods Sold: 65 units × $10.17 per unit = $661 (rounded)
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Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 6-14 (a) Cost of Goods Available for Sale Unit Total Date Units Cost Cost July 1 150 $5 $ 750 12 230 6 1,380 16 490 7 3,430 23 175 8 1,400 Total 1,045 $6,960 1.
FIFO Ending Inventory: Date
Units
Unit Cost
Total Cost
June 23 16
175 50 225
$8 7
$1,400 350 $1,750
Cost of Goods Sold: $6,960 – $1,750 = $5,210 Check of Cost of Goods Sold: Date
Units
June 1 12 16
150 230 440 820* * 820 = 1,045 – 225 2.
Unit Cost
Total Cost
$ 5 6 7
$ 750 1,380 3,080 $5,210
Average Average unit cost: $6,960 ÷ 1,045 units = $6.66 per unit Ending inventory: 225 units × $6.66 per unit = $1,499 Cost of goods sold: $6,960 – $1,499 = $5,461 Check of cost of goods sold: 820 units × $6.66 per unit = $5,461
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 6-14 (Continued) (b) The average cost is not $6.50 because the average cost method uses a weighted average unit cost, not a simple average of unit costs ($5 + $6 + $7 + $8 = $26 ÷ 4 = $6.50). (c)
FIFO—Periodic FIFO—Perpetual
Cost of Goods Sold $5,210 5,210
Ending Inventory $1,750 1,750
5,461 5,387
1,499 1,573
Average—Periodic Average—Perpetual
FIFO: The results are identical using either the periodic or the perpetual inventory systems. Average: Cost of goods sold is $74 lower and ending inventory $74 higher using a perpetual system. This is because in the perpetual system the higher priced purchases are only 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.
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Chapter 6
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 6-15 (a) FIFO
Date July 1 July 10 July 12 July 13 July 25 July 27 Total
Purchases Cost of Goods Sold Balance Units Cost Total Units Cost Total Units Cost Total 25 $295 $7,375 30 $300 $9,000 25 295 30 300 16,375 25 $295 13 300 3,900 17 300 $12,475 35 305 10,675 13 300 35 305 14,575 13 300 32 305 13,660 3 305 915 20 310 6,200 3 305 20 310 7,115 85 $25,875 87 $26,135 23 $7,115
Check: $7,375 + $25,875 – $26,135 = $7,115 Average
Date July 1 July 10 July 12 July 13 July 25 July 27 Total
Purchases Cost of Goods Sold Units Cost Total Units Cost Total 30 $300
$ 9,000 42 $297.727
35
305
10,675 45
20 85
310
6,200 $25,875
303.021
87
Units 25 55 $12,505 13 48 13,636 3 23 $26,141 23
Balance Cost Total $295.000 $7,375 297.727 16,375 297.727 3,870 303.021 14,545 303.021 909 309.087 7,109 $7,109
Check: $7,375 + $25,875 – $26,141 = $7,109
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 6-15 (Continued) (b) Cost of Goods Available Unit Total Date Units Cost Cost July 1 25 $295 $ 7,375 July 10 30 300 9,000 July13 35 305 10,675 July 27 20 310 6,200 Total 110 $33,250 FIFO Ending Inventory: Date
Units
Unit Cost
Total Cost
July 27 13
20 3 23
$310 305
$6,200 915 $7,115
Cost of Goods Sold: $33,250 – $7,115 = $26,135 Check of Cost of Goods Sold: Date
Units
Unit Cost
Total Cost
July 1 10 13
25 30 32 87
$295 300 305
$7,375 9,000 9,760 $26,135
Average Average cost per unit: $33,250 ÷ 110 units = $302.273 per unit Ending inventory: 23 × $302.273 = $6,952 (rounded) Cost of goods sold: $33,250 – $6,952 = $26,298 Check of cost of goods sold: 87 × $302.273 = $26,298 (rounded up)
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 6-16 (a)
Perpetual FIFO Dr. 9,000
July 10 Inventory Accounts Payable 12 Cash Sales
.
9,000 18,900
18,900 18,900
Cost of Goods Sold Inventory
12,475
13 Inventory Accounts Payable
10,675
25 Cash Sales
20,700
18,900 12,505
12,475
12,505 10,675
10,675
10,675 20,700
20,700
Cost of Goods Sold Inventory
13,660
27 Inventory Accounts Payable
6,200
Solutions Manual
Cr.
Average Dr. Cr. 9,000 9,000
20,700 13,636
13,660 6,200 6,200
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13,636 6,200
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*EXERCISE 6-16 (Continued) (b) Periodic FIFO Dr. 9,000
July 10 Purchases Accounts Payable
Average Dr. Cr. 9,000 9,000
Cr. 9,000
12 Cash Sales
18,900
13 Purchases Accounts Payable
10,675
25 Cash Sales
20,700
27 Purchases Accounts Payable
6,200
18,900 18,900
18,900 10,675
10,675
10,675 20,700
20,700
20,700 6,200
6,200
6,200
*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 .....................................
$25,000
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49,700 74,700 52,680 $22,020
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
*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, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 6-1A (a) 1.
Include the unsold portion of $510 ($875 – $365) in Kananaskis inventory. Title passes to the buyer on sale.
2.
Exclude the items from Kananaskis’ inventory. These goods have been sold.
3.
Exclude the items from Kananaskis’ 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.
Kananaskis 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 Kananaskis 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 Kananaskis’ inventory at the end of February.
(b)
$65,000 +510 +950 +405 +630 $67,495
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Original Feb. 28 inventory valuation 1. 4. 5. 6. Revised Feb. 28 inventory valuation
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Accounting Principles, Sixth 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, Sixth Canadian Edition
PROBLEM 6-2A (a) Model 8 Corolla Camry 18 Camry Venza Tundra
Nov.
(b)
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
Gross profit = $137,000 – $123,000 = $14,000
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, Sixth Canadian Edition
PROBLEM 6-3A (a) Date Nov. 1 9
Purchases Units Cost Total 100
$46
$4,600
150
44
6,600
30
45
42
1,890
Total
295
15 16 22 29
$13,090
Cost of Goods Sold Balance Units Cost Total Units Cost Total 60 $50 $3,000 60 50 100 46 7,600 60 $50 60 $5,760 40 46 1,840 46 (5) 46 (230) 45 46 2,070 45 46 150 44 8,670 45 46 7,130 35 44 1,540 115 44 35 44 45 42 3,430 275 $12,660 80 $3,430
Check: $3,000 + $13,090 – $12,660 = $3,430 (b) Nov. 22
29
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Merchandise Inventory ...................... Accounts Payable (150 × $44) ......
6,600
Accounts Receivable ......................... Sales (160 × $60)............................
9,600
Cost of Goods Sold ............................ Inventory [(45 × $46) + (115 × $44)]
7,130
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6,600
9,600 7,130
Chapter 6
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 6-3A (Continued) (c) Sales ([120 × $66] + $9,600) Less: Sales returns and allowances (5 × $66) Net sales Cost of goods sold Gross profit (d)
$17,520 (330) 17,190 12,660 $ 4,530
The entry to record the adjustment would be: Cost of Goods Sold (2 × $44)............. Merchandise Inventory .................
88 88
Revised gross profit would be: $4,530 – $88 = $4,442 (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, Sixth Canadian Edition
PROBLEM 6-4A (a) Purchases Date Units Cost Total Nov. 1 9 100 $46 $4,600 15 16 22 150 44 6,600 29 30 45 42 1,890 Total 295 $13,090
Cost of Goods Sold Balance Units Cost Total Units Cost Total 60 $50.00 $3,000 160 47.50 7,600 120 $47.50 $5,700 40 47.50 1,900 (5) 47.50 (238) 45 47.50 2,138 195 44.81 8,738 160 44.81 7,170 35 44.81 1,568 80 43.23 3,458 275 $12,632 80 $3,458
Check: $3,000 + $13,090 – $12,632 = $3,458 (b) Nov. 15
Accounts Receivable ......................... Sales (120 × $66)............................
7,920
Cost of Goods Sold ............................ Inventory (120 × $47.50) ................
5,700
16 Sales Returns and Allowances.......... Accounts Receivable (5 × $66) .....
330
Inventory ............................................. Cost of Goods Sold (5 × $47.50)...
238
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7,920
5,700
330 238
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Accounting Principles, Sixth Canadian Edition
PROBLEM 6-4A (Continued) (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. Orhas the physical flow of inventory has changed from average flow to FIFO? Comparison FIFO Ending Cost of Inventory Goods Sold $3,430 $12,660
Average Ending Cost of Inventory Goods Sold $3,458 $12,632
If prices continue to fall, the FIFO cost formula will continue to yield lower ending inventory and higher cost of goods sold than the average cost formula. 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, Sixth Canadian Edition
PROBLEM 6-5A (a)
(1) FIFO
Purchases Date Units Cost Total June 1 4 18 5 $115 $575
Cost of Goods Sold Units Cost Total
30 July 5
5
120
10
$210
3 3
660
105 115
600
12 25 Total
2 $105
2 1 2 13
$1,175
115 120 120
350 240 $1,460
Balance Units Cost Total 5 $105 $525 3 105 315 3 105 5 115 890 2 2 5
115 115 120
230
4 2 2
120 120
480 240 $240
830
Check: $525 + $1,175 – $1,460 = $240 (2)
Average
Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total June 1 5 $105.00 $525 4 2 $105.00 $210 3 105.00 315 18 5 $115 $ 575 8 111.25 890 30 6 111.25 668 2 111.25 223 July 5 5 120 600 7 117.50 823 12 3 117.50 353 4 117.50 470 25 2 117.50 235 2 117.50 235 Total 10 $1,175 13 $1,465 2 $235 Check: $525 + $1,175 – $1,465 = $235
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Accounting Principles, Sixth Canadian Edition
PROBLEM 6-5A (Continued) (b) Sales* ............................................................... Cost of goods sold.......................................... Gross profit......................................................
FIFO
Average
$3,105 1,460 $1,645
$3,105 1,465 $1,640
* Sales = (2 × $210) + (6 × $235) + (3 × $255) + (2 × $255) (c) The choice of inventory cost formula does not affect cash flow. It is an allocation of costs between inventory and cost of goods sold. 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, Sixth Canadian Edition
PROBLEM 6-6A (a) Purchases Cost of Goods Sold Date Units Cost Total Units Cost Total July 1 5 55 $9 $495 8 70 $9.31 $652 10 (15) 9.31 (140) 15 50 8 400 16 (10) 8 (80) 20 55 8.51 468 25 10 7 70 _ _ Total 105 $885 110 $980
Units 25 80 10 25 75 65 10 20 20
Balance Cost Total $10.00 $250 9.31 745 9.31 93 9.31 233 8.44 633 8.51 553 8.51 85 7.75 155 $155
Check: $250 + $885 – $980 = $155 GENERAL JOURNAL Date July
Account Titles and Explanation 5
8
10
Solutions Manual .
Debit
Merchandise Inventory (55 × $9).. Cash ..........................................
495
Cash (70 × $15) ............................. Sales..........................................
1,050
Cost of Goods Sold (70 × $9.31) .. Merchandise Inventory ............
652
495
1,050
652
Sales Returns and Allowances (15 × $15) ............................ Cash ..........................................
225
Merchandise Inventory (15 × $9.31) Cost of Goods Sold ..................
140
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Credit
225 140
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Accounting Principles, Sixth Canadian Edition
PROBLEM 6-6A (Continued) (a) (Continued) 15
16
20
25
Merchandise Inventory (50 × $8).. Cash .........................................
400
Cash (10 × $8) ............................... Merchandise Inventory ...........
80
Cash (55 × $12) ............................. Sales ........................................
660
Cost of Goods Sold (55 × $8.51) .. Merchandise Inventory ...........
468
Merchandise Inventory (10 × $7).. Cash .........................................
70
400
80
660
468 70
(b)
The ending inventory is 20 units × $7.75 = $155
(c)
Since cost is less than net realizable value, no entry is required to adjust the amount to lower of cost and net realizable value. Cost: 20 × $7.75 = $155 Net realizable value: 20 × $8 = $160
(d) The ending inventory should be valued at $155, the lower of cost and net realizable value. The cost of goods sold is $980 ($652 – $140 + $468). Taking It Further: If Amelia had used FIFO instead of 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. Solutions Manual .
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PROBLEM 6-7A (a)
As reported Impact of Dec.31/2012 Inventory overstatement Correct amount
As reported Impact of Dec.31/2012 Inventory overstatement Impact of Dec.31/2013 Inventory understatement Correct amount
As reported Impact of Dec.31/2013 Inventory understatement Correct amount
Solutions Manual .
Year Ended December 31, 2012 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, 2013 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, 2014 Total Owner's Cost of Assets Equity goods sold $ 925,000 $ 750,000 $ 550,000
$
NE 925,000
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$
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, Kinnear, Barlow
Accounting Principles, Sixth 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, 2012, 2013 and 2014.
Taking It Further: Part (a) shows that even though inventory and owner’s equity are correct, the income statement shows the impact of the 2013 error on cost of goods sold and profit. In addition, comparative amounts for 2013 and 2012 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, Sixth Canadian Edition
PROBLEM 6-8A (a)
(Incorrect) ALYSSA COMPANY Income Statement Year Ended July 31 2014 2013 2012 $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 (Correct)
ALYSSA COMPANY Income Statement Year Ended July 31 2014 2013 2012 $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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Accounting Principles, Sixth Canadian Edition
PROBLEM 6-8A (Continued) (b) The impact of these errors on owner’s equity at July 31, 2014is 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 increased slightly in 2013 and increased substantially in 2014. (c)
Inventory turnover = Cost of goods sold ÷ Average inventory Incorrect 2013: $235,000 ÷ [($45,000 + $35,000) ÷ 2] = 5.88 2014: $245,000 ÷ [($55,000 + $45,000) ÷ 2] = 4.90 Correct 2013: $240,000 ÷ [($40,000 + $35,000) ÷ 2] = 6.40 2014: $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 2012 to $19,000 in 2013 and then to $29,000 in 2014. The corrected profit also shows an increase in profitability but with a slow rate of increase from 2012 to 2013 and a much sharper increase from 2013 to 2014. Profits increased from $9,000 to $14,000 in 2013 and subsequently increased to $34,000 in 2014. 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 tied to trends in profitability, or income smoothing, then it may be possible the errors were deliberate.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 6-9A (a)
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
(1) Sept. 30 (2) Oct. 31 (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 write-down 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, Sixth Canadian Edition
PROBLEM 6-10A (a) PepsiCo. Inc Inventory turnover Days sales in inventory Current ratio Acid-test ratio Gross profit margin Profit margin
Solutions Manual .
2011
2010
$31,593 $3,827 $3,372) 2 8.78 times 365
41.6 days
8.78 times
$26,575 $3,372 $2,618) 2 8.87 times 365 41.1 days 8.87 times $17,569 1.11:1 $15,892 $6,369 $6,323) $15,892 0.80 :1
$17,441 0.96 : 1 $18,154 $4,425 $6,912) $18,154 0.62 : 1 $66,504 $31,593 $66,504 52.5% $6,462 9.7% $66,504
$57,838 $26,575 $57,838 54.1% $6,338 11.0% $57,838
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PROBLEM 6-10A (Continued) (a)(Continued) Coca- Cola Company Inventory turnover Days sales in inventory Current ratio Acid-test ratio
Gross profit margin Profit margin
Solutions Manual .
2011
2010
$18,216 ($3,092 $2,650) 2 6.34 times
365
57.5 days
$12,693 ($2,650 $2,354) 2 5.07 times
365
71.9 days
6.34 times
5.07 times
$25,497 1.05 : 1 $24,283 ($14,035 $4,920) $24,283
$21,579 1.17 : 1 $18,508
0.78 : 1 $46,542 $18,216 $46,542 60.9% $8,634 18.6% $46,542
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($11,337 $4,430) $18,508 0.85 : 1 $35,119 $12,693 $35,119 63.9% $11,859 33.8% $35,119
Chapter 6
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Accounting Principles, Sixth Canadian Edition
PROBLEM 6-10A (Continued) (b) PepsiCo’s liquidity has decreased slightly. Its current ratio has decreased from 1.11:1 to 0.96:1and the acid-test ratio has also decreased over the same time period. Its inventory turnover and days sales in inventory showed a slight deterioration for the two years. PepsiCo’s results for 2010 and 2011 shows a slight decline in the gross profit margin from 54.1% to52.5% respectively and shows deterioration of the profit margin from 11.0% and 9.7% respectively. Overall, liquidity and profitability have decreased slightly for PepsiCo from 2010 to 2011. Coca-Cola’s liquidity has also decreased slightly, although it is at higher levels than PepsiCo’s. Its current ratio was 1.17:1 in 2010and it decreased marginally from 2010 to 2011. The acid-test ratio also shows deterioration from 0.85:1 in 2010 to 0.78 in 2011. Its inventory turnover and days sales showed a significant improvement for the two years. Inventory turnover improves when cost of sales increases or inventory decreases. By examining the amounts, we can see that cost of sales increased substantially in 2011 while the level of inventory remained relatively stable. Although Coca-Cola was profitable in both years, its profitability declined from 2010 to 2011. Its gross profit margin deteriorated from 63.9% in 2010 to 60.9% in 2011 and its profit margin decreased from 33.8% to 18.6%. This decline in profitability is due to higher cost of sales. 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’s showed a less dramatic deterioration to liquidity and profitability than Coca-Cola, it is substantially less profitable and has a lower liquidity. It would be useful to know if their accounting polices differ in any significant ways.
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PROBLEM 6-10A (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 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, snack and other foods. A cost formula such as 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)
Costof Goods Available for Sale Date Jan. 1 Mar. 15 July 20 Sept. 4 Dec. 2 Total
Explanation Units Unit Cost Total Cost Beginning inventory 300 $21 $ 6,300 Purchase 800 20 16,000 Purchase 600 19 11,400 Purchase 250 18 4,500 Purchase 100 17 1,700 2,050 $39,900
(b) Number of units sold = 2,050 units available for sale – 350 units on hand at the end of the year = 1,700 units sold Sales = 1,700 units × $33 = $56,100 (c)
(1) FIFO Ending Inventory: Date Units Dec. 2 100 Sep. 4 250 350
Unit Cost $ 17 18
Total Cost $1,700 4,500 $6,200
Cost of goods sold: $39,900 – $6,200 = $33,700 Check of cost of goods sold: Date Units Unit Cost Total Cost Jan. 1 300 $21 $ 6,300 Mar.15 800 20 16,000 July 20 600 19 11,400 1,700* $33,700 *1,700 = 2,050 – 350
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*PROBLEM 6-11A (Continued) (c) (Continued) (2) Average Average unit cost: $39,900 2,050 units = $19.46 per unit Ending Inventory: 350 units × $19.46 per unit = $6,811 Cost of Goods Sold: $39,900 – $6,811 = $33,089 Check of cost of goods sold: 1,700 units × $19.46 per unit = $33,082 (difference due to rounding). (d) Sales revenue (1,700 × $33) Cost of goods sold Gross profit
FIFO Average $56,100 $56,100 33,700 33,089 $22,400 $23,011
Taking It Further: Wolick Company should continue to use the 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.
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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 Check of cost of goods sold: Date Units Unit Cost July 1 400 $3.00 10 1,300 3.10 1,700
Total Cost $1,200 4,030 $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
Date July 1 2 10
Purchases Units Cost
Total
300 1,300
$3.10
27
100 900 700 600
3.40 3.75
3.00 3.10
3,090
2,250
400 2,600
$ 900
2,380
28 Total
$3.00
$4,030
11 13
Cost of Goods Sold Units Cost Total
$8,660
3.10
1,700
1,240 $5,230
Balance Units Cost 400 $3.00 100 3.00 100 3.00 1,300 3.10 400 400 700 400 700 600 700 600 1,300
3.10 3.10 3.40 3.10 3.40 3.75 3.40 3.75
Total $1,200 300 4,330 1,240 3,620
5,870 4,630 $4,630
Check: $1,200 + $8,660 = $5,230 + $4,630 Sales revenue Cost of goods sold Gross profit
Solutions Manual © 2013John Wiley & Sons Canada, Ltd.
$10,400 5,230 $ 5,170
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*PROBLEM 6-12A (Continued) (d) (1) FIFO periodic GENERAL JOURNAL Date
Account Titles and Explanation
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 and Explanation
July 10
11
(e)
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
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.
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*PROBLEM 6-12A (Continued) Taking It Further: Companies are required to disclose their inventory cost determination method (FIFO, 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 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 6-13A (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) 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 Check of cost of goods sold: 50b × $1,300 = $65,000 b 50 = 15 + 35 Sales revenue Cost of goods sold Gross profit
$100,000 * 65,000 $ 35,000
*(15 × $2,000) + (35 × $2,000)
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*PROBLEM 6-13A (Continued) (c) Average—perpetual
Purchases Cost of Goods Sold Balance Cost Total Units Cost Total Units Cost Total $1,000 $10,000 10 $1,000 $10,000 1,200 12,000 20 1,100 22,000 15 $1,100 $16,500 5 1,100 5,500 1,300 19,500 20 1,250 25,000 1,500 30,000 40 1,375 55,000 35 1,375 _48,125 5 1,375 6,875 $71,500 50 $64,625 5 $6,875
Date Units Jan. 5 10 Jun. 11 10 Jul. 4 Oct . 18 15 Dec. 20 20 Dec. 29 Total 55
Check $71,500 = $64,625 + $6,875 Sales revenue Cost of goods sold Gross profit
$100,000 64,625 $ 35,375
(d) (1) Average periodic
GENERAL JOURNAL Date
Account Titles and Explanation
Dec. 20
29
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Debit
Purchases ..................................... Cash (20 × $1,500) ....................
30,000
Cash (35 × $2,000)......................... Sales..........................................
70,000
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30,000 70,000
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*PROBLEM 6-13A (Continued) (d) (Continued) (2) Average perpetual GENERAL JOURNAL Date
Account Titles and Explanation
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 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 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 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 average method. In a period of increasing prices, the perpetual average method will yield higher ending inventory, but lower cost of goods sold and higher gross profit than the periodic average method. Although applying the perpetual 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 systemand 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) ....................................... Less: Estimated gross profit (35.6% × $938,790) .......... Estimated cost of goods sold ........................................
$938,790 334,209 $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 Kananaskis Company not Banff Company and should not be included in Banff 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 Banff 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 Banff’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. 9. 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 (a)
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
(b) Gross profit = $202,550 – $186,300 = $16,250 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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PROBLEM 6-3B (a) Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total June 1 20 $50.00 $1,000 4 85 $55 $4,675 105 54.05 5,675 10 90 $54.05 $4,864 15 54.05 811 18 35 58 2,030 50 56.81 2,841 25 30 56.81 1,705 20 56.81 1,136 26 (5) 56.81 (284) 25 56.81 1,420 28 15 60 900 40 58.01 2,320 30 135 $7,605 115 $6,285 40 $2,320 Check: $1,000 + $7,605 – $6,285 = $2,320 (b) June 10 Accounts Receivable ......................... Sales (90 × $90) .............................
18
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8,100 8,100
Cost of Goods Sold ............................ 4,864 Merchandise Inventory (90 × $54.05)
4,864
Merchandise Inventory ...................... Accounts Payable (35 × $58) ........
2,030
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PROBLEM 6-3B (Continued) (c)
The entry to record the adjustment would be: Cost of Goods Sold ($58.01 × 3) ........ Merchandise Inventory .................
174 174
(d) The merchandise inventory on the balance sheet would be overstated by $174, 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. This would lead to an overstatement of gross profit by $174 and of profit by $174. Taking It Further: The average cost formula produces the more meaningful profit because average costs are matched against current revenues (sales).
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PROBLEM 6-4B (a)
Date June 1
Purchases Cost of Goods Sold Balance Units Cost Total Units Cost Total Units Cost Total
4
85
$55 $4,675
10 18
35
15 135
$50 55 $4,850
15 15 (5)
55 58 58
58 2,030
25 26 28 30
20 70
60
900 $7,605
115
1,695 (290)
$6,255
20 20 85
$50 $1,000 50 55 5,675
15 15 35
55 825 55 58 2,855
20 25 25 15 40
58 1,160 58 1,450 58 60 2,350 $2,350
Check: $1,000 + $7,605 – $6,255 = $2,350 (b) June 25 Accounts Receivable ......................... Sales (30 × $95) .............................
2,850
Cost of Goods Sold ............................ Merchandise Inventory ................. ([15 × $55] + [15 × $58])
1,695
Sales Returns and Allowances.......... Accounts Receivable (5 × $95) .....
475
Merchandise Inventory ...................... Cost of Goods Sold (5 × $58)........
290
26
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1,695
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PROBLEM 6-4B (Continued) (c)
Comparison FIFO Ending Cost of Inventory Goods Sold $2,350 $6,255
Average Ending Cost of Inventory Goods Sold $2,320 $6,285
If prices continue to rise, the FIFO cost formula will continue to yield higher ending inventory and lower cost of goods sold than the average cost formula.
Taking It Further: Before making the change to the average cost formula, the company must consider if the average formula would result in more relevant information in the financial statements. For example, has the physical flow of inventory has changed from FIFO to 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 36 $21 $756 7 18 $21 $ 378 18 21 378 18 21 23 50 $20 $1,000 1,378 50 20 18 21 26 18 20 360 32 20 1,018 18 20 Mar.10 24 19 456 24 19 816 18 20 14 19 23 626 10 19 _190 74 $1,456 100 $2,022 10 $190 Check: $756 + $1,456 – $2,022 = $190 (2) Average
Date Feb. 1 7 23 26 Mar. 10 23
Purchases Unit Cost Total
50 24 74
Cost of Goods Sold Balance Unit Cost Total Units Cost Total 36 $21.000 $756 18 $21.000 $ 378 18 21.000 378 $20 $1,000 68 20.265 1,378 50 20.265 1,013 18 20.265 365 19 456 42 19.548 821 _ 32 19.548 626 10 19.548 195 $1,456 100 $2,017 10 $195
Check: $756 + $1,456 – $2,017 = $195
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PROBLEM 6-5B (Continued) (b) FIFO Average Sales................................................................. Cost of goods sold.......................................... Gross profit......................................................
$3,004 2,022 982
$3,004 2,017 987
* Sales = (18 × $32) + (50 × $30) + (32 × $29) (c)
The choice of inventory cost formula does not affect cash flow. It is an allocation of costs between inventory and cost of goods sold.
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 and Explanation Oct. 5 8
10
15 16 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
Sales Returns and Allowances .. Cash (25 × $20) .......................
500
Merchandise Inventory (25 × $13) Cost of Goods Sold................
325
Merchandise Inventory (35 × $12) Cash ........................................
420
Cash (5 × $12) .............................. Merchandise Inventory ..........
60
Cash (70 × $16) ............................ Sales .......................................
1,120
Cost of Goods Sold..................... Merchandise Inventory .......... (55 × $13) + (15 × $12)
895
Merchandise Inventory (15 × $11) Cash ........................................
165
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1,430 2,800 1,880
500 325 420 60 1,120 895
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PROBLEM 6-6B (Continued) (b)
Ending Inventory (FIFO): Date Units Unit Cost Oct. 25 15 $ 11 15 15 12 30*
Total Cost $165 180 $345
*30 = 60 + 110 – 140 + 25 + 35 – 5 – 70 + 15 (c)
Cost: $345 Net realizable value: 30 × $10 = $300 The inventory should be valued at its net realizable value of $300. This is the lower of cost and net realizable value. Cost of Goods Sold ($345 – $300) .... Merchandise Inventory .................
45 45
(d)
The cost of goods sold is $2,495: Cost of goods sold per (a)* Plus: write down to NRV ($345 – $300) Cost of goods sold reported on the income statement
$2,450 45 $2,495
*$2,450 = $1,880 – $325 + $895
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PROBLEM 6-6B (Continued) Taking It Further: Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Oct 1 60 $14.00 5 110 $13 $1,430 170 13.35 8 140 $13.35 $1,869 30 13.35 10 (25) 13.35 (333) 55 13.35 15 35 12 420 90 12.82 16 (5) 12 (60) 85 12.87 20 70 12.87 901 15 12.87 25 15 11 165 _ _ 30 11.93 Total 155 $1,955 185 $2,437 30
Total $840 2,270 401 734 1,154 1,094 193 358 $358
Check: $840 + $1,955 – $2,437 = $358 The ending inventory cost under the average cost formula is $358. The October 31 balance sheet amount would be $300, the lower of cost and net realizable value. The balance sheet amount is the same because net realizable value is lower than cost under both cost formulae.
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PROBLEM 6-7B (a)
Year Ended December 31, 2012
As reported
Total Assets $525,000
Owner's Cost of Equity goods sold $250,000 $ 300,000
Profit $ 40,000
Impact of Dec. 31/12 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, 2013 Total Owner's Cost of Assets Equity goods sold $575,000 $275,000 $335,000
Profit $ 50,000
As reported
Impact of Dec. 31/12 Inventory overstatement
NE
NE
O 20,000
U 20,000
Impact of Dec. 31/13 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, 2014
As reported
Total Assets $600,000
Owner's Cost of Equity goods sold $280,000 $315,000
Profit $ 60,000
Impact of Dec. 31/13 Inventory understatement Correct amount
NE $600,000
NE $280,000
O 30,000 $ 30,000
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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, 2012, 2013 and 2014.
Taking It Further: Part (a) shows that even though inventory and owner’s equity are correct, the income statement shows the impact of the 2013 error on cost of goods sold and profit. In addition, comparative amounts for 2013 and 2012 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 2014 2013 2012 $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 (Correct)
JAMES COMPANY Income Statement Year Ended July 31 2014 2013 2012 $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
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PROBLEM 6-8B (Continued) (b) The combined effect of the errors at July 31, 2014 before correction is nil. The error in 2013 closing inventory is offset by the error in 2014 opening inventory and the error in the 2012 purchases is offset by the error in 2013 purchases. The trend over the three years is completely opposite using the incorrect numbers as compared to the correct numbers. (c)
Inventory turnover ratio = Cost of goods sold ÷ Average inventory Incorrect 2013: $510,000 ÷ [($60,000 + $70,000) ÷ 2] = 7.85 2014: $540,000 ÷ [($40,000 + $60,000) ÷ 2] = 10.80 Correct 2013: $500,000 ÷ [($70,000 + $40,000) ÷ 2] = 9.09 2014: $520,000 ÷ [($40,000 + $40,000) ÷ 2] = 13.0
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PROBLEM 6-8B (Continued) Taking it Further: The incorrect annual profits show a decreasing trend of profitability with profits decreasing from $20,000 in 2012 to $14,000 in 2013 and then to $8,000 in 2014. 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 2013and then to a profit of $28,000 in 2014. It is not possible to determine if the errors weredeliberate or not. Certain factors can indicate a higher likelihood that the errors are deliberate. Management bonuses tied to trends in profitability, or a desire to maintain profitability every year may 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) June30 No entry (2) July 31 Cost of Goods Sold .................. 403,000 Merchandise Inventory ....... ($4,216,000 – $3,813,000) (c)
An adjusting entry is required at August 31 because the inventory, on which a previous write-down 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. Inventory turnover Days sales in inventory Current ratio Acid-test ratio
Gross profit margin Profit margin
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2012
2011
$46,133 ($10,325 $10,625) 2 4.40 times 365 82.9 days 4.40 times
$44,693 ($10,625 $10,188) 2 4.29 times 365 85.0 days 4.29 times
$14,520 1.55 : 1 $9,376 ($1,987 $1,245) $9,376 0.34 : 1 $70,395 $46,133 $70,395 34.5% $3,883 5.5% $70,395
$13,479 1.33 : 1 $10,122 ($545 $1,085) $10,122 0.16 : 1 $67,997 $44,693 $67,997 34.3% $3,338 4.9% $67,997
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PROBLEM 6-10B (Continued) (a) (Continued) Lowe’s Companies Inc. Inventory turnover Day sales in inventory
Current ratio Acid-test ratio Gross profit margin Profit margin
(b)
2012
2011
$32,858 $31,663 ($8,355 $8,321) 2 ($8,321 $8,249) 2 3.94 times 3.82 times 365 365 95.5 days 92.6 days 3.82 times 3.94 times
$10,072 1.28 : 1 $7,891 $1,300 0.16 : 1 $7,891 $50,208 $32,858 $50,208 34.6% $1,839 3.7% $50,208
$9,967 $7,119 $1,123
1.40 : 1 0.16 : 1
$7,119 $48,815 $31,663 $48,815 35.1% $2,010 4.1% $48,815
Home Depot’s liquidity showed improvement from 2011 to 2012. Its current ratio is more than 1:1 and it increased from 2011 to 2012. The acid-test ratio was very low in 2011 but it increased over the same time period. It would be helpful to have industry statistics to determine if the low acid-test ratio is normal for companies in this industry. Its inventory turnover and days sales in inventory showed a slight improvement for the two years. Home Depot’s show a stable gross profit margin of 34.3% and 34.5% and a substantial increase in overall profitability as its profit margin increased from4.9% to 5.5%.
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PROBLEM 6-10B (Continued) (b)
(Continued) While Home Depot showed improvements in both its liquidity and profitability, Lowe’s showed deterioration in both liquidity and profitability. Its current ratio was 1.40:1 in 2011 and it decreased to 1.28:1 in 2012. The acid-test ratio remained stableat 0.16:1 for both years,but is very low and we would benefit from being able to compare it to industry averages. Its inventory turnover and days sales showed a slight improvement for the two years. Lowe’s showed a decline in profitability. Its gross profit margin was decreased from 35.1 in 2011to 34.6 in 2012 with a substantial decline in overall profitability from 4.1% in 2011 to 3.7% in 2012. 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. They have similar liquidity and profitability ratios. Lowe’s appears to have less liquidity than Home Depot with lower current and acid-test ratios, and lower inventory turnover. Lowe’s has a similar gross profit and profit margins than Home Depot. It would be useful to know if their accounting polices differ in any significant ways.
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PROBLEM 6-10B (Continued) Taking It Further: A 53 week year for 2012 affects the calculation of the inventory turnover and the days sales in inventory. A 53week year means that cost of sales is proportionately higher in 2012 than in 2011 because it contains an extra week of sales transactions. This would cause an increase in the inventory turnover and a decrease in the days sales in inventory. The extra week would not affect the current ratio, acid-test ratio, gross profit margin and profit margin. The extra week would affect the comparison of the inventory turnover trend and days sales in inventory in comparing with Home Depot. This should be recorded in the notes to the financial statements.
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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 $30 $ 4,500 Purchase 700 35 24,500 Purchase 400 39 15,600 Purchase 300 45 13,500 Purchase 250 47 11,750 1,800 $69,850
(b) Number of units sold = 1,800 units available for sale – 200 units on hand at the end of the year = 1,600 units sold Sales = 1,600 units × $72 = $115,200 (c)
(1) FIFO Ending Inventory: Date Units Oct. 26 200 200
Unit Cost $47
Total Cost 9,400 $9,400
Cost of goods sold: $69,850 – $9,400 = $60,450 Check of cost of goods sold: Date Units Unit Cost Jan. 1 150 $30 Feb. 17 700 35 Apr. 12 400 39 Jul. 10 300 45 Oct. 26 50 47 1,600*
Total Cost $ 4,500 24,500 15,600 13,500 2,350 $60,450
*1,600 = 1,800 – 200
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*PROBLEM 6-11B (Continued) (c) (Continued) (2) AVERAGE Average unit cost: $69,850 1,800 units = $38.81 per unit Ending Inventory: 200 units × $38.81 per unit = $7,762 Cost of Goods Sold: $69,850 – $7,762 = $62,088 Check of cost of goods sold: 1,600 units × $38.81 per unit = $62,096 (difference due to rounding). (d) Sales revenue (1,600 × $72) Cost of goods sold Gross profit
FIFO $115,200 60,450 $54,750
Average $115,200 62,088 $53,112
Taking It Further: Chan Company 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 income tax purposes. 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) Average cost per unit: $15,180 ÷ 3,500 = $4.337
Ending inventory = 800 × $4.337 = $3,470 Cost of goods sold = $15,180 – $3,470 = $11,710 Check of cost of goods sold: 2,700 × $4.337 = $11,710* * Difference due to rounding of average cost per unit. Sales revenue Cost of goods sold Gross profit
$19,600 * 11,710 $ 7,890
*(300 × $7.00) + (1,000 × $7.00) + (1,400 × $7.50)
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*PROBLEM 6-12B (Continued)
(c) Average—perpetual
Purchases Units Cost Total
Date Apr. 1 2 10 11 25 27 29 Total
1,300 1,200 600 3,100
$4.10 4.50 4.75
Cost of Goods Sold Units Cost Total 300
$4.00
$1,200
1,000
4.093
4,093
1,400 2,700
4.494
6,292 $11,585
$5,330 5,400 2,850 $13,580
Units 400 100 1,400 400 1,600 2,200 800 800
Balance Cost Total $4.000 $1,600 4.000 400 4.093 5,730 4.093 1,637 4.398 7,037 4.494 9,887 4.494 3,595 $3,595
Check $1,600 + $13,580 = $11,585 + $3,595 Sales revenue Cost of goods sold Gross profit
$19,600 11,585 $ 8,015
(d) (1) Average periodic
GENERAL JOURNAL Date
Account Titles and Explanation
April 25
29
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Purchases ..................................... Cash (1,200 × $4.50) .................
5,400
Cash (1,400 × $7.50)...................... Sales..........................................
10,500
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5,400 10,500
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*PROBLEM 6-12B (Continued) (d) (2) Average perpetual GENERAL JOURNAL Date
Account Titles and Explanation
April 25 29
Debit
Credit
Merchandise Inventory ................. Cash (1,200 × $4.50) .................
5,400
Cash (1,400 × $7.50)...................... Sales..........................................
10,500
5,400 10,500
Cost of Goods Sold (1,400 × $4.494) 6,292 Merchandise Inventory ............
6,292
(e) Comparison: Perpetual $3,595 11,585 8,015
Ending inventory Cost of goods sold Gross profit
Periodic $3,470 11,710 7,890
The numbers are different. Using the perpetual system, the 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, 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 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 Check of cost of goods sold: Date Units Unit Cost Total Cost Feb. 7 20 $100 $ 2,000 Apr. 12 20 120 2,400 Jul. 18 25 130 3,250 Oct. 26 20 150 3,000 85 $10,650 Sales revenue Cost of goods sold Gross profit
$12,200 * 10,650 $ 1,550
*(35 × $120.00) + (50 × $160.00)
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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. 7 20 $100 $2,000 20 $100 $2,000 Apr. 12 20 120 2,400 20 100 20 120 4,400 Apr. 30 20 $100 15 120 $ 3,800 5 120 600 Jul. 18 25 130 3,250 5 120 25 130 3,850 Oct. 26 40 150 6,000 5 120 25 130 40 150 9,850 Nov. 12 5 120 25 130 20 150 6,850 20 150 3,000 Total 105 $13,650 85 $10,650 20 $3,000 Check: $13,650 = $10,650 + $3,000 Sales revenue Cost of goods sold Gross profit
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*PROBLEM 6-13B (Continued) (d) (1) FIFO periodic GENERAL JOURNAL Date
Account Titles and Explanation
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 and Explanation
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........................................................ Net Purchases ($197,000 – $4,940) .................. $192,060 Add: Freight in ................................................... 3,940 Cost of goods purchased ............................................... Cost of goods available for sale..................................... Less: Estimated cost of goods sold .............................. Estimated total cost of ending inventory ...................... Less: Inventory not lost (20% × $37,565)....................... Estimated inventory lost in fire (80% × $37,565) ...........
$26,200
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196,000 222,200 184,635 37,565 7,513 $ 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 Cost Retail Beginning inventory $ 55,600 $ 98,000 Purchases 775,000 1,445,000 Purchase returns (41,000) (71,500) Freight in 8,900 Goods avail. for sale $798,500 1,471,500 Net sales (1,268,000) Ending inventory at retail $ 203,500
Jewellery and Cosmetics Cost Retail $ 34,000 $ 54,000 565,000 923,000 (17,200) (25,700) 6,700 $588,500 951,300 (839,600) $ 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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CONTINUING COOKIE CHRONICLE (a)
Natalie has been using the specific identification method to track her inventory of mixers. She has been able to do this because each mixer has a unique serial number. This allows her to match the exact cost of the mixer to the sales revenue when the mixer is sold. But it also allows Natalie to manipulate profit by choosing the specific mixer 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 average cost or FIFO cost formulas. In this situation, I recommend the average cost formula because the mixers are identical. Since she is selling mixers and the inventory items are not subject to spoilage or obsolescence, the FIFO cost formula would not be advantageous.
(b) Natalie has purchased mixers #3, #4, #5, #6 and #7. She has sold mixers #2, #4, and #5 and has returned mixer #6. At the end of March, her ending inventory would consist of mixers #1, #3 and #7. Ending Inventory:
Mixer #1 - #12459 Mixer #3 - #49295 Mixer #7 - #72531 Total
$545 550 571 $1,666
Cost of Goods Sold:
Mixer #2 - #23568 Mixer #4 - #56204 Mixer #5 - #62897 Total
$545 550 550 $1,645
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CONTINUING COOKIE CHRONICLE (Continued) (c)
Average–Perpetual
Purchases Cost of Goods Sold Balance Date Units Cost Total Units Cost Total Units Cost Total Jan. 31 2 $545.00 $1,090 Feb. 14 3 $550.00 $1,650 5 548.00 2,740 19 1 $548.00 $ 548 4 548.00 2,192 Mar. 17 2 571.00 1,142 6 555.67 3,334 18 (1) 571.00 (571) 5 552.60 2,763 27 2 552.60 1,105 3 552.60 1,658 Total 4 $2,221 3 $1,653 Check: $1,090 + $2,221– $1,653 = $1,658 (d)
Comparison
Cost of Goods Sold Ending Inventory
From (b) Specific Identification $1,645 1,666
From (c) Average $1,653 1,658
Difference $8 8
GENERAL JOURNAL Date
Account Titles and Explanation
Mar. 31 Cost of Goods Sold ........................... Merchandise Inventory................
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Debit
Credit
8 8
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CONTINUING COOKIE CHRONICLE (Continued) (e) GENERAL JOURNAL Date
Account Titles and Explanation
Feb. 3
No entry.
14
19
19
Mar. 3 17
18
27
27
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J1 Debit
Merchandise Inventory...................... Accounts Payable .........................
1,650
Cash ................................................... Sales .............................................
1,050
Cost of Goods Sold ........................... Merchandise Inventory .................
548
Credit
1,650
1,050
548
No entry. Merchandise Inventory...................... Accounts Payable .........................
1,142
Accounts Payable.............................. Merchandise Inventory .................
571
Cash ................................................... Sales .............................................
2,100
Cost of Goods Sold ($552.60 × 2) ..... Merchandise Inventory .................
1,105
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571
2,100 1,105
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BYP 6-1 FINANCIAL REPORTING PROBLEM (a)
Inventories are valued at the lower of cost and net realizable value. Cost is determined on an average basis using the retail inventory method. Cost includes invoice cost, transportation costs, and distribution costs. Net realizable value is defined as the expected selling price less estimated costs necessary to make the sale.
(b) According to Note 3, Reitmans Group uses the average cost formula. The company does not specifically state if they are following a perpetual or periodic inventory system in the financial statements.It is highly likely a company this size is using a perpetual inventory system. (c)
The specific identification method would not be appropriate. Most of the goods sold by Reitmans are not individually distinguishable.
(d) During fiscal 2012, Reitmans recorded $2,014,000 in writedowns of inventory as a result of net realizable value being lower than cost. This amount was reported in cost of goods sold. No reversals of write-downs were recorded in 2012.
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BYP 6-1 (Continued) (e)
Amounts are reported in thousands of Canadian dollars. Inventory as a percentage of current assets 2012: $78,285 ÷ $366,983 = 21.3% 2011: $73,201 ÷ $389,005 = 18.8% Cost of sales as a percentage of total revenue 2012: $363,333 ÷ $1,019,397 = 35.6% 2011: $350,671 ÷ $1,059,000 = 33.1% Inventory as a percentage of current assets and cost of sales as a percentage of total revenue were fairly consistent from 2011 to 2012.
(f) Inventory Turnover
Days Sales in Inventory
2012
2011
$350,671 ($73,201 $63,127) 2 5.1 times
365
71days
5.1 times
Reitmans’ inventory management appears to have deteriorated in 2012. The inventory turnover has decreased slightly and the days sales in inventory has increased, indicating it is taking more time to sell the inventory.
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BYP 6-2 INTERPRETING FINANCIAL STATEMENTS (a)
Inventory Turnover 2012
2011
Days Sales in Inventory
$600,400 ($229,706 + $232,694) ÷ 2 = 2.60 times $585,700 ($232,694 + $224,406) ÷ 2 = 2.56 times
365
= 140 days
2.60 times 365
= 143 days
2.56 times
The ratios have improved slightly. This means that the inventory is being sold a bit faster in 2012 than in 2011. (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 lower than cost was $10.5 million in fiscal 2012. At March 31, 2012 there was $1.7 million of inventory on hand that was recorded at net realizable value.
(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 if it used average. However, if inventory costs are relatively stable, both inventory methods would yield similar results.
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BYP 6-3 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 6-4 COMMUNICATION ACTIVITY
Subject:
2013 Ending Inventory Error
From:
controller.small toys@hotmail.com
Sent:
February 10, 2015
To:
Mutahir Kazmi, President
Hello Mr. Kazmi, I wanted to clarify the situation with respect to the ending inventory error of 2013 and its impact on the financial statements of 2013 and 2014. The combined gross profit and profit for 2013 and 2014 are correct. However, the gross profit and profit for each individual year are incorrect. As you know, the 2013 ending inventory was understated by $1 million. This error will cause the 2013 profit to be incorrect because the ending inventory is used to calculate the 2013 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 2014 profit. The 2013 ending inventory is also the 2014 beginning inventory. Therefore, the 2014 beginning inventory is also understated, which causes an understatement of cost of goods sold. The 2014 gross profit and profit are subsequently overstated. If the error is not corrected, the gross profit and profit for 2013 and 2014 will be incorrect. Although the combined profits will be correct, (because the understatement in 2013 cancels the overstatement in 2014), the trend in each year will be misleading. Solutions Manual .
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BYP 6-5 ETHICS CASE
(a)
1. Maximize gross profit—select lowest cost inventory for cost of goods sold Sales [(500 × $850) + (170 × $800)] ................... $561,000 Cost of goods sold [(140 × $500) + (200 × $540) + (330 × $570)] ... 366,100 Gross profit........................................................ $194,900 2. Minimize gross profit—select highest cost inventory for cost of goods sold Sales [(500 × $850) + (170 × $800)] ................... Cost of goods sold [(130 × $500) + (200 × $540) + (340 × $570)] ... Gross profit........................................................
$561,000
Difference...........................................................
$700
Reconciliation of difference 10 × ($570 – $500) .............................................
$700
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BYP 6-5 (Continued) (b) Average cost formula Purchases Cost Total
Date Units Mar 1 3 200 $540.00 $108,000 5 10 340 570.00 193,800 25 _ _ Total 540 $301,800
(1) (2)
Cost of Goods Sold Units Cost Total
Units 140 340 170 $523.53 $ 89,000 170 510 500 554.51 277,255 10 670 $366,255 10
Balance Cost $500.00 (1) 523.53 523.53 (2) 554.51 554.51
Total $70,000 178,000 89,000 282,800 5,545 5,545
($70,000 + $108,000) ÷ (140 + 200) ($89,000 + $193,800) ÷ (170 + 340)
Sales [(500 × $850) + (170 × $800)] ................................ Cost of goods sold ......................................................... Gross profit .....................................................................
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$561,000 366,255 $194,745
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BYP 6-5 (Continued) (c)
The stakeholders are the investors and creditors of Discount Diamonds. Specific identification is not an appropriate method for this type of business, because all of the diamonds are identical. Choosing which diamonds to sell in a month is unethical because enables the company to manipulate its profit.
(d) Discount Diamonds should select the average cost. The specific identification method is not appropriate because all items are identical. Using the average cost will smooth out variations in prices and result in reasonable values for both the income statement and balance sheet.
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BYP 6-6 “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 paid 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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BYP 6-6 (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 in time. 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, however, keep their accounting textbooks during their studies as a reference tool as they progress to more advanced levels.
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CHAPTER 7 Internal Control and Cash ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Brief Problems Problems Questions Exercises Exercises Set A Set B
1. Explain the activities that help 1, 2, 3, 4, 5, 6, 7 prevent fraud and achieve internal control.
1
1, 2, 3, 5
2, 3,
3, 4,
2. Apply control activities to cash receipts.
8, 9, 10, 11, 12
3. Apply control activities to cash payments including petty cash.
13, 14, 15, 4, 5, 6 16
5, 6, 7
4. Describe the control features 17, 18, 19, 7, 8, 9, 10, 8, 9, 10, 20, 21 11, 12 11, 12, of a bank account and prepare a bank reconciliation. 5. Report cash on the balance sheet.
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13, 14
7-1
13
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Description Number 1A Identify internal control activities related to cash receipts.
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.
Simple
25-35
4A
Record debit and bank credit card and petty cash transactions and identify internal controls.
Moderate
25-35
5A
Record and post petty cash transactions and identify internal controls and petty cash procedures.
Moderate
20-30
6A
Prepare back reconciliation and related entries.
Moderate
25-35
7A
Prepare bank reconciliation and related entries.
Moderate
40-50
8A
Prepare bank reconciliation and related entries.
Moderate
40-50
9A
Prepare bank reconciliation and related entries.
Complex
40-50
10A
Prepare bank reconciliation and adjusting entries.
Moderate
30-40
11A
Calculate cash balance and report other items.
Moderate
20-30
1B 2B
Identify internal control weaknesses over cash receipts. Identify internal control over cash payments.
Moderate Moderate
25-35 25-35
3B
Identify internal controls for cash receipts and cash payments.
Simple
25-35
4B
Record debit and bank credit card and petty cash transactions and identify internal controls.
Moderate
25-35
5B
Record and post petty cash transactions and identify internal controls and petty cash procedures.
Moderate
20-30
6B
Prepare bank reconciliation and related entries.
Moderate
25-35
7B
Prepare bank reconciliation and related entries.
Moderate
40-50
8B
Prepare bank reconciliation and related entries.
Moderate
40-50
9B
Prepare bank reconciliation and related entries.
Complex
40-50
10B
Prepare bank reconciliation and adjusting entries.
Moderate
30-40
11B
Calculate cash balance and report other items.
Moderate
20-30
Solutions Manual .
7-2
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material 1.
Study Objective Explain the activities that help achieve internal control.
Knowledge Comprehension Q7-1 Q7-3 P7-1A Q7-2 Q7-5 P7-2A Q7-4 Q7-6 P7-3A Q7-7 P7-1B BE7-1 P7-2B E7-1 P7-3B E7-2
2.
Apply control activities to cash receipts.
Q7-8 Q7-9 Q7-10 Q7-11 Q7-12
3.
Apply control activities to cash payments including petty cash.
BE7-4
Q7-13 Q7-14 Q7-15 Q7-16 P7-2A P7-3A P7-2B P7-3B
4.
Describe the control features of a bank account and prepare a bank reconciliation.
Q7-17
Q7-18 Q7-19 Q7-20 Q7-21 BE7-8 P7-2A P7-2B
5.
Report cash on the balance sheet.
P7-1A P7-2A P7-3A P7-1B P7-2B P7-3B
BE7-2 BE7-3 E7-3 E7-4 E7-5
BE7-5 BE7-6 E7-5 E7-6 E7-7 P7-4A P7-5A P7-4B P7-5B BE7-7 BE7-9 BE7-10 BE7-11 BE7-12 E7-8 E7-9 E7-10 E7-11 E7-12 BE7-13 E7-13
Q7-22 Q7-23 BE7-14
Broadening Your Perspective
Solutions Manual .
Application E7-3 E7-5 P7-1A P7-1B
BYP7-1 BYP7-2 BYP7-3 BYP7-4
7-3
P7-4A P7-5A P7-4B P7-5B
Analysis
Synthesis Evaluation
P7-10A P7-10B
P7-10A P7-10B
P7-6A P7-10A P7-7A P7-10B P7-8A P7-9A P7-10A P7-6B P7-7B P7-8B P7-9B P7-10B P7-11A P7-11B Continuing Cookie Chronicle BYP7-5 BYP7-6
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
ANSWERS TO QUESTIONS 1.
The three primary factors that contribute to employee fraud are: opportunity, financial pressure and rationalization. The opportunity to commit fraud exists when there is a lack of controls to deter and detect fraud. Financial pressures, experienced in the personal lives of employees, provide an incentive or a need to use fraud to alleviate these pressures. Finally, rationalization is a technique whereby the employee committing the fraud justifies his or her fraudulent behaviour.
2.
The five components of good internal control include: (a) Control environment: Management sets the “tone at the top” by communicating to all members of the organization what behaviour is expected and enforcing the rules of conduct. (b) Risk assessment: Companies must identify and analyze the various factors that create risk for the business and must determine how to manage these risks. (c) Control activities: Management must design policies and procedures to address the specific risks faced by the company in order to reduce the occurrence of fraud and honest errors. (d) Information and communication: The internal control system must identify, collect, and communicate all relevant information to the appropriate internal and external parties. (e) Monitoring: Monitoring involves identifying problems and reporting them to appropriate levels of the organization where action can be taken.
3.
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.
4.
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.
5.
Independent checks of performance are necessary even if the 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’s policies and procedures.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 6.
Documentation procedures provide evidence of the occurrence of transactions and events. Many documents used in an organization require prenumbering and accounting for the numerical sequence of these documents. An example is the use of prenumbered 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.
7.
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.
8.
Sales using debit cards and bank credit cards 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).
9.
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. Exact procedures will be different in every company, but the basic principles should be the same. 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.
Solutions Manual .
7-5
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 10.
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.
11.
All 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.
12.
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.
13.
Payment by cheque or electronic funds transfer contributes to effective internal control over cash payments. Prenumbered cheques help to ensure that all payments are accounted for. In addition, the bank provides a double record of the cash payments, and safekeeping of the cash until paid. However, effective control is also possible when small payments are made from a petty cash fund.
14.
This statement is incorrect. The use of EFT for cash payments will result in better internal control as long as there is proper authorization and segregation of duties. EFT payments also reduce the costs involved in making payments by cheque, such as postage and envelope costs. Costs are not necessarily reduced by eliminating or reducing internal control procedures.
Solutions Manual .
7-6
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 15.
Wanda could potentially commit a fraud by: (1) falsifying a receiving report and approving payment to a nonexistent supplier. She could open a bank account in the name of the nonexistent supplier and deposit the payments in this account, allowing her to steal cash from Walter’s Watches. (2) ordering merchandise and stealing the inventory. She could cover her theft by falsifying the receiving reports and approving the payment to the supplier even though the goods are not in the store. Instructor’s note: These are only two examples. Students may develop other valid examples.
16.
This could be a problem for the company as Su Mai 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 Mai 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 short-term loans to employees). Each payment from the fund must be documented on a prenumbered 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.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 17.
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. (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.
18.
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.
19.
Astrid is incorrect; since the March cheque has still not cleared the bank at April 30 it must be included in the April 30 bank reconciliation as an outstanding cheque because it is still outstanding on April 30.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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 and thus have accurate information on his bank account balance.
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. 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. Failing to do so will remain an omission error and will also result in a reconciling item on the next month’s bank reconciliation.
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 businesses’ bank allows an overdraft position which is in effect, a temporary bank loan.
23.
Cash equivalents are short-term, highly liquid (easily sold) investments that are not subject to significant risk of changes in value. They typically have maturities of three months or less from the date they are purchased. Cash equivalents are sometimes combined with cash on the balance sheet. 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.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 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 prenumbered.
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.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-1 (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.
BRIEF EXERCISE 7-2 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
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-3 Credit Card (Visa) April 9 Cash .................................................. Credit Card Expense ($175 × 4%) ... Sales.............................................
168 7
Kopper Kettle Credit Card April 9 Accounts Receivable ....................... Sales.............................................
175
Debit Card April 9 Cash .................................................. Debit Card Expense ......................... Sales.............................................
173 2
175
175
175
BRIEF EXERCISE 7-4 1. Documentation procedures 2. Physical and IT controls 3. Human resource controls 4. Independent checks of performance 5. Establishment of responsibility 6. Segregation of duties
BRIEF EXERCISE 7-5 March 2
Petty Cash ........................................ Cash .............................................
100
March 27 Supplies ............................................ Freight Out........................................ Repairs Expense .............................. Cash Over and Short ....................... Cash ($100 − $8) ..........................
30 17 43 2
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100
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-6 Nov. 21
Freight Out........................................ Supplies ............................................ C. Shekk, Drawings.......................... Cash ($150 − $10) ........................ Cash Over and Short ...................
26 57 60 140 3
BRIEF EXERCISE 7-7 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
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-8 (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.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-8 (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 7-9 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 7-10 Aug. 31
31
31
Solutions Manual .
Accounts Receivable ....................... Cash .............................................
280
Bank Charges Expense ................... Cash .............................................
40
Cash .................................................. Interest Revenue..........................
22
7-15
280
40 22
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-11 1.
(a)
The amount of the payment of an account payable has been recorded in the books as $1,720 when the correct amount is $1,270. The reconciling item of $450 ($1,720 − $1,270) will appear as an increase to the book cash balance.
(b) March 31 Cash .................................................. Accounts Payable........................ 2.
450
(a) The amount of the collection on account has been recorded in the books as $4,550 when the correct amount is $4,250. The reconciling item of $300 ($4,550 − $4,250) will appear as a decrease to the book cash balance.
(b) March 31 Accounts Receivable ....................... Cash ............................................. 3.
450
300 300
(a)
The amount of the deposit was recorded by the bank as $2,750 when the correct amount is $5,720. The reconciling item of $2,970 ($2,750 − $5,720) will appear as an increase to the bank cash balance.
(b)
No entry needed as this is a bank error.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-12 1.
(a) The amount of the payment of an account payble has been recorded in the books as $2,180 when the correct amount is $2,810. The reconciling item of $630 ($2,180 − $2,810) will appear as a decrease to the book cash balance.
(b) June 30
2.
630 630
(a) The amount of the collection on account has been recorded in the books as $3,330 when the correct amount is $4,440. The reconciling item of $1,110 ($3,330 − $4,410) will appear as an increase to the book cash balance.
(b) June 30
3.
Accounts Payable ............................ Cash .............................................
Cash ...................................................... 1,110 Accounts Receivable ..................
1,110
(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. 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 7-13 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. Staledated 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 7-14 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.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 7-1 (a)
A dishonest store employee can steal from Discount Toys without getting caught by filling out a pre-numbered return form with all of the necessary information to pretend that a return of goods has occurred and pocket the cash. The employee need not have any merchandise, nor does he have to collude with any other employee for the fraud to occur without detection.
(b)
In order to avoid the fraud described in (a) above, Discount Toys should insist on the following procedures concerning returns: 1. Insist that cash register receipts must be attached to the pre-numbered return form as proof of the original purchase. 2. The original cash register receipt should have the return entered on it to ensure that the receipt cannot be used for an additional refund. 3. Have the customer fill out a form with their name and telephone number where they can be reached and do a spot check later in the day to verify that the customer did in fact request a refund that day. 4. Have a supervisor approve the return in the presence of the customer, to verify that the return is valid and that merchandise was in fact obtained from the customer. 5. The cashier should be instructed to refund the customer only if an approved return was obtained by the customer. Cash should not be handed out by the employee filling out the return form.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 7-1 (Continued) (b) (Continued) 6. The refund should be in the same manner as the original payment. Credit and debit card purchases should be refunded to the same credit and debit card. Cash refunds should be made only for cash purchases. 7. Management should not allow the employee handing returns to have access to inventory. The returned merchandise should not be placed back on the shelf immediately. Returned merchandise should be set aside. At the end of the day, another employee should be charged with the duty of matching the merchandise returned to the duplicate return slips to ensure that employees are not creating fictitious return forms, or without any merchandise being provided. The matching procedure will prevent the employee preparing the duplicate return slip from entering items of greater value, as a favour to a friend. 8. Accounting personnel should account for the numerical sequence of duplicate return slips. When accounting for the slips, they should apply some scrutiny to the information on the slips and ensure that the proper approval has been documented by the supervisor. Unusual amounts and frequency of returns should be reported and followed up with the general manager. 9. The general manager of the store should supervise the employees performing the return procedures to ensure that the controls are working effectively.
Solutions Manual .
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 7-2 (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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 7-3 1.
2.
3.
(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)
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 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.
(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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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-3 (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 7-4 (a)
(b)
Mar. 15 Cash ($5,814 − $11) ................... Debit Card Expense ($0.25 × 44) ............................ Sales ......................................
5,803
June 21 Cash ($2,400 − $66) ................... Credit Card Expense ($2,400 × 2.75%) .................... Sales ......................................
2,334
11 5,814
66 2,400
July 17 No entry (c)
Oct.
7 Accounts Receivable—Ramos . Sales ......................................
Nov. 10 Cash ........................................... Accounts Receivable—Ramos
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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-5 1.
2.
(a)
Company cheques are not prenumbered 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 prenumbered cheques and account for their numerical sequence. Store the unused cheques in a secure area.
(a) Improper segregation of duties because only one employee is signing cheques. (b)
3.
Require two employees to sign each cheque. In this situation, it would be appropriate to have only one person sign the cheques only if it was the owner.
(a) Improper segregation of duties has been established leaving the possibility of the misappropriation of company assets by having a 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)
Solutions Manual .
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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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-5 (Continued) 4.
(a) Improper segregation of duties has been established leaving the possibility of the misappropriation of company assets by having 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)
5.
(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)
6.
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.
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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-5 (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 7-6 (a) Feb. 14
(b) Feb. 28
Petty Cash ........................................ Cash .............................................
150
Petty Cash ($175 − $150) ................. Supplies ($15 + $20 + $35)............... Miscellaneous Expense ................... Merchandise Inventory .................... Freight Out........................................ Cash ($175 − $5) .......................... Cash Over and Short ...................
25 70 10 45 25
150
170 5
EXERCISE 7-7 (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) ........................
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200 200
95 35 10 10 50 100
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 7-8 (a) TINDALL COMPANY Bank Reconciliation September 30, 2014 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
$6,102 $ 63 67
Less: Bank service charge ............................... $ 22 NSF cheque ............................................. 206 Adjusted cash balance per books.................................. (b)
Sept. 30
30
Solutions Manual .
Cash ........................................... Supplies ($570 – $507) ......... Accounts Receivable............
130
Bank Charges Expense ............ Account Receivable .................. Cash.......................................
22 206
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$7,456 1,399 8,855 2,851 $6,004
130 6,232 228 $6,004 63 67
228
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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-9 (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 7-10 (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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-11 1. (a) The amount of $450 ($2,725 – $2,275) needs to be added to the company cash balance. (b) July
9
Cash....................................... Account Receivable .......
450 450
2. (a) The amount of $360 ($950 – $590) needs to be added to the company cash balance. (b) July 14
Cash....................................... Accounts Payable...........
360 360
3. (a) The amount of $90 ($459 – $549) needs to be deducted from the company cash balance. (b) July 16
Supplies................................. Cash ................................
90 90
4. (a) Nothing is recorded on the bank reconciliation as was a bank error and was corrected by the bank on July 23. (b) No entry needed as this was a bank error. 5. (a) The amount of $109 ($778 – $887) needs to be added to the company cash balance. (b) July 31
Cash....................................... Accounts Receivable .....
109 109
6. (a) The amount of $282 needs to be added to the bank balance. (b) No entry needed as this was a bank error.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-12 (a) CLARESVIEW COMPANY Bank Reconciliation August 31, 2014
Cash balance per bank statement ...................................... $17,602 Add: Error Cheque# 705 ($150 – $105) ... $ 45 Deposits in transit........................... 17,127 17,172 34,774 Less: Outstanding cheques # 673................................................ $1,450 # 710................................................. 2,504 # 712................................................. 2,600 6,554 Adjusted cash balance per bank.................................... $28,220 Cash balance per books ................................................. Add: EFT deposits of Accounts Receivable ............... Less: Bank service charge ....................... $ 25 NSF cheque ..................................... 485 Adjusted cash balance per books.................................. (b)
$26,474 2,256 28,730 510 $28,220
Aug. 31 Cash ............................................... 2,256 Accounts Receivable............
2,256
31 Bank Charges Expense ............ Account Receivable .................. Cash.......................................
510
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Accounting Principles, Sixth Canadian Edition
EXERCISE 7-13 (a)
Cash balance June 30, 2014 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 April 30: Currency and coin......................................... Cheques from customers ............................. Debit card slips ............................................. Bank credit card slips................................... Total....................................................................
$ 79 12,000 300 2,500 4,250 300 570 130 580 750 $21,459
(b) 2. Note: the Guaranteed investment certificate 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 $12,459. 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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 7-1A
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 prenumbered. Cash count sheets are prepared. Deposit slips are prepared. Copies are used for verification and recording.
Physical controls
and
IT
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, Sixth Canadian Edition
PROBLEM 7-1A (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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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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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Chapter 7
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Accounting Principles, Sixth 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.
Solutions Manual .
Receiving reports and purchase orders should be reinstated.
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Accounting Principles, Sixth 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, Sixth 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, Sixth 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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-4A (a)
July
1
Petty Cash.................................. Cash.......................................
250 250
8 Cash ............................................. 40,024 ($40,500 − $41 − $435) Debit Card Expense (164 × $0.25) 41 Credit Card Expense ($14,500* × 3%)...................... 435 Sales ...................................... *($40,500 − $14,940 − $11,060 = $14,500) 8
Freight Out................................. Supplies ..................................... Advertising Expense ................. R. Malik, Drawings..................... Cash Over and Short ............ Cash ($250 − $75) .................
60 30 40 50 5 175
15 Cash ............................................. 37,931 ($38,459 − $39 − $489) Debit Card Expense (156 × $0.25) 39 Credit Card Expense 489 ($16,300* × 3%)...................... Sales ...................................... *($38,459 − $9,907 − $12,252 = $16,300) 15 Postage Expense....................... Advertising Expense ................. Supplies ..................................... Cash Over and Short................. Petty Cash ($250 − $200) ...... Cash ($200 − $73) .................
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40,500
38,459
44 70 56 7 50 127
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-4A (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 small amounts of 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 prenumbered 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, Sixth Canadian Edition
PROBLEM 7-5A (a) Nov.
1 15
30
Petty Cash.................................. Cash.......................................
150
Repairs Expense ($15 + $28) .... Advertising Expense ................. R. Hayes, Drawings ................... Miscellaneous Expense ............ Cash Over and Short................. Cash ($150 − $5) ...................
43 53 40 11
Repairs Expense ($32 + $12) .... Supplies ..................................... R. Hayes, Drawings ................... Miscellaneous Expense ............ Cash Over and Short................. Cash ($150 − $4) ...................
44 45 45 8 4
150
2 145
146
(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 ............................................... $44 Cash Over and Short ........................... 4 Miscellaneous Expense....................... 8 $56 Profit overstated ...................................... 56 R. Hayes, Drawings understated ............ 45 Cash overstated....................................... 146 Supplies understated .............................. 45 Total assets overstated ($146 – $45)...... 101 Total owner’s equity overstated ($56 + $45) 101
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-5A (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 prenumbered 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-5A (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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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-6A (a) LISIK COMPANY Bank Reconciliation October 31, 2014 Cash balance per bank statement ...................................... $10,173 Add: Deposit in transit..................................... $965 Bank error—Lasik cheque...................... 600 1,565 11,738 Less: Outstanding cheques ($419 + $555 + $646 + $323)............................... 1,943 Adjusted cash balance per bank.................................... $ 9,795 Cash balance per books ................................................. Add: Collection of EFT....................................... $1,885 Error in recording cheque #1181 for Accounts Payable ($685 − $568) .......... 117 Interest revenue ...................................... 27 Less: NSF cheque ............................................. $820 Error in Oct. 12 deposit of cash sales 324 ($963 − $639) .................................... Bank service charge ............................... 35 Cheque printing charge .......................... 40 Adjusted cash balance per books..................................
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$ 8,985
2,029 11,014
1,219 $9,795
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-6A (Continued) (b)
Oct. 31 Cash ............................................... 2,029 Accounts Receivable............. Accounts Payable—Helms & Co. Interest Revenue ....................
1,885 117 27
31 Accounts Receivable—W. Hoad 820 Sales............................................ 324 Bank Charges Expense ($35 + $40) 75 1,219 Cash........................................ Check: $8,985 + $2,029 − $1,219 = $9,795 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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-7A (a)
General Ledger Cash Balance: Book balance, February 28 (Adjusted cash balance per bank reconciliation) Add: Cash receipts................................................. Less: Cash payments ............................................. Unadjusted cash balance, March 31 ......................
$10,632 10,781 (12,918) $ 8,495
(b) YAP CO. Bank Reconciliation March 31, 2014 Cash balance per bank statement.................................. Add: Deposits in transit................................................
$10,863 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 Adjusted cash balance per bank....................................
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4,707 $7,181
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-7A (Continued) (b) (Continued) 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.................................. (c)
Mar. 31 Cash ........................................... Accounts Payable ................. Interest Revenue ...................
$8,495 473 8,968
1,787 $7,181
473
31 Note Payable .................................. 1,000 Interest Expense ....................... 125 Accounts Receivable—Jordan . 595 Bank Charges Expense ............ 49 Accounts Receivable ................ 18 Cash.......................................
450 23
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-8A (a)
Book balance, October 31 (from Oct. 31 bank reconciliation)...................................................... Add: Cash receipts per journal ........................... Less: Cash payments per journal ........................ Unadjusted cash balance, November 30 .............
$ 8,496 15,690 (14,026) $10,160
(b) MALONEY COMPANY Bank Reconciliation November 30, 2014 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
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-8A (Continued) (c)
Nov. 30
30
Cash ........................................... Accounts Receivable............ Interest Revenue ................... Accounts Receivable............
2,746
Accounts Receivable ................ Accounts Payable ..................... Note Payable.............................. Interest Expense ....................... Cash.......................................
260 450 2,000 250
2,430 49 267
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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-9A (a)
Balance per Bank Statement Balance May 31, 2014 .................................................. $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, 2014 ............... $20,342 Balance Per Books Adjusted balance, May 31, 2014 ............................. Add: Cash receipts................................................. Less: Cash payments ............................................. Unadjusted cash balance, June 30, 2014 ..............
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$ 16,940 17,809 (18,491) $ 16,258
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-9A (Continued) (b) TRILLO COMPANY Bank Reconciliation June 30, 2014 Unadjusted bank balance Add: Deposits in transit................................... $ 3,127 Error Trill Co. cheque #7119 .................. 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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-9A (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, 2014 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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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-10A (a) SALLY’S SWEET SHOP Bank Reconciliation August 31, 2014
Unadjusted bank balance $11,135 Add: Deposits in transit ................................... $ 2,545 Bank error Cheque #4832 Wally’s Water Works ............... 800 3,345 14,480 Less: Outstanding cheques No. 421 ................................................ $ 160 No. 485 ................................................ 267 No. 492 ................................................ 175 No. 494 ................................................ 1,173 1,775 Outstanding EFT—for utilities ............... 250 2,025 Adjusted bank balance ................................................... $12,455 Unadjusted cash balance ............................................... Add: EFT collections of Accounts Receivable $1,750 Deposit error – cash sales ..................... 300 Error in cheque # 490 for Accounts Payable ($599 − $509) ............................... 90 Less: NSF cheque ($385 + $20) ........................ $405 Bank service charges—cheque printing 40 Adjusted cash balance ...................................................
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$10,760
2,140 12,900 445 $12,455
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-10A (Continued) (b)
Aug. 31
31
Cash .......................................... Accounts Receivable............ Sales ...................................... Accounts Payable .................
2,140
Accounts Receivable ................ Bank Charges Expense ............ Cash.......................................
405 40
1,750 300 90
445
Check: $10,760 + $2,140 − $445 = $12,455 adjusted cash balance (c)
The reported cash balance on the August 31, 2014 balance sheet is $12,455.
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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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-11A (a) Cash and cash equivalents: 1. 2. 3.
Cash on hand.................................................... Petty cash fund................................................. Chequing account ............................................ US bank account .............................................. Treasury bills .................................................... Total ..............................................................
7.
$
500 125 24,500 16,000 25,000 $66,125
(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. Post dated 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 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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-11A (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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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-1B (a)
The weaknesses in internal accounting control over collections are: (1) Each usher could take cash from the collection plates en route to the basement office. (2) The head usher counts the cash alone which gives him/her an opportunity to steal. (3) 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. (4) The financial secretary counts the cash alone. Again, this gives her an opportunity to steal. (5) The financial secretary withholds $150 to $200 per week. She does not have to provide any support for how she spends this cash. (6) The cash is vulnerable to robbery when kept in the unlocked safe overnight. (7) Cheques are made payable to “cash.” This means anyone could cash the cheque. (8) 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. (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.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-1B (Continued) (b)
(Continued)
The improvements for the finance committee should include the following: (1) A finance committee member should witness the ushers transferring their cash collections to a cash pouch (or bag) held by the head usher. (2) A finance committee member should be present when the cash is counted by the head usher and the financial secretary, when the cash is taken to the office. (3) At the end of each month, a member of the finance committee should prepare the bank reconciliation. (4) All cheques should be made payable in the church’s name. (5) A petty cash fund should be set up for small expenditures. (6) All amounts collected at weekly services should be deposited. Taking It Further: As illustrated in the fraud triangle, when the opportunity, financial pressure or rationalization factors are present, the weaknesses in internal control can lead to fraud.
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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-2B 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) (b)
The numerical sequence of cheques is not tracked. The numerical sequence of cheques should be tracked. Checking the numerical sequence of used and recorded prenumbered 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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Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-2B (Continued) 5. (a) (b)
6. (a) (b)
The controller is responsible for the preparation of all of the journal entries. The journal entries should be prepared by the assistant controller and the controller should approve the entries. The assistant controller posts the journal entries. 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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Chapter 7
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Accounting Principles, Sixth 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.
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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Accounting Principles, Sixth Canadian Edition
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 prevents others from assisting with her accounting functions, thereby examining her work and discovering errors or misappropriations.
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Prenumbered 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
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-4B (a)
May
1 Petty Cash.................................. Cash.......................................
150 150
8 Cash ............................................. 14,035 ($14,175 − $11 − $129 = $14,035) Debit Card Expense (55 × $0.20) 11 Credit Card Expense 129 ($4,300* × 3%)........................ Sales ...................................... *($14,175 − $4,550 − $5,325 = $4,300) 8
15
Freight Out................................. Postage Expense....................... Advertising Expense ................. Miscellaneous Expense ............ Cash Over and Short................. Cash ($150 − $9) ...................
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44 30 54 10 3 141
Cash ........................................... 16,204 ($16,380 − $17 − $159 = $16,190) Debit Card Expense (85 × $0.20) 17 Credit Card Expense ($5,300* × 3%)........................ 159 Sales ...................................... *($16,380 − $3,690 − $7,390 = $5,300)
15 Petty Cash ($250 − $150) .......... B. Ramesh, Drawings................ Supplies ..................................... Freight Out................................. Cash Over and Short................. Cash ($250 − $5) ...................
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14,175
16,380
100 60 20 67 2 245
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-4B (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 employees are exposed to. 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 prenumbered 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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-5B
(a)
June
8
Petty Cash.................................. Cash.......................................
200
15 Supplies ..................................... Repairs and Maintenance Expense Advertising Expense ................. E. Bender, Drawings ................. Miscellaneous Expense ............ Cash Over and Short................. Cash ($200 − $1) ...................
35 48 55 40 19 2
30 Freight Out................................. Supplies ..................................... Advertising Expense ................. E. Bender, Drawings ................. Miscellaneous Expense ............ Cash Over and Short ............ Cash ($200 − $29) .................
10 54 48 45 18
200
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-5B (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 small amounts of 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 prenumbered 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-5B (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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-6B (a)
AGRICULTURAL GENETICS COMPANY Bank Reconciliation May 31, 2014
Cash balance per bank statement ...................................... $11,890 Add: Deposit in transit.................................................. 1,794 13,684 Less: Outstanding cheques ($636 + $276 + $760 + $348) ...................... $2,020 Bank error, May 2 deposit ($1,638 − $1,386) .................................... 252 2,272 Adjusted cash balance per bank.................................... $11,412 Cash balance per books ................................................. Add: Error in cheque No. 1151 for Accounts Payable ($945 − $495) ........................... $ 450 EFT collections of Accounts Receivable 2,511 Interest revenue .......................................... 24 Less: NSF cheque and service charge ............ $675 Error in cheque No. 1192 for Equipment ($765 − $675) ......................................... 90 Bank service charge ............................... 50 Adjusted cash balance per books..................................
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$ 9,242
2,985 12,227
815 $11,412
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-6B (Continued) (b)
May 31 Cash ............................................... 2,985 Accounts Payable—L. Kingston Accounts Receivable............ Interest Revenue ...................
450 2,511 24
31 Accounts Receivable—P. Dell .. Equipment.................................. Bank Charges Expense ............ Cash.......................................
815
675 90 50
Check: $9,242 + $2,985 – $815 = $11,412 adjusted cash balance Taking It Further: Businesses should expect that the bank and book balances are not 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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Chapter 7
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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-7B (a)
Cash balance per books, August 31, 2014 (from Aug. 31 bank reconciliation).................... Add: Cash receipts............................................... Less: Cash payments .......................................... Unadjusted cash balance per books, September 30, 2014 ............................................
$10,107 15,197 (15,076) $10,228
(b) KATSARIS COMPANY Bank Reconciliation September 30, 2014 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
Chapter 7
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-7B (Continued) (c)
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-8B (a) Book balance, Apr. 30 ............................................... Add: Cash receipts ................................................... Less: Cash payments................................................ Unadjusted cash balance, May 31 ............................
$ 7,776 6,825 (13,526) $ 1,075
(b) RIVER ADVENTURES COMPANY Bank Reconciliation May 31, 2014 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
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 7-8B (Continued) (b)
May 31
31
Cash ........................................... Accounts Receivable............ Interest Revenue ................... Accounts Receivable............ Accounts Payable .................
2,140
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 7-9B (a)
Balance per Bank Statement Balance November 30, 2014 ................................... Add: Deposits........................................................ Less: Cheques cleared................................ $8,741 NSF cheques ................................... 520 Service charge ................................ 48 Balance, December 31, 2014 ..................................
$ 7,181 11,951 19,132
9,309 $9,823
Balance Per Books Adjusted cash balance, November 30, 2014.......... $ 6,968 Add: Cash receipts................................................. 13,741 Less: Cash payments ................................................. (11,548) Unadjusted cash balance, December 31, 2014...... $9,161
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PROBLEM 7-9B (Continued) (b) KIRAN’S KAYAKS Bank Reconciliation December 31, 2014 Balance per bank statement........................................... Add: Deposits in transit................................................
$ 9,823 2,218 12,041
Less: Outstanding cheques No. 165 ................................................ $ 812 No. 185 .................................................... 1,165 No. 189 ................................................... 1,721 Adjusted cash balance per bank....................................
3,698 $8,343
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 .............................
$9,161 450 9,611
1,268 $8,343
450
31 Accounts Receivable—M. Sevigny 520 Accounts Receivable ................ 700 48 Bank Charges Expense ............ Cash.......................................
450
1,268
Check: $9,161 + $450 − $1,268 = $8,343 adjusted cash balance (d)
The reported cash balance on the December 31, 2014 balance sheet is $8,343.
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PROBLEM 7-9B (Continued) Taking It Further: Failing to complete the bank reconciliation and recording the necessary adjusting entries prior to the preparation of the closing entries will result in errors in the balance of all of the accounts affected by the adjusting entries. Bank charges expense would be understated, equipment would be overstated, accounts receivable would be understated and cash would be overstated. Profit would be consequently overstated and owner’s equity would be overstated.
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PROBLEM 7-10B (a)
SOUTH HAMPTON POOL SUPPLIES Bank Reconciliation May 31, 2014 Unadjusted bank balance Add: Deposits in transit .................................. $ 2,930 Bank error cheque 600 #3723 South Hampton Pizzeria.......... 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, Sixth Canadian Edition
PROBLEM 7-10B (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, 2014 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 7-11B (a)
Cash and Cash Equivalents balance: 1. 2. 3. 4. 6. 7.
Cash on hand..................................................... $ 1,494 Petty cash fund.................................................. 32 Bank chequing account .................................... 7,460 60-day treasury bill ............................................ 5,000 US Dollar Account ............................................. 3,555 American Express credit card slips* [$700 − ($700 × 3%)] .......................................... 679 Total ................................................................... $18,220
*American Express credit card slips are effectively a deposit in transit because the funds will be deposited in the bank account in two days. (b) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record: Drawing of the owner of $55 Expenses of $85 ($140 − $55 Drawings) Cash shortage as an expense for $3 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 it’s term exceeds three months. 5. The staledated cheque is not an asset of the business. The amount owed by the customer would be part of the accounts receivable balance. 8. The 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.
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PROBLEM 7-11B (Continued) 9. The deposit with Ontario Hydro should be recorded as an advance or deposit in the current assets section of the balance sheet. 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 8 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 statement to properly evaluate the liquidity of the business and to properly measure the amount of cash that is available to settle liabilities in the future.
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE
Divisions of duty to strengthen internal accounting control are limited as the situation allows the involvement of only two individuals: Natalie and John. (a), (b) and (c) 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 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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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (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.
(d) 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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BYP 7-1 FINANCIAL REPORTING AND ANALYSIS (a)
Regarding the company’s system of internal control, the Management’s Responsibilities for Financial Statements states that “the Company has developed and maintains a system of internal control.” The report then goes on to state: “Management believes that this system of internal accounting control provides reasonable assurance that the financial records are reliable and form a proper basis for the preparation of the financial statements and that assets are properly accounted for and safeguarded.” The Independent Auditor’s Report describes how the auditors have considered internal control in assessing the risk of material misstatement of the financial statements. The report specifically states that the procedures they perform as auditors are not performed for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, in the performance of the audit, the system of internal control will have been examined and any weaknesses discovered communicated to the entity.
(b) According to the statement of Management’s Responsibility for Financial Statements, management is responsible for the financial statements and all of the information in the annual report. The statement of this responsibility is reiterated in the independent auditor’s report. (c)
The Company’s external auditors are KPMG LLP, Chartered Accountants. The auditor’s responsibility is to perform an audit in accordance with Generally Accepted Auditing Standards and to express an opinion as to whether or not the financial statements present fairly, in all material respects the financial position, performance and cash flows of the entity in accordance with International Financial Reporting Standards.
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BYP 7-1 (Continued) (d) Reitmans audit committee is a committee of all outside directors of the Board of Directors. The audit committee reviews the financial statements and recommends their approval to the Board of Directors. If there are any issues relating to financial reporting that require attention, the audit committee would get involved. They would draw on the necessary resources (likely including the external auditor) to resolve issues and advise the remaining members of the board. If issues or concerns are uncovered or develop from conducting the audit, the external auditors would first address the audit committee to outline the problems and suggest a strategy for resolution. The audit committee meets with management and the external auditor to satisfy itself that the committee is properly discharging its responsibilities. The committee also reviews the financial statement and the auditor’s report, and examines other auditing, accounting and financial reporting matters. (e)
According to Note 3 b) cash and cash equivalents consist of cash on hand, bank balances and short-term deposits with original maturities of three months or less. According to the statement of cash flows, cash and cash equivalents decreased in 2012 by $33,199,000. The major reasons for the $33 million decrease in cash are: i) Purchase of property and equipment and intangible assets, and ii) Dividends paid.
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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. Western Wind Energy Corp. likely doesn’t have cash equivalents as it has very little excess cash. Most of the cash is restricted.
(b) At December 31, 2011, there was a combination of $21,152,225 in current restricted cash and $25,863,450 on non-current restricted cash for a total of $47,015,675. At December 31, 2010 there was no current restricted cash. All of the restricted cash was non-current, in the amount of $127,128,155. As the company has met the obligations requiring holding restricted cash, the balance has substantially reduced to the balances reported at December 31, 2011. It is likely that the repayment of debt has been responsible for the majority of the decrease in balance of restricted cash.
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BYP 7-2 (Continued) (c) 2011 (1) Working capital (deficiency) = $26,716,724 (2) Current ratio
=
– $129,198,231
$26,716,724 $129,198,231
=
= ($102,481,507)
0.21:1
2010 (1)
Working capital (deficiency) = (2) Current ratio
$2,961,184 – =
$26,224,629
$2,961,184 $26,224,629
=
= ($23,263,445)
0.11:1
The company’s working capital deficiency has increased significantly due to an extraordinary increase in current liabilities. On the other hand, the current ratio has improved, because of the increase in current assets, but is still at an alarmingly low level. (d) The restricted cash should be excluded in the calculation of an acid-test ratio in this case. The amounts of the restricted cash are extremely large. Since the restriction on the cash is to meet specific operational, project and debt service requirements, as required by financial arrangements, these funds are not available to settle current obligations outside of those addressed in the arrangements.
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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 ETHICS CASE (a)
The stakeholders in this situation are the clients of the banks and the bank’s managers, employees, and shareholders. Also impacted are the persons and businesses to whom the cheques were written.
(b) The amount of revenue depending on order of processing would be: (1) (2) (3)
(c)
Largest to smallest: 4 bounced cheques × $35 = $140 Smallest to largest: 1 bounced cheque × $35 = $35 In the order of cheque numbers: 4 bounced cheques × $35 = $140
Whether this is ethical is subject to debate. On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts. Some customers are frequently overdrawn. Only severe penalties will persuade them to maintain an adequate balance or at least not issue or release cheques without sufficient funds on deposit. However, it could be argued that charging $35 for something that has a cost to the bank of $5 is “gouging”—that is, taking unfair advantage of the customer.
(d) In deciding what approach to take, the bank must consider its relationship with the customer. Clearly, by adopting a “largest to smallest” approach, it is going to anger some customers, who may well decide to leave the bank and go to a more customer-friendly bank. However, it could be argued that some of the customers the bank may lose are customers that are frequently overdrawn and therefore costly to the bank. Also, it can be time-consuming to change banks, and most people don’t have the spare time to change banks unless they really need to. (e)
Answer will vary depending on student’s opinion.
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BYP 7-6 “ALL ABOUT YOU”ACTIVITY (a) Identity theft occurs when someone uses your personal information without your knowledge or consent to commit a crime, such as fraud or theft. The key types of information that thieves use include: 1) Social insurance number 2) Driver’s licence numbers 3) Credit card and banking information 4) Bank cards 5) Calling cards 6) Birth certificates 7) Passports
(b) Identity thieves may get your personal information by: 1) removing mail from your mailbox or fraudulently redirecting your mail; 2) stealing personal and private information from wallets, purses, mail, your home, vehicle, computer, and websites you've visited or e-mails you've sent; 3) retrieving personal information from your garbage or recycling bin by "dumpster diving"; 4) posing as a creditor, landlord or employer to get a copy of your credit report or access to your personal information from other confidential sources; 5) tampering with automated banking machines (ABMs) and point of sale terminals, enabling thieves to read your debit or credit card number and Personal Identification Number (PIN);
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BYP 7-6 (Continued) (b) (Continued) 6) searching public sources, such as newspapers (obituaries), telephone books, and records open to the public (professional certifications); 7) buying the information from a dishonest employee working where personal and/or financial information is stored. (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. 2) You receive calls from collection agencies or creditors for an account you don't have or that is up to date. Someone may have opened a new account in your name, or added charges to an account without your knowledge or permission. 3) For information about changes to the Consumer Reporting Act that came into effect January 1, 2008, see the Personal Finance section of the site. 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. Or, you get credit card statements for accounts you don't have. 6) You apply for credit and are turned down, for reasons that do not match your understanding of your financial position.
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BYP 7-6 (Continued) (d) 1.
Some of the physical and IT controls that can be implemented to safeguard your identity include: i) Always store any cards and documents, such as birth certificates, social insurance numbers and passports, containing personal information in a secure place, and shred them after they expire. ii) Look into encryption, firewalls and virus protection for your computer. iii) Install fire-wall, anti-virus, anti-spyware, and security software and keep it up to date.
2.
Some of the checks that you can do to recognize identity theft and prevent it from continuing include: i) Regularly review the balances on your statements from banks, credit card companies, and other companies, and report any discrepancies, however minor, right away. Fraudsters often steal in small amounts from many cards to evade detection. ii) Once a year, get a copy of your credit report from the two national credit reporting agencies, Equifax Canada and TransUnion Canada. The report tells you what information the bureau has about your credit history, financial information, any judgments, collection activity and who has asked for your information. iii) If your bills don't arrive, or you applied for a new credit card that hasn't come on time, call the credit grantor immediately.
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CHAPTER 8 Accounting for Receivables ASSIGNMENT CLASSIFICATION TABLE Brief Exercises Exercises
Problems Set A
Problems Set B
1, 2, 3, 4, 5
1, 2, 3, 4
1, 2, 3, 6
1, 2, 3, 8, 9, 10
1, 2, 3, 8, 9, 10
2. Calculate the net realizable value of accounts receivable and account for bad debts.
6, 7, 8, 9, 10, 11, 12, 13, 14
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. Account for notes receivable. 4. Demonstrate the presentation, analysis, and management of receivables.
15, 16, 17, 18, 19 20, 21, 22, 23, 24, 25
11, 12, 13, 14 14, 15, 16
8, 9, 10, 11 3, 11, 12, 13
9, 10
9, 10
2, 8, 10, 11, 12, 13
2, 8, 10, 11, 12, 13
Study Objectives
Questions
1. Record accounts receivable transactions.
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A
Difficulty Level Moderate
Time Allotted (min.) 35-45
Simple
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
Identify impact of accounts receivable and bad debts transactions; determine statement presentation. Record receivables transactions.
Moderate
20-30
Moderate
35-45
Moderate
30-40
Moderate
20-30
12A
Record note receivable transactions; show balance sheet presentation. Prepare assets section of balance sheet; calculate and interpret ratios. Comment on approach; 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. Record accounts receivable and bad debts transactions; show balance sheet presentation. Record accounts receivable and bad debts transactions; show financial statement presentation. Calculate bad debt amounts and answer questions.
Moderate
35-45
Simple
20-30
Moderate
35-45
Moderate
15-25
Moderate
20-30
6B
Prepare aging schedule and record bad debts and explain method. Prepare aging schedule and record bad debts.
Moderate
15-25
7B
Determine missing amounts.
Complex
20-30
8B
Identify impact of accounts receivable and bad debts transactions; determine statement presentation. Record receivables transactions.
Moderate
20-30
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. Comment on approach; 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. Record accounts receivable and bad debts transactions; show balance sheet 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, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study 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 Q8-1 Q8-3 Q8-5
Application BE8-2 P8-3A 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
Q8-9 Q8-11 Q8-11 Q8-12
Q8-6 Q8-7 Q8-8 Q8-10 Q8-13 Q8-14
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
Q8-15
Q8-16 Q8-17 Q8-18 Q8-19
Q8-25
Q8-20 Q8-21 Q8-22 Q8-23 Q8-24
BE8-11 BE8-12 BE8-13 BE8-14 E8-8 E8-9 BE8-14 BE5-15 E8-3 E8-11 E8-12 P8-2A
notes receivable. 4. Demonstrate
the presentation, analysis, and management of receivables.
Continuing Cookie Chronicle BYP8-3
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 P8-8A P8-10A P8-2B P8-8B P8-10B
8-3
BE8-16 E8-13 P8-11A P8-12A P8-13A P8-11B P8-12B P8-13B BYP8-1 BYP8-2 BYP8-6
Synthesis Evaluation
BYP8-4 BYP8-5
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Accounting Principles, Sixth Canadian Edition
ANSWERS TO QUESTIONS 1.
For a service company, a receivable is recorded when service is provided on account and the revenue is recognized. For a merchandising company, a receivable is recorded at the point of sale of merchandise on account.
2.
Accounts and notes receivable are sometimes called trade receivables because they result from sales transactions and occur in the normal course of business operations.
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 customers payments on account are properly recorded and outstanding balances are promptly and appropriately updated. Up to date accounts provide management with a tool to follow up 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 in total 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 given in the negotiated terms documented on the invoice. Sometimes a grace period, of three days, for example, is given for payments received beyond the due dates, before interest is applied to the account. The rate of interest calculated must correspond to the terms given in the invoice.
5.
Ernie is not correct. Only bank credit card sales are cash sales. Sales on credit cards that are not directly associated with a bank are reported as credit sales, not cash sales. This occurs because it takes time for the retailer to collect the amounts outstanding from any non bank credit card company.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 6.
Companies offering credit to customers cannot know with certainty whether or not they can collect their accounts receivable from customers. The requirement to write-off an accounts receivable may occur because of circumstances beyond the customer’s control. For example, the customer may suddenly not be able to pay bills because of an unexpected decrease in revenues or an unexpected increase in expenses.
7.
I agree that ACCT 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 lost sales to competition might cause a downturn in profit far greater than any experienced bad debt expense. Strategies including doing a proper scrutiny of potential customers’ credit worthiness can greatly reduce the risk of non-collection. As well, ACCT should closely monitor its accounts receivable to reduce further losses on suspect accounts by suspending sales.
8.
The net realizable value of accounts receivable is the collectible amount of an account receivable; the amount of the cash expected from the collection of the account. 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.
9.
The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and recorded at the end of an accounting period. Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. (2) When collection efforts demonstrate that an actual account receivable needs to be written off, the amount of the uncollectible receivable is debited to Allowance for Doubtful Accounts and credited to Accounts Receivable, reducing the balances of both accounts. (3) If an account previously written off is later collected, the original write-off is reversed to reinstate the account receivable and then the collection on account is recorded. (a) The allowance method requires that the accounts receivable be reported on the balance sheet at their net realizable value. Failure to adequately provide for any accounts that will require write-off in the future would cause the assets to be overstated.
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Chapter 8
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) Question 9 (Continued) (b) By recording the accrual of the amount of the bad debt expense, the expense is recorded in the same accounting period as the sale occurred. The matching of expenses to revenues is achieved by this accrual. 10.
(a) The Allowance for Doubtful Accounts is a contra asset account that shows the amount of the receivables that are expected to become uncollectible in the future. It is deducted from the gross receivables to provide proper valuation for accounts receivable. (b) The account will have a debit balance when the actual amount of receivables written off in an accounting period exceeds the amount of uncollectible accounts that was estimated and recorded at the end of the previous period.
11.
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.
12.
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.
13.
The aging schedule is the 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 account and consequently the net realizable value of accounts receivable. The older the account receivable, the higher the percentage of write-off is applied, based on past experience.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 14.
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 outcome or 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.
15.
Notes and accounts receivable are credit instruments. Both are valued at their net realizable value. Both can be sold to another party. Accounting for the recognition of a note receivable and an account receivable are the same. Accounting for the disposition of a note receivable and an account receivable are the same. An account receivable is an informal promise to pay, while a note receivable is a written promise to pay. An account receivable results from 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 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.
16.
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.
17.
Notes are not recorded at their maturity value, which includes principal and interest, because the interest on the note is earned over time. The value of the asset would be overstated if the interest was included at the inception of the note. According to revenue recognition criteria, interest is recorded as earned.
18.
A dishonoured note is a note that is not paid in full at maturity. The payee still has a claim against the makerof 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.
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Chapter 8
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 19.
When a promissory note is dishonoured, the principal amount may or may not be determined to be collectible. If the principal amount is not collectible it will be written off. Any interest that has accrued on the note that is not collectible and has been previously recognized and recorded would be written-off along with the principal. Any unrecorded interest would not be accrued or recorded. If on the other hand the payee feels that the principal can eventually be collected the principal amount will be dr. to accounts receivable, and any interest that has accrued up to the note’s maturity date must be recorded as interest revenue and added to the account receivable principal as well.
20.
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.
21.
Each of the major types of receivables should be identified in the balance sheet or in the notes to the financial statements. Short term receivables are reported in the current asset section of the balance sheet, following cash and short term investments. In this case, notes receivable due in three months would be disclosed first, followed by net accounts receivables (accounts receivable less the allowance for doubtful accounts) and finally other receivables which would include sales taxes recoverable and income taxes receivable. The note receivable due in two years would be included in Long-term Investments on the company’s balance sheet.
22.
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. 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.
23.
When a company’s receivable turnover is smaller, (fewer times) this means that the business has been able to convert accounts receivable to cash less quickly than it did in the past. The management of receivable has therefore worsened.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 24.
A company might not want a receivables turnover ratio significantly higher than that of its competitors because this might be an indication that the credit terms offered to its customers are much less lenient that those offered by the competitor. The competitor is likely offering payment terms that are more generous (more time given to customers to pay) and so customers will be more likely to buy from the competitor resulting in loss of the business to the company.
25.
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
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 (a) (b) Trans. Accounts Note No.: Receivable Receivable
(c) Total Assets
(d) Total Liabilities
(d) Owner's Equity
1. 2. 3. 4. 5. 6. 7.
Increase Increase Increase No effect Increase No effect No effect
No effect Increase No effect No effect No effect No effect Decrease
Increase No effect Increase No effect Increase No effect Increase
Increase No effect No effect Decrease No effect Decrease No effect
No effect No effect Increase No effect No effect Increase No effect
BRIEF EXERCISE 8-2 (a) Sept. 1
(b) Sept. 4
(c) Sept. 10
Solutions Manual .
Accounts Receivable ......................... Sales ............................................... Cost of Goods Sold ............................ Merchandise Inventory..................
20,000
Sales Returns and Allowances ......... Accounts Receivable ..................... Merchandise Inventory ...................... Cost of Goods Sold .......................
4,000
Cash .................................................... Sales Discount [($20,000 − $4,000) × 2%] ................... Accounts Receivable [$20,000 − $4,000] ..........................
15,680
8-10
20,000 12,000 12,000
4,000 2,400 2,400
320 16,000
Chapter 8
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 8-3 (a) May 1
(b) May 6
Accounts Receivable ............................ 30,000 Sales ...............................................
30,000
Sales Returns and Allowances .............. 6,000 Accounts Receivable .....................
6,000
(c) June 30 Accounts Receivable ......................... Interest Revenue ............................ [($30,000 − $6,000) × 10% × 1/12] (d) July 5
Solutions Manual .
200 200
Cash [$30,000 − $6,000 + $200]............ 24,200 Accounts Receivable .....................
24,200
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Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 8-4 (a)
Nonbank credit card:
Aug. 7
(b)
18 582 600
Visa card:
Aug. 7
(c)
Credit Card Expense [$600 × 3%] ...... Accounts Receivable [$600 − $18] .... Sales ...............................................
Credit Card Expense [$600 × 3%] ...... Cash [$600 − $18] ............................... Sales ...............................................
18 582 600
Imports to You Co. Credit Card:
Aug. 7
Accounts Receivable ........................ Sales ...............................................
600 600
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
Accounts receivable Less: Allowance for doubtful accounts Net realizable value
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8-12
1% 4% 10% 20%
Estimated Uncollectible Accounts $ 2,650 2,800 4,500 4,000 $13,950 $400,000 13,950 $386,050
Chapter 8
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 8-6 (a) Dec. 31
(b) Dec. 31
Bad Debts Expense [$13,950 − $4,500] ................................... 9,450 Allowance for Doubtful Accounts.
9,450
Bad Debts Expense [$13,950 + $2,500] ................................. 16,450 Allowance for Doubtful Accounts.
16,450
BRIEF EXERCISE 8-7 (a)
Required balance $250,000 × 4% = $10,000
Accounts receivable Less: Allowance for doubtful accounts Net realizable value (b) Dec. 31
Bad Debts Expense ........................... 11,500 [($250,000 × 4%) + $1,500] Allowance for Doubtful Accounts .
(c) Dec. 31 Bad Debts Expense ........................... [($250,000 × 4%) − $500] Allowance for Doubtful Accounts .
Solutions Manual .
$250,000 10,000 $240,000
8-13
11,500
9,500 9,500
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Accounting Principles, Sixth Canadian Edition
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
(1) Before Write-Off $575,000
(2) After Write-Off $569,500
28,000 $547,000
22,500 $547,000
BRIEF EXERCISE 8-10 June 4
Solutions Manual .
Accounts Receivable ......................... Allowance for Doubtful Accounts.
5,500
Cash .................................................... Accounts Receivable .....................
5,500
8-14
5,500
5,500
Chapter 8
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Accounting Principles, Sixth Canadian Edition
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 2014 $15,000 × 6% × 4/12 = $300 $44,000 × 8% × 2/12 = $587 $30,000 × 7% × 3/12 = $525
(c) Interest 2015 $15,000 × 6% × 5/12 = $375 $44,000 × 8% × 4/12 = $1,173 $30,000 × 7% × 12/12 = $2,100
BRIEF EXERCISE 8-12 Apr.
1 Accounts Receivable—Emerald........ 42,000 Sales ...............................................
42,000
Cost of Goods Sold............................ 25,200 Merchandise Inventory..................
25,200
June 1 Notes Receivable—Emerald .............. 42,000 Accounts Receivable—Emerald ...
42,000
July 31 Interest Receivable [$42,000 × 6% × 2/12].......................... Interest Revenue............................ Dec. 1
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420 420
Cash .................................................... 43,260 Interest Receivable ........................ Interest Revenue [$42,000 × 6% × 4/12] Notes Receivable ...........................
420 840 42,000
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Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 8-13 (a) June 1
Notes Receivable ............................... 27,000 Accounts Receivable.....................
27,000
Cash .................................................... 27,540 Notes Receivable ........................... Interest Revenue [$27,000 × 6% × 4/12]
27,000 540
June 1 Notes Receivable .................................. 27,000 Accounts Receivable.....................
27,000
Oct.
1
(b)
Oct.
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
(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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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 8-14 (a) 2014 July 1
Oct 1
Dec 31
2015 Jan 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
Cash ........................................................ 1,000 Interest Receivable ........................
1,000
(b) Included in the current assets section of the balance sheet will be $1,000 of interest receivable. Included under the long-term investments section of the balance sheet will be the $100,000 note receivable.
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 8-15 WAF COMPANY Balance Sheet (Partial) November 30, 2014
Assets Current assets Cash............................................................................. $ 74,000 Short-term investments ............................................. 80,500 Accounts receivable ..................................... $109,000 Less: Allowance for doubtful accounts ... 6,950 102,050 Notes receivable ......................................................... 50,000 GST recoverable ......................................................... 21,850 Interest receivable ...................................................... 2,500 Merchandise inventory............................................... 110,800 Prepaid expenses ....................................................... 15,300 Total current assets ............................................... $457,000
BRIEF EXERCISE 8-16 (a) Receivables turnover — 2011 $4,893,624 ÷ [($133,504 + $108,379) ÷ 2] = 40.46 times Collection period — 2011 365 days ÷ 40.46 = 9 days Receivables turnover — 2010 $4,968,119 ÷ [($108,379 + $372,330) ÷ 2] = 20.67 times Collection period — 2010 365 days ÷ 20.67 = 17.66 days (b) The company’s receivables turnover and collection period have improved dramatically in 2011, and so the company’s liquidity should have improved.
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 8-1 (a) Transaction Date May 8 May 10 May 18 May 19 May 20 July 19 July 22 (b) May
Cash
Accounts Receivable
Owner's Equity
Inventory
NE NE +$11,760 NE NE NE +$5,569
+$13,000 −$1,000 −$12,000 +$6,000 −$500 +$69 −$5,569
−$5,980 +$460 NE −$3,600 NE NE NE
8 Accounts Receivable—Grande ............ 13,000 Sales ............................................... 5,980 Cost of Goods Sold ............................ Merchandise Inventory.................. 10
Sales Returns and Allowances ......... Accounts Receivable—Grande ..... Merchandise Inventory ...................... Cost of Goods Sold .......................
Solutions Manual .
Accounts Receivable—Summer ....... Sales ............................................... Cost of Goods Sold ............................ Merchandise Inventory..................
8-19
13,000 5,980
1,000 1,000 460 460
18 Cash [$12,000 − $240] ........................ 11,760 Sales Discounts [($13,000 − $1,000) × 2%] ................... 240 Accounts Receivable—Grande ..... 19
+$7,020 −$540 −$240 +$2,400 −$500 +$69 NE
12,000
6,000 6,000 3,600 3,600
Chapter 8
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-1 (Continued) May 20 Sales Returns and Allowances ......... Accounts Receivable—Summer ... July 19
500 500
Accounts Receivable—Summer [($6,000 − $500) × 15% × 1/12] ........... Interest Revenue ............................
69
22 Cash ($6,000 − $500 + $69) ................ Accounts Receivable—Summer ...
5,569
69
5,569
EXERCISE 8-2 (a) June 3
Accounts Receivable—Kidd ..................... 1,050 Sales ......................................................
6 Accounts Receivable—Pavic.................... Sales ......................................................
840
8
210
Sales Returns and Allowances ................ Accounts Receivable—Pavic ...............
1,050
840
210
9 Cash ......................................................... 412.58 Credit Card Expense [$421 × 2%] ............. 8.42 Sales ...................................................... 421.00 18 Accounts Receivable—Kidd ..................... Sales ......................................................
348 348
19 Cash .......................................................... 229.50 Debit Card Expense ................................. 0.50 Sales ...................................................... 230.00 20
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Cash ........................................................... Accounts Receivable—Pavic ...............
8-20
315 315
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-2 (Continued) (a) (Continued) June 23 Accounts Receivable—Montpetit ............. Sales ...................................................... 25
498 498
Cash ........................................................... 1,050 Accounts Receivable—Kidd ................
30 Accounts Receivable—Pavic.................... Sales ......................................................
1,050
420 420
(b) Date
Explanation
June 6 8 20 30
Sales Return Collection Sales
Biljana Pavic Ref. Debit
Balance
210 315
840 630 315 735
Credit
Balance
1,050
1,050 1,398 348
Credit
Balance
840
420 Ben Kidd Ref.
Date
Explanation
June 3 18 25
Sales Sales Collection
Date
Nicole Montpetit Explanation Ref. Debit
June 23
Sales
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Credit
Debit 1,050 348
498
8-21
498
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-2 (Continued) (b) (Continued)
Date
General Ledger Accounts Receivable Explanation Ref. Debit
June 3 6 8 18 20 23 25 30
Sales Sales Return Sales Collection Sales Collection Sales
(c)
Credit
1,050 840 210 348 315 498 1,050 420
Subsidiary ledger account balances: Biljana Pavic ............................................................ Ben Kidd .................................................................. Nicole Montpetit ...................................................... Total ......................................................................... Balance per general ledger control account .........
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8-22
Balance 1,050 1,890 1,680 2,028 1,713 2,211 1,161 1,581
$
735 348 498 $1,581 $1,581
Chapter 8
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-3 (a) Oct. 15
20
30
31
Nov. 15
18
Accounts Receivable ......................... 15,000 Service Revenue ............................
15,000
Cash [$7,500 − $263] .......................... Credit Card Expense [$7,500 × 3.5%] Service Revenue ............................
7,237 263 7,500
Accounts Receivable [$2,000 − $85] . Credit Card Expense [$2,000 × 4.25%] Service Revenue ............................
1,915 85
Cash [$5,000 − $50] ............................ Debit Card Expense [100 × $0.50] ..... Service Revenue ............................
4,950 50
Cash .................................................... Accounts Receivable .....................
9,000
Cash .................................................... Accounts Receivable .....................
1,915
2,000
5,000
9,000
30 Accounts Receivable [($15,000 − $9,000) × 24% × 1/12 × 15/30] Interest Revenue ............................
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1,915
60 60
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-3 (Continued) (b) KRAZY HAIR SALON Income Statement Two Months Ended November 30, 2014 Service revenue............................................................. Operating expenses Salaries expense ..................................... $5,000 Rent expense ........................................... 4,000 Supplies expense .................................... 500 Credit and debit card expense................ 398 Profit from operations................................................... Other revenue Interest revenue ........................................................ Profit...............................................................................
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8-24
$ 29,500
9,898 19,602 60 $ 19,662
Chapter 8
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-4 (a)
Accounts receivable Less: Allowance for doubtful accounts Net realizable value * ($210,000 × 10%)
$210,000 21,000* $189,000
(b) Dec. 31 Bad Debts Expense ..................... 19,700 Allowance for Doubtful Accounts [($210,000 × 10%) − $1,300] (c)
19,700
Net realizable value does not change from (a) $189,000. Bad Debts Expense is $23,800 [($210,000 × 10%) + $2,800]
EXERCISE 8-5 (a) Age of Accounts 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
(b)
Amount $170,000 35,700 20,000 15,300
Accounts receivable Less: Allowance for doubtful accounts Net realizable value
% 1 10 25 60
Estimated Uncollectible $1,700 3,570 5,000 9,180 $19,450 $241,000 19,450 $221,550
(c)
Sept. 30 Bad Debts Expense ..................... 20,850 Allowance for Doubtful Accounts 20,850 [$19,450 + $1,400*] *$1,400 = Debit balance in Allowance prior to adjustment = Oct. 1, 2014 balance – write-offs during year = $17,600 – $19,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-6 (a) and (b) Item (1) $45,000
Amount of credit sales in sales account
(2)
$800
Write-offs of accounts receivable
(3)
$ 15,000 +45,000 −800 −35,200 $24,000
Opening balance Item (1) Sales on account Write-offs of accounts receivable Collection on account Ending balance
(4)
$1,200 −800 −2,400 $ 2,000
Opening balance Write-offs of accounts receivable Required ending balance in Allowance (5) Bad debt expense recorded
(5)
$2,400
Required balance based on aging 10% of (3)
Entries (not required) with description: Accounts Receivable ......................... 45,000 Sales ............................................... Sales on account for the year
(1)
(2)
Allowance for Doubtful Accounts ..... Accounts Receivable ..................... Write-off of accounts receivable
(4)
(c)
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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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-7 (a) 2014 Dec. 31 Bad Debts Expense [(5% × $650,000) + $2,300] ................. 34,800 Allowance for Doubtful Accounts.
34,800
2015 Mar. 5 Allowance for Doubtful Accounts ..... Accounts Receivable—Black ........
3,700
3,700
5 Allowance for Doubtful Accounts ..... Accounts Receivable—Wright ......
6,900
June 6 Accounts Receivable—Wright........... Allowance for Doubtful Accounts.
6,900
6
Cash .................................................... Accounts Receivable—Wright ......
6,900
6,900 6,900 6,900
(b)
Date 2014 Dec. 31 31 2015 Mar. 5 5 June 6
Solutions Manual .
General Ledger Allowance for Doubtful Accounts Explanation Ref. Debit Credit Balance unadjusted AJE
Balance
DR 2,300 34,800 32,500
Write-off Black Write-off Wright Collection of Wright
3,700 6,900 6,900
8-27
28,800 21,900 28,800
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 8-7 (Continued) (c) Accounts receivable Less: Allowance for doubtful accounts Net realizable value (d) Accounts receivable Less: Allowance for doubtful accounts Net realizable value
Before Write-Off $685,000
After Write-Off $674,400
32,500 $652,500
21,900 $652,500
Before Write-Off $641,000
After Write-Off $641,000
21,900 $619,100
28,800 $612,200
EXERCISE 8-8 (a)
$100,000 = $12,000 ÷ 2 ÷ 6%
(b)
8% =
(c)
$4,500 = $180,000 × 10% × 3/12
(d)
$4,500 = $180,000 × 10% × 3/12 same as (c) total interest
(e)
$4,800 ÷ 6 × 5 = $4,000
(f)
$12,000 ÷ 24 × 2 = $1,000 or $100,000 × 6% × 2/12
Solutions Manual .
$4,800 $120,000 × 6/12
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Accounting Principles, Sixth Canadian Edition
EXERCISE 8-9 Nov. 1 Notes Receivable—Morgan ............... 60,000 Cash................................................ 15
Dec. 1
Accounts Receivable—Giorgi ........... 12,000 Sales ............................................... Cost of Goods Sold ............................ 7,500 Merchandise Inventory.................. 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 .............
8-29
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
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 8-10 May
1
Notes Receivable—Jioux ................... 15,000 Accounts Receivable—Jioux ........
June 30 Interest Receivable............................. Interest Revenue [$15,000 × 6% × 2/12] ..................... July 31
150 150
Notes Receivable—Irvine................... Cash................................................
2,000
Cash ($2,000 × 5% × 1/12) .................. Interest Revenue ............................
8
Sept. 30 Cash ($2,000 × 5% × 1/12) .................. Interest Revenue ............................
8
Aug. 31
Oct. 31
Cash .................................................... Interest Revenue ............................ Notes Receivable—Irvine ..............
2,000
8
8 2,008
Nov. 1 Allowance for Doubtful Accounts ..... 15,150 Notes Receivable—Jioux ..............
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15,000
8 2,000
15,150
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 8-11 (a)
Total interest revenue for the year ended December 31, 2014 − $4,918 calculated as follows: Note 1. 2. 3. 4. 5.
Calculation
Interest Revenue $15,000 × 4% × 12/12 = $ 600 $46,000 × 5% × 12/12 = 2,300 $32,000 × 4% × 11/12 = 1,173 $22,000 × 6% × 7/12 = 770 $9,000 × 5% × 2/12 = 75 Total $4,918
Interest Revenue is reported under other revenues on the income statement. (b)
Notes receivable reported under the current asset section of the balance sheet total $102,000 (Notes 1, 2, 3 and 5 which are all due before December 31, 2015). Notes receivable reported under the long-term investments section of the balance sheet total $22,000 (Note 4 which is due May 31, 2019). Interest receivable reported under the current asset section of the balance sheet total $534 calculated as follows:
Solutions Manual .
Note
Calculation
1. 2. 3. 4. 5.
$15,000 × 4% × 1/12 = $46,000 × 5% × 1/12 = $32,000 × 4% × 1/12 = $22,000 × 6% × 1/12 = $ 9,000 × 5% × 2/12 =
8-31
Interest Receivable $ 50 192 107 110 75 Total $534
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 8-12 (a) Dec.31Bad Debts Expense ................................... 28,000 Allowance for Doubtful Accounts. [$700,000 (see (1) below) × 4%]
28,000
(b) AJS COMPANY Balance Sheet (Partial) December 31, 2014
Assets Current assets Cash.......................................................................... $ 40,000 Short-term investments .......................................... 50,000 Accounts receivable (1) ............................ $700,000 Less: Allowance for doubtful accounts . 28,000 672,000 Interest receivable ................................................... 1,125 Merchandise inventory............................................ 325,000 Prepaid insurance.................................................... 8,000 Total current assets ............................................ $1,096,125 (1)
$4,000,000 − $100,000 − $3,200,000 = $700,000
(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, Sixth Canadian Edition
EXERCISE 8-13 (a)
Current Ratio: 2011: $1,848 ÷ $1,715 = 1.08 2010: $1,590 ÷ $1,906 = 0.83
(b) Receivables Turnover: 2011: $9,028 ÷ [($836 + $796) ÷ 2] = 11.06 times 2010: $8,297 ÷ [($796 + $831) ÷ 2] = 10.20 times Average Collection Period: 2011: 365 days ÷ 11.06 = 33.0 days 2010: 365 days ÷ 10.20 = 35.8 days (c)
Both liquidity and the management of accounts receivables have improved. For liquidity the current ratio increased significantly from 0.83 to 1.08. For the management of accounts receivable, the improvement is evidenced by the decrease in the average collection period from 35.8 days to 33.0 days and the increase in the receivable turnover from 10.20 times to 11.06 times.
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 8-1A (a) Jan. 3
4
8
9
18
19
20
Cash ........................................................ 18,000 Accounts Receivable—Brown’s Rep.
18,000
Accounts Receivable—Custom Rep... Allowance for Doubtful Accounts.
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 23
25
26
Accounts Receivable—Brown’s Repair 5,600 Sales ...............................................
5,600
Cash ........................................................ 10,000 Sales ...............................................
10,000
Accounts Receivable—Luxury Autos . 18,000 Sales ...............................................
18,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-1A (Continued) (a) (Continued) Jan.31 Allowance for Doubtful Accounts ........... 3,800 Accounts Receivable—Best Auto Rep.
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
8-35
3,750 1,400 1,350
3,800
18,000
1,400
Chapter 8
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Accounting Principles, Sixth 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: In a computerized accounting system, the posting to the subsidiary accounts receivable and control account occurs simultaneously and so the chances of error are far reduced. On the other hand, in a manual bookkeeping system, errors in posting, summarizing accounts and transcribing balances could occur. Errors of duplication, posting debits as credits and vice-versa, errors of omission or transposition as well as arithmetic errors are possible.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-2A
(a)
1. Accounts Receivable..................... 2,800,000 Sales .......................................... 2. Sales Returns and Allowances..... Accounts Receivable ................
325,000 325,000
3. Cash................................................ 2,410,000 Accounts Receivable ................ 4. Accounts Receivable..................... Interest Revenue .......................
72,000
5. Allowance for Doubtful Accounts Accounts Receivable ................
58,400
6. Accounts Receivable..................... Allowance for Doubtful Accounts
5,200
Cash................................................ Accounts Receivable ................
5,200
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2,800,000
2,410,000 72,000 58,400 5,200 5,200
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 8-2A (Continued) (b) Accounts Receivable Explanation Ref. Debit
Date Jan.
1
Date Jan.
1
Balance 1. 2. 3. 4. 5. 6. 6.
Credit
2,800,000
Balance
5,200
760,000 3,560,000 3,235,000 825,000 897,000 838,600 843,800 838,600
Allowance for Doubtful Accounts Explanation Ref. Debit Credit
Balance
Balance 5. 6. (c)
325,000 2,410,000 72,000 58,400 5,200
58,400 5,200 61,060
76,000 17,600 22,800 83,860
(c)
Accounts Receivable from (a) ................................ $838,600 Less: Allowance for Doubtful Accounts 10% ........ 83,860 Net Realizable Value ............................................... $754,740
(d)
Bad Debts Expense ...................................... 61,060 Allowance for Doubtful Accounts [($838,600 × 10%) − $22,800] .................
61,060
Current assets: Accounts receivable ............................... $838,600 Less: Allowance for doubtful accounts 83,860
$754,740
(e)
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-2A (Continued) Taking It Further: When deciding if the business should continue to accrue bad debt expenses at the rate of 10% of accounts receivable, Silk Co. should consider the following factors: 1. Any change in the collection risk of customers. 2. Trends in the economy which would add risk to the collection of current accounts. 3. The age of the accounts receivable. 4. Experience with current customers concerning business failures. 5. The deterioration in the accounts receivable turnover. 6. Changes in terms offered to customers. Silk’s write-offs, (net of reversals of write-offs) were $53,200 This is less than the opening balance of the Allowance for doubtful accounts by $22,800 and may indicate that 10% is slightly high.
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-3A (a)
Accounts Receivable .................................. 400,000 Sales .......................................................
400,000
Cash ............................................................ 361,500 Accounts Receivable .............................
361,500
Allowance for Doubtful Accounts ............. 10,500 Accounts Receivable .............................
10,500
Accounts Receivable ................................. Allowance for Doubtful Accounts.........
1,750 1,750
Cash ............................................................ Accounts Receivable .............................
1,750
(b)
(c)
1,750
Posting to accounts not required:
Date
Accounts Receivable Explanation Ref. Debit
Credit
Balance
361,500 10,500 1,750
100,000 500,000 138,500 128,000 129,750 128,000
Allowance for Doubtful Accounts Explanation Ref. Debit Credit
Balance
Balance Sales 400,000 Collections Write-offs Reverse write-off 1,750 Coll. of prev. write-off
Date
10,500
Balance Write-offs Reverse write-off Bad debts expense
Solutions Manual .
(d)
8-40
1,750 9,750
7,000 3,500 Dr. 1,750 Dr. 8,000
Chapter 8
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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, Sixth Canadian Edition
PROBLEM 8-4A (a)
$19,000 [$24,000 − ($20,000 − $17,500 + $2,500)]
(b) $27,000 [$24,000 − ($12,000 − $17,500 + $2,500)] (c)
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. On the other hand, the amount of the bad debt expense recorded at the end of the period will be directly 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.
(d) 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 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. The second entry decreases the accounts receivable balance and the net realizable value of the receivables. Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-4A (Continued)
Taking It Further: Certainty of collection is extremely rare. If a company decided it would only sell to customers it knew for sure were going to pay their account, the company would likely lose some opportunities for sales. Competitive forces would lead to other businesses allowing some credit risk and the granting of better terms to potential customers. These companies would in turn attract business away from the business with very stringent credit terms.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 8-5A (a) Total Estimated percentage uncollectible Estimated uncollectible accounts
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
(b)
Bad Debts Expense .................................. 39,200 Allowance for Doubtful Accounts [$36,200 + $3,000].......................... 39,200
(c)
Allowance for Doubtful Accounts ........... 18,000 Accounts Receivable .................... 18,000
(d)
Accounts Receivable................................ Allowance for Doubtful Accounts
5,500
Cash........................................................... Accounts Receivable ....................
4,500
(e)
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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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
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 that is being used does not calculate an aging of the accounts receivable.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-6A
(a)
2014 # 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
2015 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
(b)
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
2014 Accounts Receivable ................................................. $270,000 Less: Allowance for Doubtful Accounts .................. 18,690 Net Realizable Value.................................................. $251,310 2015 Accounts Receivable ................................................. $275,000 Less: Allowance for Doubtful Accounts .................. 30,950 Net Realizable Value.................................................. $244,050
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-6A (Continued) (c) 1.
2.
3.
4.
Bad Debts Expense.................................... Allowance for Doubtful Accounts [$18,690 − $6,600] ..................................
12,090 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 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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Accounting Principles, Sixth Canadian Edition
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 (f) 5,237,100 (d) 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 (c) 50,400 Bad debt (e) 53,625 End. Bal. 83,475 Sales Sales
5,370,000
Bad Debts Expense (e) 53,625 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) .......................
5,370,000
4,200 4,200
50,400 50,400
Ending balance of accounts receivable (d) can be calculated from the ending balance of the allowance for doubtful accounts given as $83,475 ÷ 9% = $927,500.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-7A (Continued) Bad Debts Expense (e) .............................. 53,625 Allowance for Doubtful Accounts (e) ... Force in allowance account: ($83,475 – $76,050 + $50,400 – $4,200 = $53,625)
53,625
Cash ............................................................... 5,237,100 Accounts Receivable (f) ........................ 5,237,100 Force in account receivable 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-8A (a) Transaction Sept. 1. 2. 3. 4. 5. Oct. 1. 2. 3. 4. 5. 6.
Cash
Acc. Receiv.
Allow. for Doubt. Accts.
NE NE +$59,200 NE NE
+$56,300 −$900 −$59,200 +$800 NE
NE +$350 +$58,500 NE NE NE
+$66,300 NE −$58,500 −$7,500 +$700 NE
Total Assets
Owner's Equity
NE −$25,335 NE +$400 NE NE NE NE (1) +$1,380 NE
+$30,965 −$500 NE +$800 −$1,380
+$30,965 −$500 NE +$800 −$1,380
NE −$28,700 +$350 NE NE NE −$7,500 NE NE NE (2) +$7,190 NE
+$37,600 NE NE NE +$700 −$7,190
+$37,600 NE NE NE +$700 −$7,190
Invent.
(1) $74,500 + $56,300 − $900 − $59,200 + $800 = $71,500 $71,500 × 4% = $2,860 $2,860 – $1,480 = $1,380 (2) $71,500 + $66,300 − $58,500 − $7,500 + $700 = $72,500 $72,500 × 4% = $2,900 $2,900 – ($2,860 + $350 − $7,500) = $7,190 (See Accounts Receivable and Allowance For Doubtful Accounts balances in ledger that follows.)
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-8A (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 56,300
Opening Balance Sales Returns Collections Interest charges
900 59,200 800
Sales Coll. of prev. write-off Reverse write-off Collections Write-offs Interest charges
66,300 350 350 58,500 7,500 700
Allowance for Doubtful Accounts Explanation Ref. Debit Credit
Opening Balance Bad debts expense
1,380
Coll. of prev. write-off Write-offs Bad debts expense
350 7,500
(b) Current assets: Accounts receivable .............................. Less: Allowance for doubtful accounts
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Credit
8-51
7,190
$72,500 2,900
Balance 74,500 130,800 129,900 70,700 71,500 137,800 138,150 137,800 79,300 71,800 72,500
Balance 1,480 2,860 3,210 4,290Dr. 2,900
$69,600
Chapter 8
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-8A (Continued) (c)
The bad debts expense on the income statement for the period would be $18,430 ($9,860 + $1,380 + $7,190).
Taking It Further: By implementing an increase in the amount of credit checking, Bassano Company should be able to reduce the risk of not being able to collect accounts receivable but it won’t be able to eliminate the risk completely. Consequently, so long as Bassano 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-9A Jan.
2 Accounts Receivable —Richards Company ......................... 24,000 Sales ............................................... Cost of Goods Sold ............................ 14,400 Merchandise Inventory..................
Feb. 1 Notes Receivable—Richards ............. Accounts Receivable —Richards Company..................... 15
24,000
Accounts Receivable—Mantha Co.... 12,000 Sales ............................................... Cost of Goods Sold ............................ 7,200 Merchandise Inventory..................
Apr. 30 Notes Receivable—Mantha Co .......... 12,000 Accounts Receivable —Mantha Co................................... 30 Interest Receivable............................. Interest Revenue ............................ Richards Company, $24,000 × 5% × 3/12 Garrison Company, $15,000 × 5% × 2.5/12 Total...........................................................
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14,400
24,000
Notes Receivable—Garrison ............. 15,000 Sales ............................................... Cost of Goods Sold ............................ 9,000 Merchandise Inventory..................
Mar. 15
24,000
15,000 9,000
12,000 7,200
12,000
456 456 $300 156 $456
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PROBLEM 8-9A (Continued) May 15 Cash .................................................... 15,187 Notes Receivable—Garrison......... Interest Revenue [$15,000 × 5% × 0.5/12] .................. Interest Receivable ........................ June 1
Cash .................................................... 24,400 Notes Receivable—Richards Company Interest Revenue ($24,000 × 5% × 1/12) ..................... Interest Receivable ........................
June 30 Allowance for Doubtful Accounts ....... 12,000 Notes Receivable—Mantha Co. .... July 13
Notes Receivable—Zorilla Inc................ 6,000 Sales ............................................... Cost of Goods Sold ................................ 3,600 Merchandise Inventory..................
Oct. 13 Accounts Receivable—Zorilla Inc.......... 6,105 Notes Receivable—Zorilla Inc....... Interest Revenue ($6,000 × 7% × 3/12) .......................
15,000 31 156
24,000 100 300
12,000
6,000 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 for 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, the interest is not collected, nor the principal amount of the note.
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PROBLEM 8-10A (a) Interest Receivable at September 30, 2014 RJF Inc. Resolute Co. Imaging Ltd. Dragon Co. MGH Corp.
$19,000 × 4.5% × 1/12 = $17,000 × 5% × 6/12 = $17,500 × 5.5% × 1/12 = $6,000 × 8.5% × 1/12 = $20,500 × 6% × 0/12 = Total
$ 71 425 80 43 0 $619
The notes receivable balance at September 30, 2014 is $80,000 ($19,000 + $17,000 + $17,500 + $6,000 + $20,500). (b)
Oct.
1 Cash ........................................... Interest Receivable ($19,000 × 4.5% × 1/12) .........
71
1 Cash ........................................... Interest Receivable ($17,500 × 5.5% × 1/12) .........
80
31 Accounts Receivable—Dragon Notes Receivable—Dragon .. Interest Receivable ($6,000 × 8.5% × 1/12) ........... Interest Revenue ($6,000 × 8.5% × 1/12) ...........
6,086
71
80
31 Cash ........................................... 17,496 Notes Receivable—Resolute Interest Receivable ($17,000 × 5% × 6/12) ............ Interest Revenue ($17,000 × 5% × 1/12) ............
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6,000 43 43
17,000 425 71
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PROBLEM 8-10A (Continued) (b) (Continued) Oct. 31 Interest Receivable ................... 254 Interest Revenue................... RJF Inc., $19,000 × 4.5% × 1/12 = $ 71 Imaging Ltd., $17,500 × 5.5% × 1/12 = 80 MGH Corp., $20,500 × 6% × 1/12 = 103 Total $254
254
(c) Notes Receivable Explanation Ref. Debit
Date Oct.
1 31 31
Oct. 31
Oct.
1 1 1 31 31 31
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6,000 17,000
80,000 74,000 57,000
Credit
Balance
6,086 Interest Receivable Explanation Ref. Debit
Date
Balance
Balance
Accounts Receivable Explanation Ref. Debit
Date
Credit
6,086
Credit
Balance
71 80 43 425
619 548 468 425 0 254
Balance
Adjusting entry
254
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PROBLEM 8-10A (Continued) (d) TARDIF COMPANY Balance Sheet (partial) October 31, 2014
Assets Current assets Interest receivable ......................................................
$254
Long-term investments Notes receivable ............................................................. $57,000
(e)
Oct. 31 Allowance for Doubtful Accounts 6,043 Notes Receivable—Dragon Co. Interest Receivable ($6,000 × 8.5% × 1/12) ............
6,000 43
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 Dragon Co. note carries a higher interest rate as it is likely that Dragon Co. has a poor credit rating and represents a collection risk that is higher than the average customer.
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PROBLEM 8-11A (a) TOCKSFOR COMPANY Balance Sheet (Partial) September 30, 2014 (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 and deposits .................................. 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) 2014 Receivables turnover:
2013
($4,565.5 − $31.3) ($590.4 + $611.1) ÷ 2 = 7.5
= 8.3*
365 ÷ 7.5 = 48.7 days
365 ÷ 8.3 = 44 days
*Given in the problem Average collection period:
Tocksfor’s receivables turnover ratio was lower in 2014, which means that Tocksfor was taking a little longer in 2014 in turning receivables into cash. Taking It Further: When analyzing the accounts receivable turnover and average collection period, consideration should be given to any changes in policy implemented by management during 2014 with respect to granting credit or offering discounts to their customers. As well, sales of accounts receivable during the year would also affect the receivables turnover.
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PROBLEM 8-12A (a) Rogers
Shaw
($ in millions) Beginning of year Accounts receivable (net) Add: allowance balance Gross Accounts receivable
$1,443 138 $1,581
$196.4 19.0 $215.4
End of Year Accounts receivable (net) Add: allowance balance Gross Accounts receivable
$1,574 129 $1,703
$442.8 28.8 $471.6
Receivables turnover:
Rogers
Shaw
$12,428 ($1,581 + $1,703) ÷ 2
$4,740.9 ($215.4 + $471.6) ÷ 2
= 7.6 Average collection period:
365 ÷ 7.6 = 48 days
= 13.8
365 ÷ 13.8 = 26 days
Shaw’s receivables turnover is 82% [(13.8 – 7.6) ÷ 7.6] higher than Rogers’ which means Shaw was more efficient than Rogers in collecting its receivables. However, Shaw’s receivables more than doubled in 2014, which may indicate a problem.
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PROBLEM 8-12A (Continued) Taking It Further: The beginning balance (September 1, 2010) does not include the Canwest receivables as Canwest was acquired in October 2010, whereas the ending balance of accounts receivable shown for Shaw includes the Canwest accounts receivable. The addition of $296.6 million of receivables included in the ending balance would cause the average to be biased. If the ending accounts receivable balances are not truly consistent to the operations that generated the sales, the ratio should be ignored for the purpose of comparisons.
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PROBLEM 8-13A (a)
Collection period Days sales in inventory Operating cycle
2015 365 ÷ 7.3 = 50.0 days 365 ÷ 6.3 = 57.9 days 50.0 + 57.9 = 107.9 days
2014 365 ÷ 10.1 = 36.1 days 365 ÷ 6.1 = 59.8 days 36.1 + 59.8 = 95.9 days
2013 365 ÷ 10.3 = 35.4 days 365 ÷ 6.4 = 57.0 days 35.4 + 57.0 = 92.4 days
(b)
Overall, Satellite Mechanical’s liquidity has improved over the three year period. 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. This has occurred in spite of the accounts receivable collection period increasing over the three year period resulting in the operating cycle weakening from 92.4 days to 107.9 days. A possible explanation is that other assets, besides accounts receivable and inventory (such as short-term investments) have increased or current liabilities have decreased over the years that have caused a substantial improvement in the current or acid test ratios.
(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.
(d)
With any slowdown in the turnover ratio, comes a delay in converting inventory back to cash. The opposite is also true. The amount of the cash flows in total might not be affected by a change in inventory turnover, but the speed at which cash is obtained is affected.
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PROBLEM 8-13A (Continued) Taking It Further: The dramatic deterioration in the collection period in 2014 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 Design.
4 Accounts Receivable—New Do .......... Allowance for Doubtful Accounts.
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
19 Cash...................................................... Accounts Receivable—Luxury Spa
5,000
20
23
24
25
26
8,000
900
900
3,000
2,000
500
5,000
Cash ........................................................ 10,000 Accounts Receivable—Great Looks.
10,000
Accounts Receivable—Hair Designs .. Sales ...............................................
9,000
9,000
Cash .......................................................... 3,000 Accounts Receivable—Ken’s Salon
3,000
Cash .......................................................... 5,000 Sales ...............................................
5,000
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
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 ........................................ 4,250 Allowance for Doubtful Accounts [($26,500 × 10%) + $1,600] ..................... Hair Designs Great Looks Ken’s Salon Luxury Spa New Do Total subsidiary ledgers
5,000
900
4,250
$9,000 3,500 0 14,000 0 $26,500
Balance equals control account of $26,800. Taking It Further: In a computerized accounting system, the posting to the subsidiary accounts receivable and control account occurs simultaneously and so the chances of error are far reduced. On the other hand, in a manual bookkeeping system, errors in posting, summarizing accounts and transcribing balances could occur. Errors of duplication, posting debits as credits and vice versa, errors of omission or transposition as well as arithmetic errors are possible.
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PROBLEM 8-2B (a)
1. Accounts Receivable ....................... 4,800,000 Sales ......................................... 2. Sales Returns and Allowances.... Accounts Receivable ...............
4,800,000
120,000 120,000
3. Cash.................................................. 4,700,000 Accounts Receivable ............... 4. Accounts Receivable.................... Interest Revenue ......................
200,000
5. Allowance for Doubtful Accounts Accounts Receivable ...............
179,000
6. Accounts Receivable.................... Allowance for Doubtful Accounts
24,000
Cash............................................... Accounts Receivable ...............
24,000
4,700,000
200,000
179,000
24,000
24,000
(b) Accounts Receivable Explanation Ref. Debit
Date Jan.
1
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Credit
Balance
4,800,000
Balance 1 2 3 4 5 6 6
1,580,000 6,380,000 120,000 6,260,000 4,700,000 1,560,000 200,000 1,760,000 179,000 1,581,000 24,000 1,605,000 24,000 1,581,000
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PROBLEM 8-2B (Continued) (b) (continued) Allowance for Doubtful Accounts Explanation Ref. Debit Credit
Date Jan.
(c)
1 5 6
Balance
179,000 24,000
Balance 94,800 84,200 Dr. 60,200 Dr.
Balance before adjustment [see (b)]...................... $60,200 Balance needed [$1,581,000 × 6%]......................... 94,860 Adjustment required ............................................... $155,060 The journal entry would therefore be as follows: Dec. 31
Bad Debts Expense ................... 155,060 Allowance for Doubtful Accounts
155,060
(d)
Accounts Receivable part (a) ............................... $1,581,000 Less: Allowance for Doubtful Accounts .............. 94,860 Net Realizable Value ............................................. $1,486,140
(e)
Current assets: Accounts receivable ............................ $1,581,000 Less: Allowance for doubtful accounts 94,860 $1,486,140
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PROBLEM 8-2B (Continued) Taking It Further: When deciding if the business should continue to accrue bad debt expenses at the rate of 6% of accounts receivable, Textile Imports should consider the following factors: 1. Any change in the collection risk of customers. 2. Trends in the economy which would add risk to the collection of current accounts. 3. The age of the accounts receivable. 4. Experience with current customers concerning business failures. 5. The deterioration in the accounts receivable turnover. 6. Changes in terms offered to customers. Textile’s write-offs of, net of reversals of write-offs ($155,000) was far greater than the opening balance of the allowance for doubtful accounts at the beginning of the year of $94,800. Unless there are indications that the percentage should not be changed based on the factors listed above, the 6% should increased.
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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)
(c)
Allowance for Doubtful Accounts ............. 58,000 Accounts Receivable .............................
58,000
Accounts Receivable ................................. Allowance for Doubtful Accounts.........
4,000 4,000
Cash ............................................................ Accounts Receivable .............................
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 Write-offs 58,000 Coll. of prev. write-off Bad debts expense (d)
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4,000 46,000
Balance 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 previously 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)
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. On the other hand, the amount of the bad debt expense recorded at the end of the period will be directly 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 for the period 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.
(d) 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 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 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 which render customers unable to pay their accounts. They themselves might be suffering from collection risks from their own customers.
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PROBLEM 8-5B (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 % uncollectible 1% 7% 12% 25% Estimated $11,200 $1,200 $3,850 $2,400 $3,750 uncollectible accounts
(b)
(c) (d)
(e)
Bad Debts Expense.................................... Allowance for Doubtful Accounts......... [$11,200 − $5,000]
6,200 6,200
Allowance for Doubtful Accounts ............. 12,200 Accounts Receivable .............................
12,200
Accounts Receivable ................................. Allowance for Doubtful Accounts.........
3,400 3,400
Cash ............................................................ Accounts Receivable .............................
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.
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PROBLEM 8-6B
(a)
2014 # 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
2015 # of Days Outstanding 0-30 days outstanding 31-60 days outstanding 61-90 days outstanding Over 90 days outstanding
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) 2014 Accounts Receivable .............................................. Less: Allowance for Doubtful Accounts ................ Net Realizable Value ...............................................
$390,000 25,250 $364,750
2015 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.................................... Allowance for Doubtful Accounts [$25,250 + $3,400] ..................................
28,650 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 over 90 day balances. 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 (a) 2,633,540 Write-offs (b) 5,520 Note 1 (c) 420,000
2,545,000 (d) 28,540 5,520
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 Solutions Manual .
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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 value of the accounts receivable asset to its net realizable value.
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PROBLEM 8-8B (a) Transaction April 1. 2. 3. 4. 5. May 1. 2. 3. 4. 5. 6.
Cash
Acc. Receiv.
Allow. for Doubt. Accts.
NE NE +$69,200 NE NE
+$65,100 −$800 −$69,200 +$1,700 NE
NE +$450 +$78,500 NE NE NE
+$76,600 NE −$78,500 −$9,580 +$1,480 NE
Invent.
Total Assets
Owner's Equity
NE NE NE NE (1) +$230
−$35,530 NE NE NE NE
+$29,570 −$800 NE +$1,700 −$230
+$29,570 −$800 NE +$1,700 −$230
NE +$450 NE −$9,580 NE (2) +$8,530
−$42,130 NE NE NE NE NE
+$34,470 NE NE NE +$1,480 −$8,530
+$34,470 NE NE NE +$1,480 −$8,530
(1) ($89,200 + $65,100 − $800 − $69,200 + $1,700) = $86,000 $86,000 × 6% = $5,160 $5,160 − $4,930 = $230 (2) $86,000 + $76,600 − $78,500 − $9,580 + $1,480 = $76,000 $76,000 × 6% = $4,560 $4,560 – ($5,160 + $450 − $9,580) = $8,530 (See Accounts Receivable and Allowance For Doubtful Accounts balances in ledger that follows.)
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PROBLEM 8-8B (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 65,100
Opening Balance Sales Returns Collections Interest charges
800 69,200 1,700
Sales Reverse write-off Coll. of prev. write-off Collections Write-offs Interest charges
76,600 450 450 78,500 9,580 1,480
Allowance for Doubtful Accounts Explanation Ref. Debit Credit
Opening Balance Bad debts expense
230
Reverse write-off Write-offs Bad debts expense
450 9,580 8,530
(b) Current assets: Accounts receivable .............................. Less: Allowance for doubtful accounts
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$76,000 4,560
Balance 89,200 154,300 153,500 84,300 86,000 162,600 163,050 162,600 84,100 74,520 76,000
Balance 4,930 5,160 5,610 3,970 Dr. 4,560
$71,440
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Accounting Principles, Sixth Canadian Edition
PROBLEM 8-8B (Continued) (c)
The bad debts expense on the income statement for the period would be $26,740 ($17,980 + $230 + $8,530)
Taking It Further: Assiniboia can eliminate bad debt expenses by making only cash sales. Doing so might not be a prudent decision. The sales lost to competitors might cause a downturn in profit far greater than any experienced bad debt expense. Strategies including doing a proper scrutiny of potential credit customers’ credit worthiness can greatly reduce the risk of non-collection. As well, Assiniboia should closely monitor its accounts receivable to reduce further losses on suspect accounts by suspending sales.
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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—Figaro............. 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]
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12,000
60
Jul. 25 Allowance for Doubtful Accounts ....... 12,000 Notes Receivable—Noah Inc......... Oct. 1
25,000 375
60
12,000
Notes Receivable—Martin Rowe ........... 4,000 Cash................................................
4,000
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PROBLEM 8-9B (Continued)
Nov. 30 Notes Receivable—UOA Corp ............. 10,000 Cash................................................
10,000
Dec. 1 Since the collection of the note was not made, no entry should be recorded at this date. By the end of the fiscal year, progress for collection should demonstrate if the account should be written off, along with any interest accrued, or if the allowance for doubtful accounts should be increased for this additional collection risk. Dec. 31 Interest Receivable............................. Interest Revenue ............................
98
Martin Rowe, $4,000 × 6% × 3/12 = UOA Corp., $10,000 × 4.5% × 1/12 = Total ....................................................
$ 60 38 $98
98
Taking It Further: 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 Martin Rowe note, based upon the estimated probability of collection. Interest should continue to be accrued until it is determined from collection efforts that the note and the interest are unlikely to be collected. Alexi Co. could have protected itself from the risk of not collecting the Martin Rowe note plus any interest by requesting that the employee sign a document authorizing that his last pay cheque (net pay) be used for repayment, or partial repayment. Only if Alexi obtains this authorization in writing can it collect on the note outstanding prior to the Martin resigns and leaving his position with Alexi Co.
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PROBLEM 8-10B (a)
The interest receivable at June 30, 2014 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, 2014 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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69 344 15,000
4,870 4,800 35 35
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PROBLEM 8-10B (Continued) (b) (Continued) July 31 Interest Receivable ....................... 100 Interest Revenue ....................... ALD Inc. $ 6,000 × 4% × 1/12 = Kabam Ltd. $10,000 × 5% × 1/12 = M&J Hardware Corp. $ 9,000 × 5% × 1/12 = Total
100 $ 20 42 38 $100
(c) Notes Receivable Explanation Ref. Debit
Date July
1 31 31
Balance
July 31
July
1 1 31 31 31 31
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15,000 4,800
44,800 29,800 25,000
Credit
Balance
4,870 Interest Receivable Explanation Ref. Debit
Date
Balance
Accounts Receivable Explanation Ref. Debit
Date
Credit
Balance
4,870 Credit
Balance
20 42 344 35
441 421 379 35 0 100
Adjusting entry
100
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PROBLEM 8-10B (Continued) (d) OUELLETTE CO. Balance Sheet (partial) July 31, 2014
Assets Current assets Notes receivable ............................................................. $19,000 Accounts receivable ................................................... 4,870 Interest receivable .......................................................... 100 Total current assets ................................................... $23,970 Long-term investments Notes receivable ......................................................... $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 the average customer.
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PROBLEM 8-11B (a) NORLANDIA SAGA COMPANY Balance Sheet (Partial) November 30, 2014 (in thousands) Assets Current assets Cash............................................................................... $ 417.1 Short-term investments ............................................... 224.6 Notes receivable ........................................................... 51.2 Accounts receivable ....................................... $311.4 Less: Allowance for doubtful accounts ........ 14.8 296.6 Merchandise inventory................................................. 336.5 Prepaid expenses and deposits .................................. 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) 2014 Receivables turnover:
2013
($2,823.8 − $18.5) ($311.4 + $271.7) ÷ 2 = 9.6
= 9.1*
365 ÷ 9.6 = 38 days
365 ÷ 9.1 = 40 days
*Given in the problem Average collection period:
Norlandia’s receivables turnover ratio was a little higher in 2014, which means that Norlandia was more efficient in 2014 in turning receivables into cash.
Taking It Further: When analyzing the accounts receivable turnover and average collection period, consideration should be given to any changes in policy implemented by management during 2014 with respect to granting credit or offering discounts to their customers. As well, sales of accounts receivable during the year would also affect the receivables turnover.
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PROBLEM 8-12B Nike
Adidas
($ in U.S. millions)
(in Euro millions)
Beginning of Year Jan. 1, 2011 Accounts receivable (net) Add: allowance Gross Accounts receivable
$2,650 74 $2,724
€1,667 127 €1,794
End of Year Dec. 31, 2011 Accounts receivable (net) Add: allowance Gross Accounts receivable
$3,138 74 $3,212
€1,707 151 €1,858
Receivables turnover:
Nike
Adidas
$20,862 ($2,724 + $3,212) ÷ 2
€13,344 (€1,794 + €1,858) ÷ 2
= 7.0 Average collection period:
365 ÷ 7.0 = 52.1 days
= 7.3
365 ÷ 7.3 = 50.0 days
Adidas’ receivables turnover ratio was a little higher than Nike’s, which means that Adidas was more efficient than Nike in turning receivables into cash.
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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
(b)
2015 365 ÷ 10.6 = 34.4 days 365 ÷ 7.3 = 50.0 days 34.4 + 50.0 = 84.4 days
2014 365 ÷ 8.9 = 41.0 days 365 ÷ 7.6 = 48.0 days 41.0 + 48.0 = 89.0 days
2013 365 ÷ 9.0 = 40.6 days 365 ÷ 7.5 = 48.7 days 40.6 + 48.7 = 89.3 days
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 .8 to 1. On the other hand, Western experienced a substantial improvement in the accounts receivable turnover in 2015. 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 that have adversely affected the current or acid test ratios.
(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 8-13B (Continued)
(d)
With any slowdown in the turnover ratio, comes a delay in converting inventory back to cash. The opposite is also true. The amount of the cash flows in total might not be affected by a change in inventory turnover, but the speed at which cash is obtained is affected.
Taking It Further: The dramatic improvement in the collection period in 2015 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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CONTINUING COOKIE CHRONICLE (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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CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued) 2. Other alternatives to extending credit to Curtis include: Waiting for 30 days to make the sale Have Curtis borrow from the bank Have Curtis use a bank credit card to finance the purchase. 3. 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. 4. The advantages of allowing customers to use bank credit cards include: making the purchase easier for the customer, potentially increasing sales, as customers are not limited to the amount of cash in their wallet, and reducing the accounts receivable you have to manage if credit cards are used instead of granting credit to customers. The disadvantage is the cost to your business. When a customer makes a purchase using a credit card, you will have to pay a percentage of the sale to the credit card company. The rate varies but 3% would not be unusual. You will also have to pay to rent the equipment. The fee is not large but is an ongoing expense.
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CONTINUING COOKIE CHRONICLE (Continued) (b) Apr.
1
Note Receivable—Lesperance ....... Sales ............................................ Cost of Goods Sold ......................... Merchandise Inventory...............
1,050 1,050 553 553
30 No entry May 15 Cash ................................................. Interest Revenue ($1,050 × 7.5% × 1.5/12) .............. Note Receivable—Lesperance ...
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BYP 8-1 FINANCIAL REPORTING PROBLEM (a)
($ in thousands) Receivables turnover
2012
2011
= 345.6*
$1,059,000 [($2,866 + $2,926) ÷ 2] = 365.7
Average collection period
= 1.1 days*
365 days = 1.0 day 365.7
*Given in text Inventory turnover
= 4.8**
$350,671 [($73,201 + $63,201) ÷ 2] = 5.1
Days sales in inventory
76 days**
365 days = 71.6 days 5.1
**Given in Ch. 6 Operating cycle
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BYP 8-1 (Continued) (b)
Overall, the operating cycle has increased and this trend represents a modest deterioration. It is taking Reitmans 77.7 days to purchase its inventory, sell it and collect the cash. The average collection period has remained the same as sales are essentially for cash, or from customers using credit cards collected the next day. The number of days sales in inventory has increased from 71.6 days to 76 days, a increase of close to 7%. It would appear that Reitmans is managing its inventory less efficiently which has resulted in the increase in number of days to sell inventory and a net increase in the overall operating cycle of approximately five days.
(c)
Sales made using MasterCard and Visa result in accounts receivable balances of one day’s credit card sales. The amounts of the sales clear the businesses’ bank account the day following the day of the sale, and so are almost cash sales. The accounts receivable turnover and collection period for 2012 and 2011 are consistent with the company’s explanation of the balances in accounts receivable.
(d)
As explained in (c) above, there is very minimal risk for Reitmans not being able to collect its accounts receivable. Since the validity of credit cards are checked at the point of sale, the collection of all sales made using MasterCard and Visa and are assured and so Reitmans should not have any uncollectible accounts receivable.
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BYP 8-2 INTERPRETING FINANCIAL STATEMENTS (a)
($ in millions)
2011
Current ratio
$1,262a ÷ $1,131 = 1.12:1
$596b ÷ $1,019 = 0.58:1
Acid-test ratio
$886c ÷ $1,131 = 0.78:1
$413d ÷ $1,019 = 0.41:1
$4,741 ($472 + $215) ÷ 2 = 13.8
$3,718 ($215 + $212) ÷ 2 = 17.4
365 ÷ 13.8 = 26.4 days
365 ÷ 17.4 = 21.0 days
Receivables turnover
Average collection period
2010
a
$1,262 = $443 + $472 − $29 + $97 + $279 $596 = $217 + $215 − $19 + $54 + $129 c $886 = $443 + $472 − $29 d $413 = $217 + $215 − $19 b
Shaw’s current and acid-test ratios have improved from 2010 to 2011. On the other hand, Shaw’s receivables turnover and average collection period have deteriorated. Overall, Shaw’s liquidity is not strong. (b)
Allowance balance end of 2010 Bad debt expense provision 2011 Less allowance balance end of 2011 Account receivable written off in 2011
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$19.0 33.7 (29.0) $23.7
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BYP 8-2 (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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BYP 8-3 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 8-4 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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BYP 8-4 (Continued) The selling staff has been placed in a conflict of interest position. While 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 which would ensure that the selling staff only grant credit to those customers who meet the company’s credit standards.
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BYP 8-5 ETHICS CASE (a)
The stakeholders in this situation are: The president of Proust Company The controller of Proust Company The company’s bank Any other parties who rely upon the company’s financial statements
(b) Yes. The controller has an ethical dilemma—should he/she follow the president's “suggestion” and prepare misleading financial statements (understated profit) or should he/she attempt to stand up to and possibly anger the president by preparing a fair (realistic) income statement. (c)
Proust Company's growth rate should be a product of fair and accurate financial statements. One should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of “creative accounting”.
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BYP 8-6 “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. Avoid increasing your spending or buying things you don’t need just to get points. 9. Use alternatives to using your credit card that will cost less in interest, such as using 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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BYP 8-6 (Continued) (d) Number of days for the cash advance: April 1 — May 15 = 45 days. Interest charge: $1,000 × 19% × 45/365 = $23.42. (e) Calculation Results Option A: Option B: Make Make the the minimum minimum payment plus an payment each additional $10 month each month.
Option C: Pay a fixed amount of $100.00 each month.
Time to pay off
10 years and 5 months
4 years and 7 months
11 months
Interest paid
$889.40
$413.60
$97.28
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CHAPTER 9 Long-Lived Assets ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Brief Problems Problems Questions Exercises Exercises Set A Set B
1. Determine the cost of property, plant, and equipment.
1, 2, 3, 4, 1, 2, 3, 4 5
2. Explain and calculate depreciation.
6, 7, 8, 9, 5, 6, 7, 8, 2, 3, 4, 5, 2, 3, 6, 7, 2, 3, 6, 7, 10, 11 9 12 8, 9 8, 9, 12
10, 11 3. Explain the factors that cause 10, 12, 13, 14, 15 changes in periodic depreciation and calculate revisions.
1, 2, 3, 12 1, 2, 3, 4, 1, 2, 3, 4, 7 6
6, 7, 8
4, 5, 6, 12 4, 5, 6
4. Account for the disposal of property, plant, and equipment.
16, 17, 18, 19
12, 13, 14 9, 10
6, 7, 8, 9 6, 7, 8, 9
5. Calculate and record depreciation of natural resources.
20, 21
15
12
6. Identify the basic accounting issues for intangible assets and goodwill.
22, 23, 24 16
25, 26 7. Illustrate the reporting and analysis of long-lived assets.
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12, 13, 14 10, 11
17, 18, 19 15, 16
9-1
12
10, 11
9, 11, 12, 9, 11, 12, 13 13
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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
20-25
11A
Record intangible asset transactions; prepare partial balance sheet.
Moderate
30-40
12A
Record natural resource transactions; prepare partial financial Moderate statements.
30-40
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
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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
20-25
11B
Record intangible asset transactions; prepare partial balance sheet.
Moderate
30-40
12B
Record equipment, notes payable and natural resource transactions; prepare partial financial statements.
Moderate
30-40
13B
Calculate ratios and comment.
Moderate
15-25
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-ofChapter Exercises and Problems Study Objective
Knowledge Comprehension Q9-1 Q9-2 Q9-3 Q9-4 Q9-5
1. Apply the cost BE9-3 principle to property, plant, and equipment.
2. Explain and calculate depreciation.
Q9-8
Q9-6 Q9-7 Q9-9 Q9-10 Q9-11
3. Revise periodic depreciation.
Q9-10 Q9-12 Q9-13 Q9-14 Q9-15
4. Account for the Q9-18 disposal of property, plant, and equipment.
Q9-16 Q9-17 Q9-19
5. Calculate and record Q9-20 depreciation of natural resources. 6. Identify the basic accounting issues for intangible assets.
Q9-21
7. Illustrate the reporting and analysis of longlived assets.
Q9-26
Q9-25 BE9-17
Q9-22 Q9-23 Q9-24
Analysis
P9-10A P9-11A P9-10B P9-11B P9-11A E9-16 P9-12A P9-13A P9-9B P9-13B P9-11B P9-12B Continuing BYP9-4 Cookie Chronicle BYP9-1 BYP9-2 BYP9-3
Synthesis Evaluation
BE9-16 E9-12 E9-13 E9-14 BE9-18 BE9-19 E9-15 P9-9A
Broadening Your Perspective
Solutions Manual .
Application BE9-1 P9-2A BE9-2 P9-3A BE9-4 P9-4A E9-1 P9-1B E9-2 P9-2B E9-3 P9-3B E9-12 P9-4B P9-1A P9-6B BE9-5 P9-6A BE9-6 P9-7A BE9-7 P9-8A BE9-8 P9-9A BE9-9 P9-2B E9-2 P9-3B E9-3 P9-6B E9-4 P9-7B E9-5 P9-8B E9-12 P9-9B P9-2A P9-12B P9-3A BE9-10 P9-5A BE9-11 P9-6A E9-6 P9-12A E9-7 P9-4B E9-8 P9-5B E9-12 P9-6B P9-4A P9-12B BE9-12 P9-8A BE9-13 P9-9A BE9-14 P9-6B E9-9 P9-7B E9-10 P9-8B P9-6A P9-9B P9-7A BE9-15 P9-12A E9-11 P9-12B
9-4
BYP9-5 BYP9-6
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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. They are similar to inventory, in that they have physical substance. They are different in they are used in operations, and not intended for resale, as is the case for inventory.
2.
The cost of an item of property, plant, and equipment includes: (1) the purchase price, plus any non-refundable taxes, less any discounts or rebates (2) the expenditures necessary to bring the asset to the location and condition necessary to make it ready for its intended use and (3) if there are obligations to dismantle, remove, or restore the asset when it is retired, an initial estimate of these costs is also included in the cost of the long-lived asset.
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.
Land improvements are structural additions made to the land such as parking lots and fences. Clearing and grading the land are not land improvements but are part of the land cost as they are required to get the land ready for its intended use.
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.
Justine’s arguments are somewhat valid, with respect to more useful information being provided when using the revaluation model. Where I do not agree with Justine is about the possibility that the revaluation model would only be applied to undervalued assets. For reasons of consistency, the method cannot be applied only to a select group of assets.
7.
Depreciation (a) is a form of cost allocation. Depreciation’s purpose is not (b) asset valuation and (c) does not involve any cash.
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 8.
The three factors that affect calculation of depreciation include: cost, useful life and residual value. The cost of a depreciable asset must include all necessary costs 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.
9.
The amount of annual depreciation and profit 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 is based on the amount of use that is being made of the asset. The lower the depreciation charge, the higher the profit. By the end of the useful life of the asset, the total amount of depreciation recorded under each of the three methods will be the same.
10.
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.
11.
Ralph’s plan will not work. For accounting purposes, a company should choose the depreciation method that best matches the estimated pattern in which the asset’s economic benefits are expected to be. For tax purposes income tax regulations require a company to use the single diminishing-balance method and in some case, the straight-line basis. Depreciation is calculated on a class basis and a specified rate is provided by Canada Revenue Agency for specific classes of assets.
12.
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.
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 13.
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 not correction of errors and so there is no revision of depreciation previously recorded in past accounting periods.
14.
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, environmental concerns causing extra costs of disposal at the end of the useful life. Under International Financial Reporting Standards (IFRS) a company may write up the carrying amount of the asset if there is a reversal in a previously recorded impairment. The write up 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. Also under IFRS, a company will write up its property, plant, and equipment if it is using the revaluation model and the fair value increases. Adoption of the revaluation model is optional, and very rare.
15.
Extending the total service life and consequently the estimated remaining useful life of a depreciable asset will reduce the amount depreciation recorded in the remaining years of use. On the other hand, the depreciation recorded in the previous periods will not be affected. Also, the total amount of depreciation over the asset’s useful life will not change.
16.
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 disposition.
17.
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.
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 18.
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.
19.
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.
20.
Both natural resources and property, plant, and equipment are tangible long lived assets which are expected to last beyond one year and are therefore classified on the balance sheet as non-current. Both these types of assets are depreciated. Cost is determined in the same way for both. Asset retirement costs may be higher with natural resources. Unlike property, plant, and equipment where the depreciation recorded in a year becomes an expense that causes profit to be reduced, the depreciation (often called depletion) of natural resources results in the increase in another asset, inventory which is subsequently sold. Another difference between these assets is that the natural resources are physically extracted in operations such as mining, cutting, or pumping and only an act of nature can replace them.
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 21.
The units-of-production method for depreciation is a common and ideal method of depreciating 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 depreciation can be arrived at that corresponds to the asset created (inventory) when the natural resource is reduced. The process of reducing the natural resource is called depletion which corresponds more directly to the meaning of the reduction of the asset through conversion to another asset (inventory). This term is in contrast to the term depreciation which is more closely associated with consumption or loss of use of depreciable assets.
22.
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.
23.
Impairment losses are treated as follows: (a) For finite life intangible assets, an impairment loss often brings about a change in the estimated remaining useful life for amortization recorded following the impairment. This is not the case with indefinite life intangibles since there is no amortization recorded for these types of intangible assets. (b) Under IFRS, indefinite life intangible asset must be tested for impairment at least one a year and reversals of impairment losses can be recorded. Under ASPE, the impairment test need not be performed annually, but must be performed if indicators of impairment are present. Reversals of impairment losses are not recorded under ASPE. (c) For goodwill, reversals for impairment are not recorded under either IFRS or ASPE.
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 24.
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.
25.
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 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. Under IFRS, companies must disclose in the notes to the financial statements if they are using the cost or the revaluation model for each class of assets, and include a reconciliation of the carrying amount at the beginning and end of the period for each class of long-lived assets. If a company uses the revaluation model, it must also disclose any increases or decreases from revaluation.
26.
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.
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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.
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 a prepayment insurance which will later be expensed as it is consumed.
BRIEF EXERCISE 9-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)
O C C C O C O C O C C O C
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
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 (a) $9,000 for each year of the equipment’s life and (b) $36,000 in total over the equipment’s life.
BRIEF EXERCISE 9-6 The diminishing-balance rate is 50% (1 4 × 2) and this rate is applied to carrying amount at the beginning of the year. Depreciation expense for each year is as follows: (a)
Carrying Amount Beginning Depr. Year Of Year × Rate
End of Year Depr. Accum. Carrying = Expense Depr. Amount $42,000 2014 $42,000 50% $21,000 $21,000 21,000 2015 21,000 50% 10,500 31,500 10,500 2016 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 (b) Total depreciation over the truck’s useful life is $36,000.
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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: 2013: 90,000 × $0.063 = 2014: 135,000 × $0.063 =
$5,670 $8,505
BRIEF EXERCISE 9-8 (a) Depreciation expense for each year:
Depreciable Year Amount* × 2014 2015 2016 2017 2018
$36,000 36,000 36,000 36,000 36,000
Depr. Rate
=
25% × 9/12 25% 25% 25% 25% × 3/12
Depr. Expense $ 6,750 9,000 9,000 9,000 2,250
End of Year Accum. Carrying Depr. Amount $42,000 $ 6,750 35,250 15,750 26,250 24,750 17,250 33,750 8,250 36,000 6,000
*Depreciable amount = $42,000 − $6,000 = $36,000 (b) Total depreciation expense over the equipment’s useful life is $36,000. (See accumulated depreciation at end of 2018 above.)
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-9 The double diminishing-balance rate is 50% (25% × 2) and this rate is applied to carrying amount at the beginning of the year. Depreciation expense for each year is as follows: (a) Double Diminishing-balance Carrying Amount Beginning Year Of Year × 2014 2015 2016 2017
$42,000 31,500 15,750 7,875
End of Year Depr. Depr. Accum. Carrying Rate = Expense Depr. Amount $ 42,000 50% × 1/2 $ 10,500 $ 10,500 31,500 50% 15,750 26,250 15,750 50% 7,875 34,125 7,875 50% 1,875¹ 36,000 6,000
¹ Limited to the amount that brings the carrying amount to the residual value of $6,000 (b) Total depreciation expense over the equipment’s useful life is $36,000. (See accumulated depreciation at end of 2017 above.)
BRIEF EXERCISE 9-10 (a)
Annual depreciation: ($250,000 − $10,000) 6 = $40,000 Equipment cost ............................................... Less accumulated depreciation ($40,000 × 3) for 2012 to 2014................. Carrying amount Dec. 31, 2014 ......................
(b) Impairment Loss......................................... Accumulated Depreciation—Equipment Carrying amount (a) ........................................ Less: Recoverable amount ............................ Impairment loss............................................... Solutions Manual .
9-14
$250,000 120,000 $130,000 30,000 30,000 $130,000 100,000 $ 30,000 Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-11 Depreciation expense from 2011 to 2013: [($65,000 − $5,500) ÷ 7 years = $8,500] 2011 2012 2013 Total
$ 8,500 8,500 8,500 $25,500
Carrying amount, Jan. 1, 2014 ($65,000 − $25,500) ....... $39,500 Add: Equipment up-grade ............................................. 10,200 Less: Revised residual value ......................................... (3,200) Remaining depreciable amount ..................................... 46,500 Remaining useful life (9 years − 3 years) ...................... ÷ 6 years Revised annual depreciation expense 2014 .................. $ 7,750
BRIEF EXERCISE 9-12 (a)
(b)
Accumulated Depreciation— Equipment................................................... Equipment ..............................................
25,700
Accumulated Depreciation— Equipment................................................... Loss on Disposal........................................ Equipment ..............................................
22,500 3,200
25,700
Cost of equipment.................................................. Less: Accumulated depreciation .......................... Carrying amount at date of disposal..................... Proceeds from retirement...................................... Loss on disposal ....................................................
Solutions Manual .
9-15
25,700 $25,700 22,500 3,200 0 $ 3,200
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-13 (a) Mar. 31
(b) Mar. 31
Depreciation Expense [($86,400 − $2,200) ÷ 6 × 3/12] ........ Accumulated Depreciation —Equipment .............................
3,508 3,508
Cash ................................................ 15,000 Accumulated Depreciation— Equipment ¹ .................................... 73,675 Gain on Disposal ...................... 2,275 Equipment ................................. 86,400
¹ [($86,400 − $2,200) ÷ 72 months × 63 months] = $73,675 Cost of equipment.................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Gain on disposal ...................................... (c) Mar. 31
Cash ................................................ 9,000 Accumulated Depreciation— 73,675 Equipment....................................... Loss on Disposal............................ 3,725 Equipment ................................. 86,400
Cost of equipment.................................... Less: accumulated depreciation ............. Carrying amount at date of disposal....... Proceeds from sale .................................. Loss on disposal ......................................
Solutions Manual .
$86,400 73,675 12,725 15,000 $ 2,275
9-16
$86,400 52,500 12,725 9,000 $ 3,725
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-14 Jan. 7
Equipment (new) ........................... Accumulated Depreciation —Equipment .................................. Loss on Disposal........................... Equipment (old) ........................ Cash...........................................
105,000** 78,000 2,000*** 95,000 90,000*
*Cash paid on exchange = list price of new less trade-in allowance: ($110,000 − $20,000 = $90,000) **Cost of new = consideration paid in cash plus fair value of old asset: ($90,000 + $15,000 = $105,000) ***Loss on disposal = Carrying amount − fair value: [($95,000 − $78,000) − $15,000 = $2,000]
BRIEF EXERCISE 9-15 (a)
Depreciable amount = $6,500,000 − $500,000 = $6,000,000 Depreciable amount per unit = $6,000,000 ÷ 25,000,000 tonnes = $0.24 per tonne Depreciation cost for ore extracted in Year 1: $0.24 per tonne × 5,000,000 tonnes = $1,200,000 Aug. 31 Inventory ....................................... 1,200,000 Accumulated Depreciation—Mine 1,200,000 Depreciation to be included in cost of goods sold: $0.24 per tonne × 3,000,000 tonnes = $720,000 Depreciation to be included in inventory: $0.24 per tonne × 2,000,000 tonnes = $480,000
Solutions Manual .
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-15 (Continued) (b) CUONO MINING CO. Balance Sheet (Partial) August 31, 2014 Assets Current assets Inventory ..................................................
$480,000*
Property, plant, and equipment Ore mine ................................................... $6,500,000 Less: Accumulated depreciation ............ 1,200,000 5,300,000 * Check ($1,200,000 − $720,000 = $480,000)
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-16 (a)
2014 Jan.
2 Patents ....................................... 150,000 Cash....................................
150,000
(b) Dec. 31 Amortization Expense ($150,000 8) .......................... 18,750 Accumulated Amortization— Patents ...............................
18,750
(c)
2015 Jan.
5 Patents .................................... Cash....................................
30,000 30,000
(d) Original cost of patent....................................... $150,000 Less: accumulated amortization ................... (18,750) Plus: Legal costs to defend ............................... 30,000 Remaining cost to be amortized ................... 161,250 Remaining useful life (8 years − 1 year) ....... ÷ 7 years Revised annual amortization expense 2015 . $ 23,036
BRIEF EXERCISE 9-17 (a) (b) (c) (d) (e) (f) (g) (h)
PPE NA (expense) I I NA (current asset) PPE NA (investment) I
Solutions Manual .
(i) (j) (k) (l) (m) (n) (o) (p)
9-19
PPE NR NA (investment) PPE I NA (expense) NA (current asset) I
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-18 CANADIAN TIRE CORPORATION, LIMITED Balance Sheet (Partial) December 31, 2011 (in millions)
Property, plant, and equipment Land (net of $1.4 of impairments).................. $ 748.8 Buildings ......................................................... $2,589.6 Less: Accumulated depreciation ................... 1,014.8 1,574.8 Fixtures and equipment ................................. 826.0 Less: Accumulated depreciation ................... 545.6 280.4 Leasehold improvements............................... 712.5 Less: Accumulated depreciation ................... 216.5 496.0 Assets under finance lease............................ 267.4 Less: Accumulated depreciation ................... 138.5 128.9 Construction in progress ................................................ 137.0 Total property, plant, and equipment 3,365.9 Intangible assets FGL Sports indefinite-life intangibles ....................... Mark’s Work Wearhouse indefinite-life intangibles... FGL Sports finite-life intangible assets..................... Less: Accumulated amortization ............................... Total intangible assets
316.8 64.1 22.4 403.3 1.5 401.8
Goodwill ..........................................................................
377.6
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Chapter 9
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 9-19 ($ in US millions)
Return on assets
$1,375 [($13,140 + $12,892) ÷ 2] = 10.56%
Asset turnover
$15,470 [($13,140 + $12,892) ÷ 2] = 1.19 times
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Chapter 9
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Accounting Principles, Sixth 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. Land 2. Land 3. Land 4. Land ($4,800 − $900 = $3,900) 5. Vehicles 6. Vehicles 7. Vehicles 8. Licence Expense 9. Prepaid Insurance 10. Plant 11. Land Improvements
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-2 (a) Land Buildings Land Improvements
(b)
(c)
Appraised Value $ 476,000 748,000 136,000 $1,360,000
% of Total 35% 55% 10%
Land ......................................................... Building.................................................... Land Improvements ................................ Cash..................................................... Mortgage Payable ...............................
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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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-3 (a) Cost of equipment Delivery Insurance in transit Testing and installation Total cost
$75,000 1,000 200 2,800 $79,000
(b)
April 1, 2014 because that is the date the equipment was available for use to the company.
(c)
The company should use the straight-line method since the economic benefits are expected to be consumed evenly over the equipment’s useful life.
(d)
Depreciation expense, 2014 = $79,000 ÷ 10 × 9/12 = $5,925 Depreciation expense, 2015 = $79,000 ÷ 10 = $7,900
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-4 (a) Straight-line
Depreciable Year Cost* ×
Depr. Rate
=
Depr. Expense
2013 2014
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
* $345,000 − $15,000 = $330,000 (b) Diminishing-balance using double the straight-line rate Carrying Amount Beginning Year of Year ×
Depr. Rate
=
Depr. Expense
2013 2014
40% × 1/2 40%
$69,000 110,400
(c)
$345,000 276,000
End of Year Accum. Carrying Depr. Amount $345,000 $69,000 276,000 179,400 165,600
Units-of-Production
Units-ofDepr. Year Production × Cost/Unit* =
Depr. Expense
2013 2014
$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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Chapter 9
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Accounting Principles, Sixth 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 2013. 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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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-5 (a)
(1) Straight-line
Depreciable Year Amount* × 2013 2014 2015 2016 2017
$115,200 115,200 115,200 115,200 115,200
Depr. Rate
=
Depr. Expense
25% × 8/12 25% 25% 25% 25% × 4/12
$19,200 28,800 28,800 28,800 9,600
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 (2)
Diminishing-balance using double the straight-line rate
Carrying Amount Beginning Year of Year × 2013 2014 2015 2016
$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
** Limited to the amount that brings the carrying amount to the residual value of $14,000.
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Chapter 9
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Accounting Principles, Sixth Canadian Edition
EXERCISE 9-5 (Continued) (a) (Continued) (3) Units-of-Production
Year 2013 2014 2015 2016 2017
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. (b)
Over the life of the asset, depreciation expense (in total) will be the same for all three methods.
(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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Chapter 9
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Accounting Principles, Sixth Canadian Edition
EXERCISE 9-6 (a)
(b)
July 1 Equipment .................................. 500,000 2010 Cash.......................................
500,000
Dec. 31 Depreciation Expense ................. 25,000 2010 Accumulated Depreciation— Equipment ($500,000 ÷ 10 × 6/12)
25,000
Dec. 31 Depreciation Expense ................. 50,000 2013 Accumulated Depreciation— Equipment ($500,000 ÷ 10) ...
50,000
Carrying amount of the equipment—Dec. 31, 2013 [$500,000 – ($50,000 × 3.5 years)] ............. $325,000 Recoverable amount .................................. 225,000 Impairment loss.......................................... $100,000 Dec. 31 Impairment Loss ........................ 100,000 2013 Accumulated Depreciation— Equipment .............................
(c)
100,000
January 1, 2014 Carrying amount is $225,000 Depreciation expense for 2014: $225,000 ÷ 6.5 years = $34,615. December 31, 2014 Carrying amount is $190,385 ($225,000 − $34,615).
(d) Carrying amount at Dec. 31, 2014 ............. Carrying amount at Dec. 31, 2014 if no impairment recorded ($325,000 − $50,000) Recoverable amount ..................................
$190,385 275,000 240,000
The reversal of impairment loss can be recognized to increase the carrying amount up to $275,000. Therefore a reversal of impairment loss of $49,615 should be recorded. ($240,000 − $190,385)
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Chapter 9
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Accounting Principles, Sixth 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, 2014: $344,000 [$800,000 – ($38,000 × 12)] Carrying amount — Equipment Jan. 1, 2014: $77,000 [$125,000 – ($24,000 × 2)] (c)
Annual depreciation — revised estimate — 2014 Building: [($344,000 – $60,500) ÷ (30 − 12 yrs)] = $15,750 per year Equipment: [($77,000 – $4,000) ÷ (4 – 2 yrs)] = $36,500 Carrying amount — Building Dec. 31, 2014: $328,250 ($344,000 – $15,750) Carrying amount — Equipment Dec. 31, 2014: $40,500 ($77,000 – $36,500)
(d) Total depreciation expense over the life will be the difference between the cost and the revised residual value: Building: $800,000 – $60,500 = $739,500 Equipment: $125,000 – $4,000 = $121,000
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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, 2014: $63,000 [$90,000 – ($13,500 × 2)] (c)
2014 Oct.
1 Equipment .................................... 15,000 Cash.......................................
15,000
(d) 2015 Sept. 30 Depreciation Expense ................. 36,500 Accumulated Depreciation —Equipment .........................
36,500
Carrying amount Sept. 30, 2014 (b) ............................ $63,000 Add: Upgrade ............................................................... 15,000 78,000 Less: Revised residual value ..................................... 5,000 Remaining depreciable amount .................................. $73,000 Remaining useful life (4 − 2) ................................... ÷ 2 years Revised annual depreciation expense ....................... $36,500
(e)
Calculations: Cost ($90,000 + $15,000) ........................................... $105,000 Depreciation year ended Sept. 30, 2013 ..... $13,500 Depreciation year ended Sept. 30, 2014 ..... $13,500 Depreciation year ended Sept. 30, 2015 .. $36,500 63,500 Carrying amount Sept. 30, 2015.................................. $41,500
Property, plant, and equipment Equipment ................................................ $105,000 Less: Accumulated depreciation ....... 63,500
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$41,500
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-9 (a) Jan. Apr.
2 No depreciation entry 1 Depreciation Expense ........................ Accumulated Depreciation —Equipment................................... ($45,000 ÷ 10 years × 3/12)
1,125
July 30 Depreciation Expense ........................ Accumulated Depreciation —Equipment................................... ($12,600 ÷ 3 years × 7/12)
2,450
1,125
Nov. 1 Depreciation Expense ........................ 3,125 Accumulated Depreciation—Vehicles ($35,000 − $5,000) ÷ 8 years × 10/12)
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2,450
3,125
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-9 (Continued) (b)
Cash
Equipment
Accum. Depr.
Total PP&E
Total Assets
Owner's Equity
Profit
Jan. 2
NE
−$8,000
−$8,000
NE
NE
NE
NE
Apr. 1
NE
−$45,000
−$41,6251
−$3,3752
−$3,375
−$3,375
−$3,375
July 30
+$1,100
−$12,600
−$10,8503
−$1,7504
−$6505
−$650
−$650
Nov. 1
−$36,000
−$35,000 +$43,0006
−$26,2507
+$34,2508
−$1,7509
−$1,750
−$1,750
Transaction
1
$41,625 = ($45,000 ÷ 10 years) × (9 years + 3 months) $3,375 = $45,000 − $41,625 3 $10,850 = ($12,600 ÷ 3 years) × (2 years + 7 months) 4 $1,750 = $12,600 − $10,850 5 −$650 = $1,100 − $1,750 6 $43,000 = Fair value of old vehicle$7,000 + cash $36,000 7 $26,250 = [($35,000 − $5,000) ÷ 8 years)] × 7 years 8 $34,250 = $43,000 – ($35,000 − $26,250) 9 $1,750 = Fair value old vehicle $7,000 – Carrying amount $8,750 ($35,000 − $26,250) 2
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-9 (Continued) (c) Jan.
2 Accumulated Depreciation —Equipment ...................................... Equipment ......................................
8,000
Apr. 1 Accumulated Depreciation —Equipment ....................................... Loss on Disposal................................ Equipment ......................................
41,625 3,375
July 30 Cash .................................................... Accumulated Depreciation —Equipment ....................................... Loss on Disposal ............................... Equipment ...................................... Nov. 1 Vehicles (New) .................................... Accumulated Depreciation —Vehicles ........................................... Loss on Disposal................................ Vehicles (Old)................................. Cash................................................
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8,000
45,000 1,100 10,850 650 12,600 43,000 26,250 1,750 35,000 36,000
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-10 (a)
(1) (2)
Straight-line method: ($48,000 − $4,000) ÷ 4 years = $11,000 per year for 2011, 2012 and 2013. Double diminishing-balance method DDB Rate: ¼ × 2 = 50%
2011: $48,000 × 50% = $24,000 2012: ($48,000 − $24,000) × 50% = $12,000 2013: ($48,000 − $24,000 − $12,000) × 50% = $6,000 (b) (1)
Straight-line method Proceeds − Carrying amount = Gain (loss) $8,000 – [$48,000 – ($11,000 × 3)] = $8,000 – $15,000 = ($7,000) loss
(2)
Double diminishing-balance method Proceeds − Carrying amount = Gain (loss) $8,000 – [$48,000 – ($24,000 + $12,000 + $6,000)] = $8,000 – $6,000 = $2,000 gain
(c) The amount of the loss using the straight-line method is $7,000. The amount of the gain using the doublediminishing-balance method is $2,000. The amounts are not the same because of the difference in the depreciation expense calculation on a year to year basis which impacts the carrying amount of the asset which in turn impacts the gain or loss on disposal. The double-diminishing-balance method records higher depreciation in the early years than the straight-line method, thus giving a lower net book value with the double-diminishing-method in the early years. (d) When comparing the total impact on profit over the threeyear period the amounts are identical. Using the straightline method total depreciation is $33,000 and loss on disposal is $7,000 resulting in a $40,000 decrease in profit over the three year period. Using the double-diminishingbalance method total depreciation is $42,000 and gain on disposal is $2,000 resulting in a $40,000 decrease in profit over the three year period. Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
EXERCISE 9-11 (a)
The units-of-production method is recommended for depreciating 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 Depreciation—Mine
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 INC. Income Statement (Partial) Year Ended December 31, 2014 Cost of goods sold: (will include this amount plus other costs) ($1.50 × 100,000 tonnes) ............................ $150,000 PHILLIPS EXPLORATION INC. Balance Sheet (Partial) December 31, 2014 Assets Property, plant, and equipment Ore mine ................................................ $1,200,000 Less: Accumulated depreciation ....... 150,000
$1,050,000
(d) Because the market price of the ore ($1.40 per tonne) has fallen below the per unit depreciable amount ($1.50 per tonne), the carrying amount of the remaining natural resource exceeds its realizable value and so an impairment of the mine has taken place.
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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.
Depreciation is the process of allocating the cost of a longlived asset to expense over the asset’s useful life. Because the value of land generally does not decline with time and usage, its usefulness and revenue producing ability does not decline. In addition, the useful life of land is indefinite. Therefore it would be incorrect for the student to depreciate the land.
3.
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.
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-12 (Continued) 4.
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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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-13 (a) 2013 Jan. 9
Patents ............................................. Cash.............................................
45,000
Goodwill ........................................... Cash.............................................
450,000
Dec. 31 Amortization Expense ..................... Accumulated Amortization —Patents ($45,000 ÷ 5) ...............
9,000
May 15
31
45,000
450,000
9,000
Impairment Loss.............................. Goodwill ($450,000 − $400,000)..
50,000
Patents ............................................. Cash.............................................
30,000
Mar. 31 Research Expense .......................... Cash.............................................
175,000
Apr.
Copyrights ....................................... Cash.............................................
66,000
Trademark........................................ Cash.............................................
275,000
2014 Jan. 2
July
1
1
Dec. 31
Solutions Manual .
50,000
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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Chapter 9
4,950
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-13 (Continued) (a)
(Continued) Impairment test Patents: Cost .................................................. Addition............................................ Amortization 2013 ........................... Amortization 2014 ........................... Carrying amount Dec. 31, 2014 ...... Recoverable amount ....................... Impairment loss...............................
$45,000 30,000 (9,000) (16,500) 49,500 45,000 $ 4,500
Dec. 31 Impairment Loss.............................. Accumulated Amortization —Patents .....................................
4,500
Carrying amount of Goodwill ......................... Recoverable amount .......................................
400,000 425,000
4,500
No recovery of goodwill impairment is recorded under IFRS. (b) Assets Intangible assets Patents ................................................. Less: Accumulated amortization ....... Copyrights............................................ Less: Accumulated amortization....... Trademark ............................................ Total intangible assets ........................ Goodwill ....................................................
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$75,000 30,000 66,000 4,950
$45,000 61,050 275,000 $381,050 $400,000
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-14 (a) Patent Purchase price Jan. 1, 2011 Amortization 2011 (1) Amortization 2012 Amortization 2013 Balance Dec. 31, 2013 Amortization 2014 (2) Balance Dec. 31, 2014 (1) (2)
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 2013 Balance Dec. 31, 2013 Balance Dec. 31, 2014 (3) (3)
Cost $400,000
Carrying Amount
Cost $250,000 50,000 $300,000
Carrying Impairment Amount
$300,000 $25,000 $275,000
Excess of carrying amount of $300,000 over recoverable amount of $275,000
Goodwill Purchase price during 2012 Balance Dec. 31, 2013 Balance Dec. 31, 2014
Cost Impairment $70,000 $70,000 $15,000 No reversal
(b) Income statement – December 31, 2014 Operating expenses: Amortization expense—Patents Impairment loss—Trademark
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Carrying Amount $55,000 $55,000
$83,333 25,000
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-15 (a) Account Accumulated amortization — computer software Accumulated amortization — customer relationships Accumulated amortization — other intangible assets Accumulated amortization — prescription files Accumulated depreciation — assets under financing lease Accumulated depreciation — buildings Accumulated depreciation — equipment, fixtures, and computer equipment Accumulated depreciation — leasehold improvements Assets under financing leases
Financial Statement Balance Sheet
Section
Balance Sheet
Intangibles
Balance Sheet
Intangibles
Balance Sheet
Intangibles
Balance Sheet
Property, Plant, and Equipment Property, Plant, and Equipment Property, Plant, and Equipment
Balance Sheet Balance Sheet
Balance Sheet Balance Sheet
Depreciation and amortization Expense Buildings
Income Statement Balance Sheet
Computer software Customer relationships Equipment, fixtures, and computer equipment Goodwill Financing expenses
Balance Sheet Balance Sheet Balance Sheet
Investment property Land
Balance Sheet Income Statement Balance Sheet Balance Sheet
Leasehold improvements
Balance Sheet
Loss on disposal of property, plant, and equipment Other non-current assets Other intangible assets Prescription files Properties under development
Income Statement Balance Sheet Balance Sheet Balance Sheet Balance Sheet
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Intangibles
Property, Plant, and Equipment Property, Plant, and Equipment Operating Expenses Property, Plant, and Equipment Intangibles Intangibles Property, Plant, and Equipment Goodwill Other Expenses Investments Property, Plant, and Equipment Property, Plant, and Equipment Operating Expenses Non-current Assets Intangibles Intangibles Property, Plant, and Equipment
Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-15 (Continued) (b) Shoppers Drug Mart Corporation Balance Sheet (Partial) December 31, 2011 (in thousands)
Non-current assets: Investment property....................................................... Other non-current assets................................................ Property, plant, and equipment Land............................................................................. Properties under development ................................. Buildings ...................................................... $214,043 Less: Accumulated depreciation ................ 24,325 Equipment, fixtures and computer equipment ...............................1,283,062 Less: Accumulated depreciation ............... 792,644 Leasehold improvements ............................1,291,445 Less: Accumulated depreciation ............... 451,481 Assets under financing lease ................. 127,034 Less: Accumulated depreciation ................ 16,411 Total property, plant, and equipment ................... Intangible assets Prescription files......................................... $133,987 Less: Accumulated amortization ............... 64,372 Customer relationships .............................. 50,736 Less: Accumulated amortization ............... 13,691 Computer software ..................................... 308,478 Less: Accumulated amortization ............... 136,406 Other intangible assets .............................. 9,267 Less: Accumulated amortization ............... 6,262 Total intangible assets...........................................
$16,372 39,289 65,478 71,342 189,718
490,418 839,964 110,623 1,767,543
69,615 37,045 172,072 3,005 281,737
Goodwill ............................................................................... 2,499,722
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Chapter 9
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 9-16 (a) (in millions) December 31, 2011 Asset $39,337 turnover [($74,777 + $68,607) ÷ 2]
Return on assets
December 31, 2010 $32,003 [($68,607 + $67,799) ÷ 2]
= 0.55 times
= 0.47 times
$4,304 [($74,777 + $68,607) ÷ 2]
$3,829 [($68,607 + $67,799) ÷ 2]
= 6.0%
= 5.6%
(b) Suncor’s asset turnover has increased significantly from 2010 to 2011. Net Revenues have increased from $32.0 billion to $39.3 billion or 23% while total assets have increased from $68.6 billion to $74.8 billion or 9%. Suncor generated more revenues in 2011 than in 2010. Profits have not kept pace with the increase in revenues and have increased by 12.4%. Return on assets has improved from 5.6% to 6.0%. The 9% increase in total assets was exceeded by the increase in profit of 12.4%.
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 9-1A (a)
Jan. 12
16
31
Feb. 13
28
Mar. 14
31
Apr. 22
Sept. 26
Land ........................................... 420,000 Cash....................................... Notes Payable ....................... Land ........................................... Cash.......................................
8,500 8,500
Land ........................................... 25,000 Cash.......................................
25,000
Cash ........................................... 10,000 Land.......................................
10,000
Land ........................................... Cash.......................................
9,000
9,000
Building...................................... 38,000 Cash.......................................
38,000
Building...................................... 15,000 Cash.......................................
15,000
Building...................................... 17,000 Cash.......................................
17,000
Building...................................... 750,000 Cash....................................... Notes Payable .......................
150,000 600,000
Sept. 30 Prepaid Insurance ..................... Cash.......................................
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95,000 325,000
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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 2014 Jan. 12 16 31 Feb. 13 28
Date 2011 Mar. 14 31 Apr. 22 Sept.26
Date 2014 Oct. 20 Nov. 15
Solutions Manual .
Explanation
Land Ref.
Debit
Credit
420,000 8,500 25,000 10,000 9,000
Explanation
Building Ref.
Debit
Credit
38,000 15,000 17,000 750,000
Land Improvements Explanation Ref. Debit 45,000 12,000
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Balance 420,000 428,500 453,500 443,500 452,500
Balance 38,000 53,000 70,000 820,000
Credit
Balance 45,000 57,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 9-1A (Continued) (b) (Continued) The costs that will appear on Kadlec’s December 31, 2014 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, 2014 and land improvements were completed on November 15, 2014 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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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 Depreciable Year Amount* × 2013 2014
$300,000 300,000
Depr. Rate
=
Depr. Expense
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* × 2013 2014
$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, Sixth Canadian Edition
PROBLEM 9-2A (Continued) (b) (Continued) Equipment: Double diminishing-balance 1. To the nearest whole month Carrying Amount Depr. Depr. Beginning Year of Year × Rate* = Expense 2013 2014
$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
* 1/8 × 2 = 25% 2. Half a year in the year of acquisition Carrying Amount Beginning Depr. Depr. Year of Year × Rate = Expense 2013 2014 (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 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, Sixth 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 ×
Depr. Rate
2013 2014 2015 2016
25%** 25% 25% 25%
* **
$207,000* 207,000 207,000 207,000
=
Depr. Expense $ 51,750 51,750 51,750 51,750
End of Year Accum. Carrying Depr. Amount $220,000 $ 51,750 168,250 103,500 116,500 155,250 64,750 207,000 13,000
$220,000 − $13,000 = $207,000 1/4 years = 25%
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PROBLEM 9-3A (Continued) (b) (Continued) 2. DOUBLE DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×
Depr. Rate
2013 2014 2015 2016
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 14,500** 207,000 13,000
* 1/4 years = 25% × 2 = 50% ** Equal to the amount that brings carrying amount to the residual value of $13,000. 3. UNITS-OF-PRODUCTION Units of Year Production × 2013 2014 2015 2016
15,750 23,900 20,200 15,350
End of Year Depr. Depr. Accum. Carrying Amt/Unit = Expense Depr. Amount $220,000 $2.76* $ 43,470 $ 43,470 176,530 2.76 65,964 109,434 110,566 2.76 55,752 165,186 54,814 2.76 41,814** 207,000 13,000
* Depreciable amount per unit is $2.76 per unit [($220,000 – $13,000) 75,000 = $2.76] ** Equal to the amount that brings the carrying amount to the residual value of $13,000 (actual production exceeded estimated total production).
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PROBLEM 9-3A (Continued) (c)
The unit-of-activity method of calculating depreciation provides the lowest amount of depreciation expense for 2013, 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.
(d) All three methods will result in the same cash flow in 2013 and over the life of the asset. Recording depreciation expense does not affect cash flow. There is no Cash account involved in the entry to record depreciation (Dr. Depreciation Expense; Cr. Accumulated Depreciation). It is only an allocation of the capital cost to expense over an asset’s useful life. 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
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
(b) Jan. 12
Feb.
Accum. Depr.
Total PP&E
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
Repairs Expense ....................... Cash.......................................
2,200
6 Repairs Expense ....................... Cash.......................................
5,400
Apr. 24
2,200
5,400
Building...................................... 75,000 Cash....................................... 75,000 Note: Possibly add to equipment 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, Sixth Canadian Edition
PROBLEM 9-4A (Continued) (b) (Continued)
Aug. 21
Vehicles ..................................... 26,000 Cash.......................................
Sept. 20 Repairs Expense ....................... Cash....................................... Oct. 25
2,700
Equipment.................................. 20,000 Cash.......................................
Dec. 31 Impairment Loss ....................... 37,500 Accumulated Depreciation— Equipment ............................ [($150,000 − $62,500) − $50,000] Note:
26,000
2,700
20,000
37,500
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 9-5A (a)
Depreciable Year Amount ×
Depr. Rate
2010 2011 2012 2013 2014
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
* Depreciable amount = $750,000 − $50,000 = $700,000 ** 1 ÷ 10 years = 10% (b)
(c)
Dec. 31 Impairment Loss ....................... 2014 Accumulated Depreciation— Equipment ............................ ($400,000 − $320,000)
80,000 80,000
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 so that the carrying amount will be $320,000, equal to the impaired amount.
(d)
Depreciable Year Amount*** × 2015 2016 2017
$310,000 310,000 310,000
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
*Accumulated Depreciation = $350,000 end of year before impairment loss + $80,000 impairment loss ** 1 ÷ 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) (e)
Accumulated depreciation at the end of this equipment’s useful life will be $740,000. Carrying amount at the end of this equipment’s useful life will be the amount of residual value which is $10,000. Refer to table in part (d).
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) 2012 May
1 Land............................................ 150,000 Building ...................................... 235,000 Cash....................................... Notes Payable .......................
Dec. 31 Depreciation Expense ................... 6,267 Accumulated Depreciation—Building (1 ÷ 25 = 4%) ($235,000 × 4% × 8/12 = $6,267) 31 Interest Expense ............................ 9,000 Cash....................................... ($270,000 × 5% × 8/12 = $9,000) 2013 Feb. 17 Repairs Expense ....................... Cash....................................... Dec. 31
115,000 270,000
6,267
9,000
225 225
Depreciation Expense ............... 9,149 Accumulated Depreciation—Building [($235,000 − $6,267) × 4% = $9,149]
9,149
31 Interest Expense .......................... 13,500 Cash....................................... ($270,000 × 5% = $13,500)
13,500
31 Impairment Loss .......................... 30,000 Land....................................... 30,000 ($150,000 − $120,000) Building — no entry as carrying amount = $219,584; ($235,000 − $6,267 − $9,149 = $219,584) which does not exceed the recoverable amount of $240,000.
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PROBLEM 9-6A (Continued) (a) (Continued) 2014 Jan. 31 Depreciation Expense ............... 732 Accumulated Depreciation—Building ($219,584 × 4% × 1/12) 31 Cash ........................................... 320,000 Accumulated Depreciation— Building* ................................... 16,148 Loss on Disposal (see below) .. 18,852 Land....................................... Building ................................. * ($6,267 + $9,149 + $732)
Feb.
(b)
732
120,000 235,000
Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 16,148 Carrying amount .................. Proceeds ............................... Loss on disposal ..................
218,852 338,852 320,000 $ 18,852
1 Interest Expense ($270,000 × 5% × 1/12) .................. 1,125 Notes Payable ............................ 270,000 Cash.......................................
271,125
$120,000
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 ................... 7,319 Accumulated Depreciation—Building ($219,584 × 4% × 10/12) Oct. 31 Cash ........................................... 400,000 Accumulated Depreciation —Building*................................. 22,735 Land....................................... Building ................................. Gain on Sale (see below)...... * ($6,267 + $9,149 + $7,319) Land (Carrying amount)....... Building................................. $235,000 Less: Accumulated dep’n .... 22,735 Carrying amount .................. Proceeds ............................... Gain on disposal (sale) ........
7,319
120,000 235,000 67,735
$120,000 212,265 332,265 400,000 $ 67,735
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)
Invoice price Less proceeds from sale Cost of ownership
$107,500 15,000 $ 92,500
(b) 1. STRAIGHT-LINE DEPRECIATION Depreciable Year Amount × 2012 2013 2014
$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 ** 1 ÷ 3 years = 33.33% 2. DIMINISHING-BALANCE DEPRECIATION Carrying Amount Beginning Year Of Year ×
Depr. Rate
2012 2013 2014
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, Sixth Canadian Edition
PROBLEM 9-7A (Continued) (b) (Continued) 3. UNITS-OF-PRODUCTION Units of Depr. Depr. Year Production × Amt/Unit* = Expense 2012 2013 2014
10,000 20,000 29,000
$1.617* 1.617 1.617
$ 16,170 32,340 46,893
End of Year Accum. Carrying Depr. Amount $107,500 $ 16,170 91,330 48,510 58,990 95,403 12,097
* Depreciable amount per unit is $1.617 per unit [($107,500 – $10,500) 60,000 = $1.617] (c)
(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 (d)
$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 actual cost of owning in (a) is the same as the net expense under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in term causes a different gain 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 any proceeds of disposition will occur when the asset is ultimately disposed of.
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PROBLEM 9-8A (a)
(b)
2012 Mar.
1 Equipment .................................... 95,000 Accounts Payable .................
2012 Aug. 31 Depreciation Expense ................... 9,500 Accumulated Depreciation —Equipment ......................... $95,000 × 20% × 6/12 months = $9,500 2013 Aug. 31 Depreciation Expense ................. 17,100 Accumulated Depreciation —Equipment ......................... ($95,000 − $9,500) × 20% = $17,100
95,000
9,500
17,100
2014 Aug. 31 Depreciation Expense ................. 13,680 Accumulated Depreciation —Equipment ......................... 13,680 ($95,000 − $9,500 − $17,100) × 20% = $13,680 (c)
2015 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, 2015: $9,500 + $17,100 + $13,680 + $4,560 = $44,840 Carrying Amount at February 1, 2015: 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 ($47,000 + $45,000) ...................... 92,000 Accumulated Depreciation —Equipment ................................ 44,840 Loss on Disposal**** ..................... 3,160 Cash ($97,000 − $52,000)...... Equipment ............................. **** $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..........500,000 Equipment ............................. 500,000 Cost $500,000 Accumulated depreciation—equipment ($500,000 ÷ 10 × 10) 500,000 Carrying amount 0 Cash proceeds 0 Gain (loss) on disposal $ 0 (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) (Continued) Equipment Jan. 1, 2014 July 1, 2014
75,000,000 1,100,000
May 1, 2014 Dec. 31, 2014
1,400,000 500,000
Dec.31, 2014Bal. 74,200,000 Accumulated Depreciation—Building Jan. 1, 2014 Dec. 31, 2014
31,100,000 974,000
Dec. 31, 2014 Bal. 32,074,000
Accumulated Depreciation—Equipment May 1, 2014 Dec. 31, 2014
1,166,667 500,000
Jan. 1, 2014 May 1, 2014 Dec. 31, 2014 Dec. 31, 2014
27,000,000 46,667 50,000 7,365,000
Dec. 31, 2014 Bal. 32,795,000
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PROBLEM 9-9A (Continued) 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. The owner should be asked what his motivation is in making this change. Once changed, 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 for Hamsmith Corporation, and these costs may not exceed the benefits of implementing the revaluation model. Comparability with other companies might also be affected. Since the implementation is rare, Hamsmith would have financial results which would be harder to compare to others by outside users and by financial institutions.
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PROBLEM 9-10A 1.
Research Expense ($160,000 × 55%) ........ 88,000 Patents.................................................... Accumulated Amortization—Patents........ Amortization Expense ........................... $88,000 ÷ 15 years = $5,867
5,867
2. Accumulated Amortization–Goodwill ....... Amortization Expense ........................... ($400,000 ÷ 40 years) × 6/12 = $5,000
5,000
3.
12,500
4. 5.
Impairment Loss......................................... Trademark ($47,500 − $35,000) .............
88,000
5,867
5,000
12,500
Impairment Loss ($80,000 − $70,000)........ 10,000 Licence ...................................................
10,000
Charitable Donations Expense.................. Goodwill .................................................
8,000
8,000
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.......................................
18,000
Dec. 31 No entry: Reversals of impairments of goodwill may not be recorded. (b) Dec. 31 Amortization Expense ................. 12,400 Accumulated Amortization— Patent #1* .............................. Accumulated Amortization— Patent #2**.............................
10,900 1,500
* [($80,000 × 1/10) + ($23,200 × 1/8)] At Jan. 1, 2014 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............... 5,550 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, 2014
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 + $8,000 + $2,900) + 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
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PROBLEM 9-11A (Continued) 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)
2013 Mar. 31 Mine ($2,600,000 + $260,000) . 2,860,000 Cash.................................. 2,860,000 Dec. 31 Inventory ................................. Accumulated Depreciation —Mine...............................
570,000 570,000
($2,860,000 − $200,000) ÷ 560,000 t = $4.75/t × 120,000 t = $570,000 Dec. 31 Cost of Goods Sold ................ Inventory .......................... 2014 Dec. 31 Inventory ................................. Accumulated Depreciation —Mine...............................
570,000 570,000 380,000 380,000
($2,860,000 − $570,000 − $200,000) ÷ 550,000 t = 100,000 t = $380,000 Dec. 31 Cost of Goods Sold ................ Inventory ..........................
$3.80/t ×
380,000 380,000
(b) YOUNT MINING COMPANY Income Statement (partial) Year Ended December 31, 2014 Cost of goods sold........................................
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PROBLEM 9-12A (Continued) (b) (Continued) YOUNT MINING COMPANY (Partial) Balance Sheet December 31, 2014 Property, plant, and equipment Mine ........................................................ $2,860,000 Less: Accumulated depreciation* ...... 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 depreciation of the mine. It is the depreciation 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 2014
$21.4 [($702.5 + $662.8) ÷ 2]
$96.5 [($1,523.5 + $1,410.7) ÷2]
= 3.13%
= 6.58%
Return on assets 2013
$20.6 [($662.8 + $602.5) ÷ 2]
$85.4 [($1,410.7 + $1,318.4) ÷2]
= 3.26%
= 6.26%
Asset turnover 2014
Asset turnover 2013
(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
9
15
17
25
Land ........................................... 575,000 Cash....................................... Notes Payable ....................... Land ........................................... Cash.......................................
115,000 460,000
7,500 7,500
Land ........................................... 19,000 Cash.......................................
19,000
Cash ........................................... Land.......................................
8,500
8,500
Land ........................................... 10,500 Cash.......................................
10,500
Building...................................... 28,000 Cash.......................................
28,000
Building...................................... 18,000 Cash.......................................
18,000
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
Mar.
2
15
Aug. 31
3,750
Oct. 31 Land Improvements .................. 37,750 Cash.......................................
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PROBLEM 9-1B (Continued) (b) Date 2014 Feb. 7 9 15 17 25
Date 2014 Mar. 2 15 Aug. 31
Date 2014 Sept. 3 Oct. 31
Explanation
Land Ref.
Debit
Credit
575,000 7,500 19,000 8,500 10,500
Explanation
Building Ref.
Debit
Credit
28,000 18,000 850,000 Land Improvements Explanation Ref. Debit 40,000 37,750
Balance 575,000 582,500 601,500 593,000 603,500
Balance 28,000 46,000 896,000
Credit
Balance 40,000 77,750
The costs that will appear on Weisman’s December 31, 2014 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, 2014 and land improvements were completed on October 31, 2014 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 whole month Depreciable Year Amount* × 2013 2014
$300,000 300,000
Depr. Rate
=
Depr. Expense
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* × 2013 2014
$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 $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 whole month Carrying Amount Depr. Depr. Beginning Year of Year × Rate* = Expense 2013 2014
$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
* 1/8 × 2 = 25% 2) Half a year in the year of acquisition Carrying Amount Beginning Depr. Depr. Year of Year × Rate = Expense 2013 2014 (c)
$140,000 122,500
25% × 1/2 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 deprecating 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
2013 2014 2015 2016
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 1/4 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
2013 2014 2015 2016
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
* 1/4 years = 25% × 2 = 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* = 2013 2014 2015 2016
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)
Units-of-production method of depreciation provides the lowest amount of depreciation expense for 2013, 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).
(d) All three methods will result in the same cash flow in 2013 and over the life of the asset. Recording depreciation expense does not affect cash flow. There is no Cash account involved in the entry to record depreciation (Dr. Depreciation Expense; Cr. Accumulated Depreciation). It is only an allocation of the capital cost to expense over an asset’s useful life. 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 charge — part (b).
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PROBLEM 9-4B (a) Transaction
Land
Buildings
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
Apr. 10
May
6
July 20
Aug.
7
15
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Repairs Expense ....................... Accounts Payable .................
4,600 4,600
Equipment.................................. 95,000 Accounts Payable .................
95,000
Repairs Expense ....................... 30,500 Accounts Payable .................
30,500
Repairs Expense ....................... 10,000 Accounts Payable .................
10,000
Equipment.................................. 35,000 Accounts Payable .................
35,000
Training Expense ...................... Accounts Payable .................
1,900
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PROBLEM 9-4B (Continued) (b) (Continued) Oct. 25
25
Nov.
1.
2.
6
Equipment.................................. 16,700 Accounts Payable .................
16,700
Equipment.................................. Accounts Payable .................
1,500
1,500
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
2010 2011 2012 2013 2014
10% 10% 10% 10% 10%
$575,000* 575,000 575,000 575,000 575,000
=
Depr. Expense $57,500 57,500 57,500 57,500 57,500
End of Year Accum. Carrying Depr. Amount $600,000 $ 57,500 542,500 115,000 485,000 172,500 427,500 230,000 370,000 287,500 312,500
* Depreciable amount = $600,000 − $25,000 = $575,000 ** 1 ÷ 10 years = 10% (b)
Dec. 31 Impairment Loss .......................... 52,500 2014 Accumulated Depreciation— Equipment ............................ ($312,500 − $260,000)
52,500
(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 so that the book value will be $260,000 equal to the impaired amount.
(d)
End of Year Depr. Accum. Carrying = Expense Depr. Amount $340,000¹ $260,000 $125,000 465,000 135,000 125,000 590,000 10,000
Depreciable Year Amount × 2015 2016
$250,0002 250,000
Depr. Rate 50%3 50%
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%
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PROBLEM 9-5B (Continued) (e) Accumulated depreciation at the end of this equipment’s
useful life will be $590,000. The carrying amount at the end of this equipment’s useful life will be the amount of residual value which is $10,000. Refer to table in (d). 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. ASPE does not allow recording recoveries of impairment losses. 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 scrutiny of the assets to determine any impairment is greater and the measures taken more rigorous. Given that under IFRS recoveries of impairment losses are possible and given that the revaluation model allows for longlived assets to be reported at values in excess of historical cost, the chances of the recoverable amount falling below the carrying amount are vastly increased. Consequently, the recording impairment losses for long-lived assets are more frequent under IFRS than under ASPE.
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PROBLEM 9-6B (a)
2012 Aug.
1 Land............................................ 340,000 Building ...................................... 255,000 Cash ...................................... Notes Payable ......................
200,000 395,000
Dec. 31 Depreciation Expense ................... 2,500 Accumulated Depreciation—Building 2,500 [($255,000 − $15,000) ÷ 40] × 5/12 = $2,500 31 Interest Expense ............................ 8,229 Cash....................................... ($395,000 × 5% × 5/12 = $8,229) 2013 May 21
Repairs Expense............................ 2,000 Cash.......................................
8,229
2,000
Dec. 31 Depreciation Expense ................... 6,000 Accumulated Depreciation—Building ($255,000 − $15,000) ÷ 40 = $6,000
6,000
31 Interest Expense .......................... 19,750 Cash....................................... ($395,000 × 5% = $19,750)
19,750
31 Impairment Loss .......................... 60,000 Land....................................... ($280,000 − $340,000 = − $60,000)
60,000
Building — no entry as the carrying amount of $246,500 ($255,000 − $2,500 − $6,000) is less than the recoverable amount of $249,000.
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PROBLEM 9-6B (Continued) (a) (Continued) 2014 Mar. 31 Depreciation Expense ................... 1,500 Accumulated Depreciation—Building [($255,000 − $15,000) ÷ 40] × 3/12 = $1,500 31 Cash .......................................... 480,000 Accumulated Depreciation— Building* ................................... 10,000 Loss on Sale (below) ................ 45,000 Land ...................................... Building ................................ * ($2,500 + $6,000 + $1,500) Land (Carrying amount) .............. Building ....................................... Less: Accumulated depreciation Carrying amount ......................... Proceeds ...................................... Loss on disposal ......................... Apr.
(b)
1,500
280,000 255,000
$280,000 $255,000 10,000 245,000 525,000 480,000 $ 45,000
1 Interest Expense ($395,000 × 5% × 3/12) ................... 4,938 Notes Payable ............................ 395,000 Cash ......................................
399,938
The land may have been impaired due to contamination found on it or surrounding properties, or because plans to develop an adjacent property that would have increased the value of SE Parts Supply’s property may have been permanently delayed.
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PROBLEM 9-6B (Continued) (c)
Nov. 30 Depreciation Expense ................... 5,500 Accumulated Depreciation—Building 5,500 [($255,000 − $15,000) ÷ 40] × 11/12 = $5,500 30 Cash ........................................... 650,000 Accumulated Depreciation— Building* ................................... 14,000 Gain on Sale (below) ............ Land....................................... Building ................................. * ($2,500 + $6,000 + $5,500)
129,000 280,000 255,000
Land (Carrying amount) ......................... $280,000 Building ................................................... $255,000 Less: Accumulated depreciation ............ 14,000 241,000 Carrying amount ..................................... 521,000 Proceeds ................................................. 650,000 Gain on disposal (sale)........................... $129,000 Taking It Further: The recoverable amount of a property is 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 SE Parts 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 estimates of what would be obtained on sale. Under ASPE, full appraisals of the property 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 circumstance or conditions occur. If the company is using IFRS, annual impairment tests are required regardless of circumstances.
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PROBLEM 9-6B (Continued) Taking It Further: (Continued) When considering impairment of the land on its own, there might be conditions uncovered during the year or uninsured damages during the year, which might cause management to investigate the effect of these conditions on the value in use or the resale fair value of the land.
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PROBLEM 9-7B (a)
Invoice price Less proceed from sale Cost of ownership
$125,000 21,000 $104,000
(b) 1. STRAIGHT-LINE DEPRECIATION Depreciable Year Amount × 2013 2014 2015
$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
2013 2014 2015
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) (b) (Continued) 3. UNITS-OF-PRODUCTION Units of Depr. Depr. Year Production × Amt/Unit* = Expense 2013 2014 2015
6,000 2,000 3,800
$8.917* 8.917 8.917
$ 53,502 17,834 33,885
End of Year Accum. Carrying Depr. Amount $125,000 $ 53,502 71,498 71,336 53,664 105,221 19,779
* Depreciable amount per unit is $8.917 per unit [($125,000 – $18,000) 12,000 = $8.917] (c)
(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 (d)
(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 actual cost of owning in (a) is the same as the net expense under all three methods. The different depreciation methods results in different accumulated depreciation at the date of sale, which in term 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)
(b)
2012 Feb.
4 Furniture ...................................... 70,000 Accounts Payable .................
2012 Sept. 30 Depreciation Expense ................... 9,333 Accumulated Depreciation —Furniture ............................ $70,000 × 20% × 8/12 months 2013 Sept. 30 Depreciation Expense ................. 12,133 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333) × 20% 2014 Sept. 30 Depreciation Expense ................... 9,707 Accumulated Depreciation —Furniture ............................ ($70,000 − $9,333 − $12,133) × 20%
(c)
2015 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, 2015: $9,333 + $12,133 + $9,707 + $2,588 = $33,761 Carrying Amount at January 26, 2015: Cost – Accumulated Depreciation $36,239 = $70,000 − $33,761
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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 ($70,000 + $30,000) .................... 100,000 Accumulated Depreciation— Furniture ...................................... 33,761 Loss on Disposal**** ..................... 6,239 Cash ($115,000 − $45,000).... 70,000 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
July
1 Cash ........................................... 380,000 Notes Receivable ....................... 820,000 Land....................................... Gain on Disposal ..................
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 .................................. 470,000 Equipment .............................
470,000
(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, 2014
Property, plant, and equipment* Land ............................................. $ 5,600,000 Buildings ......................................... $28,500,000 Less: Accumulated depreciation . 12,670,000 15,830,000 Equipment ....................................... $47,780,000 Less: Accumulated depreciation . 18,780,000 29,000,000 Total property, plant, and equipment $50,430,000 *See T accounts that follow for balances Land Jan. 1, 2014 April 1, 2014
4,000,000 1,900,000
June 1, 2014
300,000
Dec. 31, 2014 Bal. 5,600,000 Building Jan. 1, 2014
28,500,000
Dec. 31, 2014 Bal. 28,500,000 Equipment Jan. 1, 2014 July 1, 2014
48,000,000 1,000,000
May 1, 2014 Dec. 31, 2014
750,000 470,000
Dec. 31, 2014 Bal. 47,780,000
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PROBLEM 9-9B (Continued) (c) (Continued) Accumulated Depreciation—Building Jan. 1, 2014 Dec. 31, 2014
12,100,000 570,000
Dec. 31, 2014 Bal. 12,670,000
Accumulated Depreciation—Equipment May 1, 2014 Dec. 31, 2014
550,000 470,000
Jan. 1, 2014 May 1, 2014 Dec. 31, 2014 Dec. 31, 2014
15,000,000 25,000 47,000 4,728,000
Dec. 31, 2014 Bal. 18,780,000 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. The owner should be asked what his motivation is in making this change. Once changed, 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 for Jaina Company, and these costs may exceed the benefits of implementing the revaluation model. Comparability with other companies might also be affected. Since the implementation is rare, Jaina would have financial results which would be harder to compare to others by outside users and by financial institutions.
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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
Patents ........................................................ Legal Fees Expense ..............................
38,000 38,000
4.
Amortization Expense................................ 15,050 Accumulated Amortization—Patents ... 15,050 {[($45,000 + $21,000 + $38,000) ÷ 5 years] − $5,750}
5.
No entry needed or allowed under ASPE: Recoverable amount is greater than carrying amount: Balance Patents account ........................... $104,000 Less: Accumulated Amortization initial.... $5,750 Adjusting entry 4. ............................. 15,050 20,800 Carrying amount......................................... $ 83,200 Recoverable amount .................................. $110,000
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 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
1 Research Expense .................. Cash.....................................
275,000
1
Patents ..................................... Cash.....................................
50,000
1 Prepaid Advertising ................ Cash.....................................
45,000
1
7,000
275,000
50,000
45,000
Copyright #2 ............................ 168,000 Cash.....................................
168,000
Dec. 31 Impairment Loss ..................... 9,000 Accumulated Amortization— Trademark ($59,000 − $50,000)
9,000
Trademark – impairment: Balance Jan. 1, 2014 ............... Addition Jan. 2, 2011............... Carrying amount ..................... Recoverable amount ...............
$52,000 7,000 $59,000 $50,000
Goodwill – no impairment Balance Dec. 31, 2014 ............. $150,000 Recoverable amount ............... $170,000 (b) Dec. 31 Amortization Expense............. 1,250 Accumulated Amortization— Patents ................................ [($50,000 ÷ 20) × 6/12] = $1,250]
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PROBLEM 9-11B (Continued) (b) (Continued) Dec. 31 Amortization Expense ................. 19,000 Accumulated Amortization— Copyrights........................... 19,000 [($36,000 × 1/3) + ($168,000 × 1/6 × 3/12)] (c) GHANI CORPORATION Balance Sheet (Partial) December 31, 2014 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 Less: Accumulated amortization ....... 9,000 50,000 Total intangible assets ............................................. $259,750 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)
2013 June
7 Timber Land ......................... 50,000,000 Cash................................ 10,000,000 Mortgage Payable .......... 40,000,000 26
Dec. 31
Equipment.............................. Cash...................................
196,000 196,000
Inventory ................................ 5,280,000 Accumulated Depreciation —Timber Land .................. 5,280,000 ($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 31 Mortgage Payable.................. 8,000,000 Cash................................... 8,000,000
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PROBLEM 9-12B (Continued) (a) (Continued) 2014 Dec. 31 Inventory ($48/t × 240,000 t)................... 11,520,000 Accumulated Depreciation —Timber Land .................. 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 ($32,000,000* × 7%)................. 2,240,000 Cash................................... 2,240,000 *($40,000,000 − $8,000,000) = $ 32,000,000 31 Mortgage Payable ................... 8,000,000 Cash................................... 8,000,000 (b) CYPRESS TIMBER COMPANY Income Statement (partial) Year Ended December 31, 2014 Cost of goods sold .................................
$11,520,000
Operating expenses: Depreciation expense.........................
$
Other expenses: Interest expense .................................
$ 2,240,000
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PROBLEM 9-12B (Continued) (b) (Continued) CYPRESS TIMBER COMPANY (Partial) Balance Sheet December 31, 2014
Property, plant, and equipment Timber tract ......................................... $50,000,000 Less: Accumulated depreciation1...... 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 (2013) + $28,000 (2014) = $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 2014
$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 2013
$597.8 [($5,771.4 + $5,343.9) ÷ 2]
$137.9 [($2,504.1 + $2,340.3) ÷ 2]
= 10.76%
= 5.69%
Asset turnover 2014
Asset turnover 2013
(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 it’s 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. Notwithstanding this limitation, and assuming a normal turnover of assets, one could generally conclude that the amount of profit and total assets of Cotoneaster would be lower than that of Mock Orange, 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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CONTINUING COOKIE CHRONICLE (a)
Purchase price ........................................................ Painting .................................................................... Shelving ................................................................... Cost of van...............................................................
(b)
1. STRAIGHT-LINE METHOD
Depreciable Year Amount × 2014 2015 2016 2017 2018 2019 Total
$28,000* 28,000 28,000 28,000 28,000 28,000
Depr. Rate
=
20% × 8/12 20% 20% 20% 20% 20% × 4/12
Depr. Expense $ 3,733 5,600 5,600 5,600 5,600 1,867 $28,000
$28,400 3,000 1,600 $33,000
End of Year Accum. Carrying Depr. Amount $33,000 $ 3,733 29,267 9,333 23,667 14,933 18,067 20,533 12,467 26,133 6,867 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 2014 $33,000 40%* × 8/12 $ 8,800 $ 8,800 24,200 2015 24,020 40% 9,680 18,480 14,520 2016 14,520 40% 5,808 24,288 8,712 2017 8,712 40% 3,485 27,773 5,227 2018 5,227 40% 227** 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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CONTINUING COOKIE CHRONICLE (Continued) (b) (Continued) 3. UNITS-OF-PRODUCTION METHOD Units of Depreciable Year Production × Cost/Unit = 2014 2015 2016 2017 2018 2019
$ 4,200 5,250 5,600 6,650 4,900 1,400 $28,000 * ($33,000 − $5,000) ÷ 200,000 km = $0.14 per km (c)
30,000 37,500 40,000 47,500 35,000 10,000
$0.14* 0.14 0.14 0.14 0.14 0.14
Depr. Expense
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
The straight-line method of depreciation will result in the greatest amount of profit reported for the year ended December 31, 2014 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 December 31, 2014 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)
$33,000 will be spent when the van is purchased. The choice of depreciation method or variations in the calculation will not affect cash. There will not be any difference in the cash over the life of the asset.
(f)
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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BYP 9-1 FINANCIAL REPORTING PROBLEM (a)
(in thousands) (2) Accumulated Depreciation and Impairment Losses $ 22,018 92,429 106,547 $220,994
(3) Net Carrying Amount $ 5,860 32,145 70,690 75,526 $184,221
Intangible assets
(2) (1) Accumulated Cost Amortization $28,254 $11,197
(3) Net Carrying Amount $17,057
Goodwill
$42,426
Land Buildings Fixtures and equipment Leasehold improvements
(1) Cost $5,860 54,163 163,119 182,073 $405,215
(b)
(c)
$42,426
As part of the disclosure in note 8 to the financial statements, $6,723,000 is reported as an impairment loss recorded during the year ended January 28, 2012 for property and equipment. Also, this note reports reversal of impairment losses during the year in the amount of $591,000 for leasehold improvements. The loss was arrived at by comparing the carrying amounts of assets with their value-in-use. The balance of Goodwill has not changed over the last three years. The measurement of any possible impairment is arrived at by comparing the carrying amount of goodwill with its value in use.
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BYP 9-1 (Continued)
(d) The amount of depreciation and amortization expense for the fiscal year 2012 was $55,180,000 for depreciation and $3,959,000 for amortization. These expenses were recorded in selling and distribution expenses and administrative expenses in the statement of earnings. (e)
The amount of cash used to buy property and equipment and intangible assets during the 2012 fiscal year was $59,154,000. This amount appears as an outflow in the investing activities of the statement of cash flows.
(f)
Reitmans uses the straight-line method of depreciation for property and equipment as well as limited life intangible assets. The estimated useful lives for property and equipment and intangibles are: Buildings 10 to 50 years Fixtures and equipment 3 to 20 years Leasehold improvements 6.7 to 10 years Software 3 to 5 years
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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 and assets under finance leases frequently have physical lives that are longer than the terms of the lease. But since the control and enjoyment of leasehold improvements and assets under finance leases 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:
Impairment loss of Long-Lived Assets
Long-lived assets are recorded at cost. In our company’s case those assets include trucks, garages and equipment. The cost of these assets is depreciated over their useful lives, allocating the costs of depreciation against the revenue these assets have helped us generate. The difference between the cost of an asset and its accumulated depreciation is what we refer to as carrying amount. In some circumstances, the carrying amount of a long-lived asset may not be recoverable. If this happens, and the fair value also falls far below the assets’ carrying amount, an impairment has occurred. An impairment may occur because an asset has become obsolete. In our company, an impairment could arise when equipment we have purchased to repair and maintain a truck can no longer perform the necessary service on a truck because of technological change. The impairment loss is equal to the amount by which the carrying amount of the asset exceeds its recoverable amount. In turn, the recoverable amount is the higher of the asset’s fair value less cost to sell and its value in use. The journal entry to record an impairment loss is: Dr. Impairment Loss Cr. Accumulated Depreciation
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BYP 9-4 (Continued) When an impairment loss is recorded, the cost of the long-lived asset does not change. The amount of accumulated depreciation increases by the amount of the impairment loss. The carrying amount of the asset then decreases to reflect the recoverable amount of the asset. When an impairment loss is recorded, profit is decreased in the year recorded. In future years, the annual depreciation expense will need to be revised. Future annual depreciation expense will be based on the revised carrying amount (which is equal to the recoverable amount after the impairment loss is recorded), the revised residual value, and the revised remaining useful life of the asset. It is possible the residual value and the remaining useful life may not need to be changed. In that case future annual depreciation expense will be less than it has been in previous years as a result of the loss. If the residual value and the remaining useful life change, then the future depreciation expense may be greater or lower than the previous depreciation expense.
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BYP 9-5 ETHICS CASE (a)
The stakeholders in this situation are: President of Finney Container Company Controller of Finney Container Company The owners of Finney Container Company Potential investors in Finney Container Company Creditors and others with a financial interest in the company The company’s auditors
(b) The estimate of the useful life of the equipment was tentative when first set by the management and could have been set at any point in the possible range of five to nine years. A change from seven to nine years would not be unethical if it were the result of additional information at the time of the revision. In that case, the goal is to achieve a better allocation of the asset's depreciable amount over the asset's useful life. What makes the proposed changes unethical is that the change has very little to do with the asset, but everything to do with the goal of manipulating profit in order to obtain a bonus. This is a self serving goal on the part of the president and is suggested for no other reason than for personal gain. The fact that the competition uses a longer life on its equipment is not necessarily relevant. The competition's repair and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g., one shift rather than two shifts daily) than Finney Container Company. But the change may increase the degree of comparability between Finney and its competitor.
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BYP 9-5 (Continued) (c)
Profit in the year of change is increased $114,286 ($400,000 − $285,714), because depreciation expense is decreased $114,286, by implementing the president's proposed changes.
Old Estimate Asset cost .................................................................. $2,900,000 Estimated residual value ............................................ 100,000 Depreciable amount ............................................... 2,800,000 Estimated useful life ................................................... ÷ 7 years Depreciation expense per year ............................. $ 400,000 Revised Estimate Asset cost ............................................................... $2,900,000 Depreciation taken to date ($400,000 × 2 years) .. 800,000 Carrying amount at time of change in estimate ... 2,100,000 Estimated residual value ....................................... 100,000 Remaining cost to be depreciated ........................ 2,000,000 Remaining useful life (9 years − 2 years) ............. ÷ 7 years Revised depreciation expense per year ............... $ 285,714
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BYP 9-6 “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 9-6 (Continued) (e)
The fee for filing on-line is $50 and so 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) The responsibility for monitoring the use of your song rests with the person who owns the copyright.
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CHAPTER 10 Current Liabilities and Payroll ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Account for determinable or certain current liabilities.
1, 2, 3, 4, 5, 6, 7, 12
1, 2, 3, 4, 13, 14
1, 2, 3, 4, 5, 9, 13
1, 2, 3
1, 2, 3
2. Account for estimated liabilities.
8, 9, 10, 11, 12
5, 6, 7, 8, 13
6, 7, 8, 9
3, 4, 5
3, 4, 5
3. Account for contingencies.
12, 13, 14, 15, 16
9, 10, 13
9, 10
6
6
4. Determine payroll costs and record payroll transactions. 5. Prepare the current liabilities section of the balance sheet.
17, 18, 19, 20, 21
11, 12, 13, *18
11, 12, 13, *15
3, 7, 8
3, 7, 8
22, 23, 24
13, 14, 15
5, 14
1, 2, 3, 6, 9
1, 2, 3, 6, 9
*6. Calculate mandatory payroll deductions (Appendix 10A).
*25, *26
*16, *17, *18
*15, *16
*10
*10
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A
Description Calculate current and non-current portion of notes payable, and interest payable.
Difficulty Level Moderate
Time Allotted (min.) 15-25
2A
Record note transactions; show financial statement presentation.
Moderate
30-40
3A
Record current liability transactions; prepare current liabilities section.
Moderate
30-40
4A
Record warranty transactions.
Moderate
15-25
5A
Record customer loyalty program and gift card transactions; determine impact on financial statements.
Moderate
15-25
6A
Discuss reporting of contingencies and record provisions.
Moderate
15-25
7A
Prepare payroll register and record payroll.
Moderate
25-35
8A
Record payroll transactions and calculate balances in payroll liability accounts.
Moderate
25-35
9A
Prepare current liabilities section; calculate and comment on ratios.
Moderate
15-25
*10A
Calculate payroll deductions; prepare payroll register.
Moderate
25-35
1B
Calculate current and non-current portion of notes payable, and interest payable.
Moderate
15-25
2B
Record note transactions; show financial statement presentation.
Moderate
30-40
3B
Record current liability transactions; prepare current liabilities section.
Moderate
30-40
4B
Record warranty transactions.
Moderate
15-25
5B
Record customer loyalty program and gift card transactions; determine impact on financial statements.
Moderate
15-25
6B
Discuss reporting of contingencies and record provisions.
Moderate
15-25
7B
Prepare payroll register and record payroll.
Moderate
25-35
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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 8B
Description Record payroll transactions and calculate balances in payroll liability accounts.
Difficulty Level Moderate
Time Allotted (min.) 25-35
9B
Prepare current liabilities section; calculate and comment on ratios.
Moderate
15-25
*10B
Calculate payroll deductions; prepare payroll register.
Moderate
25-35
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Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study Objectives 1. Account for determinable or certain current liabilities.
Knowledge Comprehension Q10-1 Q10-2 Q10-3 Q10-4 Q10-12 BE10-13
Q10-5 Q10-6 Q10-7 E10-9
2. Account for estimated liabilities.
Q10-12 BE10-13
Q10-8 Q10-9 Q10-10 Q10-11 E10-9
3. Account for contingencies.
Q10-12 BE10-13
4. Determine payroll costs and record payroll transactions.
Q10-19 Q10-21 BE10-13
Q10-13 Q10-14 Q10-15 Q10-16 BE10-9 E10-9 Q10-17 Q10-18 Q10-20
5. Prepare the current liabilities section of the balance sheet.
Q10-22 Q10-23 Q10-24 BE10-13
*6. Calculate mandatory payroll deductions (Appendix 10A).
*Q10-25 *Q10-26
E10-5 E10-13 P10-1A P10-2A P10-3A P10-1B P10-2B P10-3B
BE10-10 E10-10 P10-6A
P10-6B
BE10-11 BE10-12 *BE10-18 E10-11 E10-12 *E10-15
P10-3A P10-7A P10-8A P10-3B P10-7B P10-8B
10-4
Analysis
Synthesis
BYP10-1
BYP10-2 BYP10-5 BYP10-6
P10-3A P10-4A P10-5A P10-3B P10-4B P10-5B
BE10-14 P10-1B BE10-15 P10-2B E10-5 P10-3B E10-13 P10-6B E10-14 P10-9B P10-1A P10-2A P10-3A P10-6A P10-9A *BE10-16 *P10-10A *BE10-17 *P10-10B *BE10-18 *E10-15 *E10-16 Continuing Cookie Chronicle Cumulative Coverage Chapters 3 – 10 BYP10-3 BYP10-4
Broadening Your Perspective
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Application BE10-1 BE10-2 BE10-3 BE10-4 BE10-14 E10-1 E10-2 E10-3 E10-4 BE10-5 BE10-6 BE10-7 BE10-8 E10-6 E10-7 E10-8
Chapter 10
Evaluation
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
ANSWERS TO QUESTIONS 1.
A determinable liability is also referred to as certain liabilities or known liabilities. 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.
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.
4.
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.
5.
If the sales tax is included in the selling price, this means that the selling price represents 113% of the retail price. By dividing the selling price (including sales tax) by 113% (100% + the sales tax percentage), you obtain the retail price. The sales tax can then be calculated by multiplying the retail price by 13% or by calculating the difference between the selling price and the retail price. For example, a product sells for $226 including HST. The retail price is calculated as $226 ÷ 113% = $200. The HST is calculated as $200 × 13% = $26.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 6.
Your roommate is not correct. The determining factor in recording property taxes as expenses is the timing rather than avoidability. Property taxes are recorded as expenses as municipal services are received. This is usually accomplished by recording the expense in a systematic monthly basis regardless of when the tax bill is actually paid. The property tax bill for the calendar year is usually not known until the spring. If a company has a yearend prior to receiving the property tax bill, it would have to accrue an expense and estimated liability (for the months in the current calendar year) based on last year’s property tax bill. Otherwise, most companies would wait until they receive the property tax bill, and record property tax expense and property tax payable (a current liability) for the number of months in the year to date. When the property tax bill is paid, the liability will disappear and the company will record property tax expense for any intervening period of time and prepaid property tax (a current asset) for the remaining months in the year. As time passes, the company would record the property tax expense and credit the prepaid property tax account.
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.
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 reduce future periods’ revenues. Giving customers these rewards creates an obligation in the current period to provide reductions on future selling prices and reduced cash in the future.
10.
The company should estimate the number of vouchers that will likely be used. It should record this estimate as a reduction to revenue (Dr. Sales Discount for Redemption Rewards Issued) in the period of the sale and as an estimated liability (Cr. Redemption Rewards Liability), to recognize the obligation the company has with respect to these coupons.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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. This is similar to an operating line of credit in that the obligation can be satisfied in the current or long-term. 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. 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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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. Employer payroll deductions are amounts the employer is expected to pay that are charged on certain payroll deductions. 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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 20.
Income tax, CPP and EI deductions are remitted to the CRA, 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.
Paid absences refer to compensation paid by employers to employees for vacations, sickness, and holidays. When the payment of such compensation is probable and the amount can be reasonably estimated, a liability should be accrued for paid future absences, which employees have earned. When this amount cannot be reasonably estimated, the potential liability should be disclosed. Other employee benefits include workplace health, safety and compensation, as well as health and dental insurance which are expensed on a monthly basis. Employers also occasionally pay for post-employment benefits such as pensions and supplemental health and dental care and life insurance. These post-employment benefits are accounted for using the accrual basis.
22.
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.
23.
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.
24.
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 pay debt.
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QUESTIONS (Continued) *25. Contribution rates for CPP are set by the federal government and are adjusted every January if there are increases in the cost of living. 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 ($50,100 for 2012). The exemption and ceiling are prorated to the relevant pay period (e.g., weekly, biweekly, semimonthly, monthly). Contribution rates for EI are currently based upon a percentage (currently 1.83%) of insurable earnings, to a maximum earnings ceiling ($45,900 for 2012). In most cases, insured earnings are gross earnings plus any taxable benefits. *26. The amount deducted from an employee’s salary for income tax is determined by using payroll accounting programs, CRA payroll deduction tables, tables on diskette, or 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.
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) 2014 May 1 Cash ............................................... Notes Payable ........................... (b) June 1 Interest Expense ($10,500 × 4% × 1/12)..................... Cash........................................... (c) Aug. 31 Interest Expense ($10,500 × 4% × 1/12)..................... Interest Payable ........................ (d) 2015 Mar. 1 Interest Expense ($10,500 × 4% × 1/12)..................... Notes Payable................................ Cash...........................................
10,500 10,500
35 35
35 35
35 10,500 10,535
BRIEF EXERCISE 10-2 (a) Calculation of sales tax payable – Ontario store: HST payable = $7,200 × 13% = $936 Calculation of sales tax payable – Quebec store: GST payable = $8,400 × 5% = $420 QST payable = $8,400 × 9.975% = $838
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BRIEF EXERCISE 10-2 (Continued) (b) Ontario store: Mar. 12 Cash .................................................... Sales ............................................... HST Payable ................................... Quebec store: Mar. 12 Cash .................................................... Sales ............................................... GST Payable................................... QST Payable...................................
8,136 7,200 936
9,658 8,400 420 838
BRIEF EXERCISE 10-3 (a) May 10, 2014: Calculation of sales tax collected: HST: $1,500 × 13% × 10 =
$1,950
May 17, 2014: Calculation of sales: Sales = ($1,500 × 20) ÷ 1.13 = $26,549 Calculation of sales tax payable: HST payable = $26,549 × 13% = (b) Mar. 10
Mar. 17
Solutions Manual .
$3,451
Cash .................................................... 16,950 Sales ($1,500 × 10) ......................... HST Payable ...................................
15,000 1,950
Cash ($1,500 × 20) .............................. 30,000 Sales ............................................... HST Payable ...................................
26,549 3,451
10-12
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 10-4 Mar. 31
Property Tax Expense ($7,860 × 3/12) Property Tax Payable.....................
1,965
June 30 Property Tax Payable ......................... Property Tax Expense ($7,860 × 3/12) Prepaid Property Tax ($7,860 × 6/12) Cash................................................
1,965 1,965 3,930
Dec. 31
3,930
Property Tax Expense ........................ Prepaid Property Tax .....................
1,965
7,860
3,930
BRIEF EXERCISE 10-5 (a)
Dec. 31 Warranty Expense ....................... 10,625 Warranty Liability.................. [(2,500 units × 5%) × $85/unit]
(b) Dec. 31 Warranty Liability........................... 2,125 Repair Parts Inventory.......... (c)
Sales (2,500 units × $400) ......................... Less: Cost of goods sold (2,500 units × $175) Warranty expense.......................... Profit .........................................................
Solutions Manual .
10-13
10,625
2,125 $1,000,000 437,500 10,625 $551,875
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 10-6 July
July
3 Redemption Rewards Liability .......... Cash ($150 – $20) ............................... Sales ............................................... 3 Sales Discounts for Redemption Rewards Issued ($150 × 2%).............. Redemption Rewards Liability......
20 130 150
3 3
Note: Each time One-Stop has a cash sale it debits Sales Discounts for Redemption Rewards Issued and credits Redemption Rewards Liability. This would have happened when Judy collected the $20 of One-Stop money used in this transaction.
BRIEF EXERCISE 10-7 (a) Sales (50,000 novels × $8) .......................... Less: Sales Discount for Redemption Rewards Issued (50,000 novels × 10% × $2) .............. Net Sales...................................................... (b) July 31
$400,000
(10,000) $390,000
Sales Discount for Redemption Rewards Issued .................................... 10,000 Redemption Rewards Liability ......
10,000
As redeemed in August: Redemption Rewards Liability............... 2,000 Cash (1,000 × $2) ...........................
2,000
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10-14
Chapter 10
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 10-8 Dec. 2014 Cash .................................................. Unearned Revenue......................
4,750
Jan. 2015 Unearned Revenue........................... Sales ............................................
2,425
Cost of Goods Sold.......................... Merchandise Inventory ...............
1,070
4,750
2,425 1,070
BRIEF EXERCISE 10-9 (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.
(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.
(d)
(3) Neither recorded or disclosed: This contingency is considered unlikely. The treatment would be the same under both IFRS and ASPE.
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10-15
Chapter 10
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 10-10 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 10-11 (a) Gross earnings: Regular pay (40 × $18) ........................................ $720.00 Overtime pay (5 × $27) ....................................... 135.00
$855.00
Less: CPP contributions ..................................... $38.99 EI premiums .................................................15.65 Income tax withheld ................................. 132.00 Net pay .............................................................................
186.64 $668.36
(b) Employer costs: CPP contributions ................................................ $38.99 EI premiums ($15.65 × 1.4).................................... 21.91
$60.90
The employer does not bear any costs for employee income taxes.
Solutions Manual .
10-16
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 10-12 (a) Aug. 22 Salaries Expense .................................. 70,000 CPP Payable................................... 3,330 EI Payable....................................... 1,281 Income Tax Payable....................... 19,360 Salaries Payable ............................ 46,029 ($70,000 – $3,330 – $1,281 – $19,360 = $46,029) 22 Salaries Payable ................................... 46,029 Cash................................................
46,029
22 Employee Benefits Expense .................. 5,123 CPP Payable................................... EI Payable ($1,281 × 1.4) ...............
3,330 1,793
(b)
BRIEF EXERCISE 10-13 (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)
Solutions Manual .
10-17
Chapter 10
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 10-14 (a)
Current liability: $12,000 Non-current liability: $48,000 Only the portion of principal to be repaid in 2015 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 2015 would be shown as a current liability.
BRIEF EXERCISE 10-15 (a) SUNCOR ENERGY INC. (Partial) Balance Sheet December 31, 2011 (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...........................................
$ 7,755 969 811 763 12 $10,310
Note: This presentation lists the accounts in order of 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.
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Chapter 10
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 10-15 (Continued) (b) Current Ratio = Current Assets ÷ Current Liabilities $14,124* ÷ $10,310 = 1.37 to 1 * $5,412 + $3,803 + $704 + $4,205 = $14,124 Acid-Test Ratio = (Cash + AR + Income Tax Recoverable) ÷ Current Liabilities ($5,412 + $3,803 + $704) ÷ $10,310 = 0.96 to 1
*BRIEF EXERCISE 10-16 Monthly Pay = ($60,100/year ÷ 12 months) = $5,008 (a)
January 2012: CPP deduction = ($5,008 – [$3,500 ÷ 12]) × 4.95% = $233.46 EI deduction = $5,008 × 1.83% = $91.65
(b) December 2012: No deductions for CPP or EI. The cumulative salary up to November 30, 2012 is $55,092 ($60,100 × 11 ÷ 12). The cumulative salary exceeds the annual maximum pensionable earnings of $50,100 and maximum insurable earnings of $45,900.
*BRIEF EXERCISE 10-17 Gross salary for the week = $1,075 (a) CPP [($1,075.00 − $67.30) × 4.95%] EI ($1,075 × 1.83%) (b) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions
Solutions Manual .
10-19
$49.88 19.67 136.00 67.20 $272.75
Chapter 10
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Accounting Principles, Sixth Canadian Edition
*BRIEF EXERCISE 10-18 (a)
Gross earnings: Regular pay ......................................................... $860.00 Overtime pay ([$860 ÷ 40] × 1.5 × 8 hours) ....... 258.00 $1,118.00 (b) CPP ($1,118 – [$3,500 ÷ 52]) × 4.95% ........... $52.01
EI (1.83% × $1,118) .......................................... 20.46 (c) Federal income tax (claim code 2) ............... 140.95 Ontario income tax (claim code 2) .............. 69.55 Total deductions ..................................... $282.97 (d) Net pay ............................................................................ $835.03
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Chapter 10
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 10-1 (a)
Novack Company 2014 June 1 Equipment.................................. 50,000 Accounts Payable ................. July
Aug.
1
1 Interest Expense ....................... Cash....................................... ($50,000 × 7% × 1/12)
Aug. 31
Sep.
Oct.
Accounts Payable...................... 50,000 Notes Payable .......................
50,000
50,000
292 292
Interest Expense ....................... Interest Payable ....................
292
1 Interest Payable......................... Cash.......................................
292
292
292
1 Interest Expense ....................... 292 Notes Payable............................ 50,000 Cash.......................................
50,292
(b) Moleski Manufacturers 2014 June 1 Accounts Receivable ................ 50,000 Sales ......................................
50,000
1 Cost of Goods Sold................... 30,000 Merchandise Inventory.........
30,000
1 Notes Receivable ...................... 50,000 Accounts Receivable............
50,000
10-21
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July
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-1 (Continued) (b) (Continued) Aug.
Sep.
Oct.
Solutions Manual .
1 Cash ........................................... Interest Revenue................... ($50,000 × 7% × 1/12)
292
1
292
1
Cash ........................................... Interest Revenue...................
292
Cash ........................................... 50,292 Interest Revenue................... Notes Receivable ..................
10-22
292
292 50,000
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 10-2 (a)
Tundra Trees Mar. 1 Equipment.................................. Notes Payable ....................... July 31 Interest Expense ....................... Interest Payable .................... ($30,000 × 8% × 5/12) Oct.
1
30,000 30,000 1,000 1,000
Interest Expense* ...................... 400 Interest Payable......................... 1,000 Notes Payable............................ 30,000 Cash....................................... * ($30,000 × 8% × 2/12)
(b) Edworthy Equipment Mar. 1 Notes Receivable ...................... 30,000 Sales ...................................... 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
30,000
18,000
Cash ........................................... 31,400 Interest Receivable ............... Interest Revenue* ................. Notes Receivable .................. * ($30,000 × 8% × 4/12)
10-23
31,400
600
600 800 30,000
Chapter 10
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-3 1.
Sainsbury Company
April 10
2.
Cash ........................................... 35,595 Sales ($35,595 ÷ 1.13) ........... HST Payable ($31,500 × 13%)
31,500 4,095
Montgomery Company
April 21
4.
13,200 1,716
Hockenstein Company
April 15
3.
Cash ........................................... 14,916 Sales ...................................... HST Payable ($13,200 × 13%)
Cash ........................................... 31,500 Sales ...................................... GST Payable ($30,000 × 5%)
30,000 1,500
Winslow Co.
April 27
Solutions Manual .
Cash ........................................... 28,112 Sales ...................................... GST Payable ($25,100 × 5%) PST Payable ($25,100 × 7%) .
10-24
25,100 1,255 1,757
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-4 2014 (a) Oct. 31 Cash.................................................... 31,500 Unearned Revenue ....................... (150 × $210) (b) 1. Nov. 30 Unearned Revenue ............................ Admission Revenue ..................... ($31,500 × 1/6)
31,500
5,250 5,250
2015 2. Mar. 31 Unearned Revenue .................................5,250 Admission Revenue ..................... ($31,500 × 1/6)* 3. Apr. 30 Unearned Revenue .................................5,250 Admission Revenue ..................... ($31,500 × 1/6)*
5,250
5,250
* Charleswood adjusts its accounts on a monthly basis. There would be a similar entry at December 31, 2014, January 31, 2015 and February 28, 2015. (c) Parts 1, 2 and 3.
Date 2014 Oct. 31 Nov. 30 Dec. 31 2015 Jan. 31 Feb. 28 Mar. 31 Apr. 30
Solutions Manual .
Unearned Revenue Explanation Ref. Debit
Credit
Balance
31,500 Adjusting entry Adjusting entry
5,250 5,250
31,500 26,250 21,000
Adjusting entry Adjusting entry Adjusting entry Adjusting entry
5,250 5,250 5,250 5,250
15,750 10,500 5,250 0
10-25
Chapter 10
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 10-5 (a)
May 31 Property Tax Expense ($18,660 × 1/12) .............................. 1,555 Property Tax Payable ...........
1,555
The company would have accrued property tax expense on a monthly basis using the 2013 monthly expense of $1,475 per month. An adjustment would be required when the property tax bill is received: May 31 Property Tax Expense............... 320 Property Tax Payable ........... 320 [($18,660 × 1/12) – $1,475] × 4 months The company accrues property tax expense on June 30, 2014 for one month. July 31 Property Tax Payable ($18,660 × 6/12).......................... Property Tax Expense ($18,660 × 1/12) ......................... Prepaid Property Tax ($18,660 × 5/12).......................... Cash.......................................
9,330 1,555 7,775 18,660
The company makes monthly adjusting entries for property tax expense on from August to December, as follows: Property Tax Expense ................... 1,555 Prepaid Property Tax............ 1,555 (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, 2014 (Partial) Operating expenses Property tax expense .................................................. $18,660
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-5 (Continued) (b) (Continued) Prepaid Property Tax Date Explanation Ref. Debit Credit Balance Jul. 31 7,775 7,775 Aug. 31 1,555 6,220 Sep. 30 1,555 4,665 Oct. 31 1,555 3,110 Nov. 30 1,555 1,555 Dec. 31 1,555 0
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 .
Property Tax Expense Explanation Ref. Debit Credit 1,475 1,475 1,475 1,475 320 1,555 1,555 1,555 1,555 1,555 1,555 1,555 1,555
10-27
Balance 1,475 2,950 4,425 5,900 6,220 7,775 9,330 10,885 12,440 13,995 15,550 17,105 18,660
Chapter 10
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-6 (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............................. Repair Parts Inventory, Salaries Payable, Cash, etc.... ([450 + 630] × $20)
21,600 21,600
(c) Income Statement, Year Ended December 31, 2014 (Partial) Operating expenses Warranty expense ........................................................ $31,000 Balance Sheet, at December 31, 2014 (Partial) Current Liabilities Warranty liability ($31,000 – $21,600) ....................
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$9,400
Chapter 10
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-7 (a)
Warranty expense: 2012: ($2,000 × 500 units sold × 5%) = 2013: ($2,000 × 600 units sold × 5%) = 2014: ($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 2012: Less: Cost incurred in 2012 Warranty liability at end of 2012:
$50,000 (30,000) 20,000
Add: Estimated warranty expense for 2013: Less: Cost incurred 2013 Warranty liability at end of 2013:
60,000 (46,000) 34,000
Add: Estimated warranty expense for 2014: Less: Cost incurred 2014 Warranty liability at end of 2014:
52,500 (53,500) $33,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-8 (a)
2014: 900,000 × 35% × $0.01 = $3,150 2015: 1,200,000 × 35% × $0.01 = $4,200
(b) 2014: 225,000 × $0.01 = $2,250 2015: 336,000 × $0.01 = $3,360 (c)
2014: $3,150 – $2,250 = $900 2015: $900 + $4,200 – $3,360 = $1,740
(d) When the points are redeemed, the following entry would be done: Redemption Rewards Liability Cash Sales
XXX XXX
Cost of Goods Sold Inventory
XXX
XXX
XXX
The points reduce the amount of cash required to complete the sales transaction. The sale also triggers the issuance of new points: Sales Discount for Redemptions Rewards Issued XXX Redemption Rewards Liability
XXX
Points redemption reduces the amount of outstanding redemption rewards liability. The reduction of profit occurs when the original sale that triggered the points took place. However, since points are redeemed as part of a new sale transaction, there is a reduction of profit for the new points issued.
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Chapter 10
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-9 (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)
Not required.
(5)
(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, Sixth Canadian Edition
EXERCISE 10-10 (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, Sixth Canadian Edition
EXERCISE 10-11 (a) Apr. 30 Salaries Expense .................................. 45,500 CPP Payable................................... EI Payable....................................... Income Tax Payable....................... Cash................................................ (b) Apr. 30 Employee Benefits Expense .................. 5,549 CPP Payable................................... EI Payable ($833 × 1.4) .................. Workers’ Compensation Payable ($45,500 × 1%).......................... Vacation Pay Payable ($45,500 × 4%) (c) May 15 CPP Payable ($2,108 + $2,108)............... 4,216 EI Payable ($833 + $1,166) ..................... 1,999 Income Tax Payable ............................... 8,798 Cash...............................................
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10-33
2,108 833 8,798 33,761
2,108 1,166 455 1,820
15,013
Chapter 10
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-12 (a)
AHMAD COMPANY Payroll Register Week Ending May 31 Gross Earnings
Total Employee Hours Regular Overtime A. Kassam H. Faas G. Labute Totals (b)
47 45 46
$ 520.00 560.00 600.00 $1,680.00
May 31
31
Solutions Manual ..
Gross Pay
$136.50 $ 656.50 665.00 105.00 135.00 735.00 $376.50 $2,056.50
Deductions CPP
EI
Income Health Tax Insurance
$29.17 $12.01 $ 85.55 87.10 29.59 12.17 33.05 13.45 102.55 $91.81 $37.63 $275.20
Employee Benefits Expense....................................... CPP Payable ($91.81 × 1) ....................................... EI Payable ($37.63 × 1.4) ........................................ Workers’ Compensation Payable ($2,056.50 × 2%) Vacation Pay Payable ($2,056.50 × 4%) ................. Health Insurance Payable ...................................... 10-34
Total
$10.00 $136.73 15.00 143.86 15.00 164.05 $40.00 $444.64
Salaries Expense......................................................... 2,056.50 CPP Payable............................................................ EI Payable................................................................ Income Tax Payable ............................................... Health Insurance Payable ...................................... Salaries Payable .....................................................
Net Pay $ 519.77 521.14 570.95 $1,611.86
91.81 37.63 275.20 40.00 1,611.86
307.89 91.81 52.69 41.13 82.26 40.00 Chapter 10 .
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Accounting Principles, Sixth Canadian Edition
EXERCISE 10-13 Date Issued
Rate
Term
Current Portion
$60,000 3/31/14 $30,000 7/1/14 $120,000 9/1/14
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 2014 × $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 2014 × $4,000)] × 5% × 1/12
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EXERCISE 10-14 (a) LIGHTHOUSE DISTRIBUTORS (Partial) Balance Sheet September 30, 2014
Current liabilities Accounts payable ....................................................... Bank indebtedness..................................................... Income tax payable..................................................... Unearned revenue ...................................................... Warranty liability......................................................... HST payable ................................................................ Vacation pay payable ................................................. Note payable—current portion .................................. Mortgage payable—current portion .......................... Interest payable .......................................................... Property taxes payable............................................... CPP payable ................................................................ Redemption rewards liability..................................... EI payable.................................................................... Workers’ compensation payable ............................... Total current liabilities........................................... (b)
$ 90,000 62,500 35,000 30,000 22,500 15,000 13,500 12,000 10,000 10,000 10,000 7,500 5,000 3,750 1,250 $328,000
Current ratio = ($182,000 + $275,000 + $12,500) ÷ $328,000 = 1.4:1 Acid-test ratio = $182,000 ÷ $328,000 = 0.6:1
(c)
The company has a negative cash balance in the form of bank indebtedness.
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 10-15 (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 × 1.83%) Federal income tax (claim code 1) Ontario income tax (claim code 1) Total deductions
$48.13 19.02 128.10 65.35 $260.60
(b) June 15 Salaries Expense .......................1,039.60 CPP Payable.......................... 48.13 EI Payable.............................. 19.02 Income Tax Payable ($128.10 + $65.35) 193.45 Cash....................................... 779.00 (c)
June 15 Employee Benefits Expense ......... 74.76 CPP Payable.......................... EI Payable ($19.02 × 1.4) ......
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48.13 26.63
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Accounting Principles, Sixth Canadian Edition
*EXERCISE 10-16
Month
Gross Salary
Jan. – Aug. September October November December Totals
$38,000.00 4,750.00 4,750.00 4,750.00 4,750.00 $57,000.00
Cumulative Salary
CPP 4.95%
$38,000.00 $ 1,765.52 2 220.69 1 42,750.00 47,500.00 220.69 52,250.00 99.80 3 57,000.00 0 $2,306.70
EI 1.83% $695.40 5 86.93 4 57.64 6 0 0 $839.97
1. CPP = ($4,750 – [$3,500 ÷ 12]) × 4.95% = $220.69 2. CPP = $220.69/month × 8 months = $1,765.52 3. CPP = $99.80 (annual CPP maximum – CPP to end of October = maximum to be deducted in November [$2,306.70 – ($220.69 × 10) 4. EI = $4,750 × 1.83% = $86.93 5. EI = $86.93/month × 8 months = $695.40 6. EI = ($45,900 maximum insurable earnings – $42,750) × 1.83% = $57.65 (round to $57.64 so total EI equals annual maximum)
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 10-1A
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. 1/14 5.0% Sept. 1/14 4.0% Nov. 1/14 4.5% Mar. 31/14 3.5% Oct. 1/14 5.0% Jan. 31/13 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, 2014
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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
9
non-current: $20,000 = $40,000 – ($10,000 × 2)
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PROBLEM 10-1A (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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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-2A (a)
Jan. 12
31
Merchandise Inventory ............. 20,000 Accounts Payable .................
20,000
Accounts Payable...................... 20,000 Notes Payable .......................
20,000
Feb. 28 Interest Expense ....................... ($20,000 × 5% × 1/12) Cash....................................... Mar. 31
83 83
Notes Payable............................ 14,000 Interest Payable......................... 490 Interest Expense ($14,000 × 7% × 3/12)................. 245 Cash.......................................
Mar. 31 Interest Expense ....................... ($20,000 × 5% × 1/12) Cash.......................................
83 83
Apr. 30 Notes Payable............................ 20,000 Interest Expense 83 ($20,000 × 5% × 1/12)................. Cash....................................... Aug.
1
14,735
20,083
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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1,250 1,250
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-2A (Continued) (a) (Continued) Dec. 31
Interest Expense ....................... ($30,000 × 6% × 5/12) Interest Payable ....................
750 750
(b) LEARNSTREAM COMPANY (Partial) Balance Sheet December 31, 2014
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, 2014 Other expense Interest expense .........................................................
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$2,494
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-2A (Continued) (b) (Continued) Date Explanation Dec. 31 Jan. 31 Mar. 31 Apr. 30 Aug. 1 Sep. 30
Notes Payable Ref. Debit
Credit
Balance 14,000 20,000 34,000 14,000 20,000 20,000 0 30,000 30,000 100,000 130,000
Interest Expense Date Explanation Ref. Debit Credit Feb. 28 83 Mar. 31 245 Mar. 31 83 Apr. 30 83 Dec. 31 1,250 Dec. 31 750
Balance 83 328 411 494 1,744 2,494
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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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-3A (a) Jan. 2 Cash................................................ Notes Payable........................... 5
50,000 50,000
Cash................................................ Sales ......................................... HST Payable ($8,800 × 13%) ....
9,944
Cost of Goods Sold ....................... Merchandise Inventory ............
4,600
8,800 1,144
4,600
12 Unearned Revenue ........................ 8,500 Service Revenue ($8,500 ÷ 1.13) HST Payable ($7,522 × 13%) .... 14
15
HST Payable ................................... Cash ..........................................
9,230
CPP Payable................................... EI Payable....................................... Income Tax Payable....................... Cash ..........................................
1,580 730 3,367
9,230
17 Accounts Payable .......................... 15,000 Cash .......................................... 20
7,522 978
5,677
15,000
Accounts Receivable ..................... 31,075 Sales (500 × $55) ...................... HST Payable ($27,500 × 13%) ..
27,500 3,575
Cost of Goods Sold (500 × $25) .... 12,500 Merchandise Inventory ............
12,500
29 Redemption Rewards Liability...... 2,300 HST Payable ($2,300 × 13/113) Service Revenue ($2,300 − $265)
265 2,035
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-3A (Continued) (a) (Continued) Jan. 30 Sales Discount for Redemption Rewards Issued (30,000 × $1 × 20%) 6,000 Redemption Rewards Liability
6,000
31 Salaries Expense ............................. 17,500 CPP Payable ............................. EI Payable ................................. Income Tax Payable ................. Salaries Payable.......................
809 320 3,544 12,827
31 Salaries Payable............................... 12,827 Cash ..........................................
12,827
(b) (1) Jan. 31 Interest Expense ............................ Interest Payable........................ ($50,000 × 7% × 1/12) (2) Jan. 31 Warranty Expense (500 × 9% × $10) ............................. Warranty Liability ..................... (3) Jan. 31 Employee Benefits Expense ......... CPP Payable ............................. EI Payable ($320 × 1.4)............. Vacation Pay Payable .............. (4) Jan. 31 Property Tax Expense ($8,940 ÷ 12) ................................... Property Tax Payable ...............
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292 292
450 450 1,957 809 448 700
745 745
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-3A (Continued) (c) SHUMWAY SOFTWARE COMPANY (Partial) Balance Sheet January 31, 2014
Current liabilities Notes payable ............................................................. $ 50,000 Accounts payable ($37,900 – $15,000) ...................... 22,900 Unearned revenue ($15,000 – $8,500) ....................... 6,500 HST payable ($9,230 + $1,144 + $978 – $9,230 + $3,575 + $265) 5,962 Income tax payable ($3,367 – $3,367 + $3,544)......... 3,544 Redemption rewards liability ($4,500 – $2,300 + $6,000) 8,200 CPP payable ($1,580 – $1,580 + $809 + $809) ........... 1,618 EI payable ($730 – $730 + $320 + $448) ..................... 768 Vacation pay payable ($9,035 + $700) ....................... 9,735 Property tax payable................................................... 745 Warranty liability......................................................... 450 Interest payable............................................................. 292 Total current liabilities ............................................. $110,714
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. Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-4A (a)
Warranty expense 2012 – (1,500 × 5% × $30) = $2,250 2013 – (1,700 × 5% × $30) = $2,550 2014 – (1,800 × 5% × $30) = $2,700 Warranty liability at year end 2012 – ($0 – $2,250 + $2,250) = $0 2013 – ($0 – $2,400 + $2,550) = $150 2014 – ($150 – $2,640 + $2,700) = $210
Note: See analysis of warranty liability account in (b) below. (b) 2012
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
2013
2014
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2,250
2,250
2,400
2,550
2,640
2,700
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-4A (Continued) (b) (Continued)
Date 2012 During Dec. 31 2013 During Dec. 31 2014 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 2012 75 2013 90 2014 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 2012 $2,250 2013 2,400 2014 2,640 $7,290 Average warranty cost over the three-year period: $7,290 ÷ 270 = $27
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-4A (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2014 only. The January 1, 2014 opening balance in the Warranty Liability account remains at $150. The revised warranty expense for 2014 is calculated as follows: Warranty expense 2014: 1,800 × 7% × $27 = $3,402 Warranty liability at December 31, 2014: $150 – $2,640 + $3,402 = $912
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-5A (a)
1. 2. 3. 4.
Reduces revenues and profit* No effect on revenues, expenses and profit No effect on revenues, expenses and profit Increases revenues, expenses (cost of good sold) and profit *Instructors note: coupons are issued under the assumption that sales revenues and therefore profits will rise in the future. But the act of issuing the coupon will reduce both net revenues and profits as it creates an obligation.
(b) 2013: 1 Sales Discount for Redemption Rewards Issued (3,500,000 × $0.035) 122,500 Redemption Rewards Liability..... 122,500 2
Cash ....................................................... 1,755,000 Redemption Rewards Liability ............ 45,000 Sales .............................................. 1,800,000 2014: 3 Sales Discount for Redemption Rewards Issued (4,250,000 × $0.035) 148,750 Redemption Rewards Liability..... 148,750 4
Cash ....................................................... 2,177,500 Redemption Rewards Liability ............ 52,500 Sales .............................................. 2,230,000
5
Cash...................................................... Unearned Revenue .......................
75,000
Unearned Revenue .............................. Sales ..............................................
45,400
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45,400
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-5A (Continued) (c) Date 2013 During Dec. 31 2014 During Dec. 31
Date 2014 During Dec. 31
Redemption Rewards Liability Explanation Ref. Debit Credit 122,500
122,500 77,500
148,750
226,250 173,750
Credit
Balance
75,000
75,000 29,600
45,000
52,500 Unearned Revenue Explanation Ref. Debit
45,400
Balance
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 some of the amounts allocated to the liability account can be recognized as revenues if the coupons become unlikely to be redeemed. 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 that are unlikely to be used should be transferred to a revenue account.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-6A 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.
Since it is now January 31, 2015, Mega can determine if the loan has been repaid by the supplier. If the loan has not been repaid, Mega should make an accrual in its December 31, 2014 financial statements since a probable present obligation exists and it is measurable. If the loan has been repaid, then no obligation or contingency exists and no note disclosure is required.
4.
Accrue in the financial statements: Because Mega has negotiated a settlement, it now has a liability and the amount is measurable.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-6A (Continued) 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-7A (a) SURE VALUE HARDWARE Payroll Register Week Ending March 14, 2011 Gross Earnings
Employee Hours Regular I. Dahl F. Gualtieri G. Ho A. Israeli Totals
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37.5 42 44 46
Overtime
637.50 0 640.00 48.00 620.00 93.00 620.00 139.50 2,517.50 280.50
Gross Pay
Deductions
CPP
EI
637.50 29.22 11.67 688.00 30.72 12.59 713.00 31.96 13.05 759.50 34.26 13.90 2,798.00 126.16 51.21
10-54
Income United Tax Way 82.25 91.20 97.50 107.75 378.70
7.50 8.00 5.00 10.00 30.50
Total
Net Pay
130.64 506.86 142.51 545.49 147.51 565.49 593.59 165.91 586.57 2,211.43
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-7A (Continued) (b) Mar.14
Salaries Expense ......................... 2,798.00 CPP Payable ......................... 126.16 EI Payable ............................. 51.21 Income Tax Payable............. 378.70 United Way Contributions Payable 30.50 Salaries Payable................... 2,211.43
14 Employee Benefits Expense ..... 309.77 CPP Payable ($126.16 × 1)... EI Payable ($51.21 × 1.4)...... Vacation Pay Liability .......... Vacation pay liability = $2,798.00 × 4%
126.16 71.69 111.92
(c) Mar.14
Salaries Payable .......................... 2,211.43 Cash ...................................... 2,211.43
(d) Apr. 15
CPP Payable ($126.16 + $126.16) .................... EI Payable ($51.21 + $71.69) ..... Income Tax Payable .................. Cash ......................................
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-7A (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 10-8A (a) Feb.
4
7
13
Union Dues Payable ........................... Cash................................................
1,450
Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................
1,280 855 2,135
CPP Payable ....................................... 7,887 EI Payable ........................................... 3,755 Income Tax Payable ........................... 16,252 Cash................................................
20 Workers’ Compensation Payable ...... Cash................................................ 28
1,450
4,275 4,275
Salaries Expense................................ 92,600 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable......... Salaries Payable ............................
28 Salaries Payable ................................. Cash................................................
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4,281 1,695 17,595 1,574 1,380 66,075
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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27,894
66,075
4,281 2,373 4,630 3,704 926
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Accounting Principles, Sixth Canadian Edition
PROBLEM 10-8A (Continued) (b) Canada Pension Plan Payable Explanation Ref. Debit Credit
Date Feb.
1 15 28 28
Date Feb.
1 15 28 28
Date Feb. 1 15 28
Date Feb. 1 20 28
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Balance
Balance
4,281 4,281
7,887 0 4,281 8,562
Employment Insurance Payable Explanation Ref. Debit Credit
Balance
7,887
Balance
1,695 2,373
3,755 0 1,695 4,068
Credit
Balance
17,595
16,252 0 17,595
Workers’ Compensation Payable Explanation Ref. Debit Credit
Balance
3,755
Income Tax Payable Explanation Ref. Debit Balance
16,252
Balance
4,275 4,630
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PROBLEM 10-8A (Continued) (b) (Continued) Union Dues Payable Explanation Ref. Debit
Date Feb. 1 14 28
Balance
1,574
1,450 0 1,574
Credit
Balance
926
855 0 926
Credit
Balance
3,704
20,520 24,224
Disability Insurance Payable Explanation Ref. Debit Credit
Balance
Balance
1,450
Life Insurance Payable Explanation Ref. Debit
Date Feb. 1 7 28
Balance
855
Vacation Pay Payable Explanation Ref. Debit
Date Feb.
Credit
1 28
Date Feb. 1 7 28
Date Feb. 28 28
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Balance
Balance
1,380
1,280 0 1,380
Credit
Balance
66,075
66,075 0
1,280
Salaries Payable Explanation Ref. Debit 66,075
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PROBLEM 10-8A (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 10-9A (a)
MAPLE LEAF FOODS INC. (Partial) Balance Sheet December 31, 2011 (in thousands)
Current liabilities Accounts payable and accruals ................................... $482,059 Bank indebtedness................................................... 36,404 Current portion of long-term debt ........................... 5,618 Other current liabilities ............................................ 20,409 Provisions ..................................................................... 44,255 Total current liabilities ............................................. $588,745 (b)
Current ratio: $643,022 ÷ $588,745 = 1.09:1 Current assets = $133,504 + $49,265 + $43,789 + $293,231 + $98,545 + $24,688 = $643,022 Acid-test ratio: ($133,504 + $43,789 + $98,545) ÷ $588,745 = 0.47:1
(c)
Current ratio Dec. 31, 2010: $583,557 ÷ $1,091,960 = 0.53:1 Acid-test ratio Dec. 31, 2010: $217,751 ÷ $1,091,960 = 0.20:1 Both the current and acid-test ratios improved during 2011.
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PROBLEM 10-9A (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 half of 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 10-10A (a) WESTERN ELECTRIC COMPANY Payroll Register Week Ending June 5, 2012
Employee C. Tam 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 EI Income Tax 4 103.70 17.29 5 131.65 20.68 5 146.55 20.68 6 133.35 19.53 78.18 515.25
Ontario Total Income Tax Deductions 54.40 218.84 66.70 271.63 71.60 291.43 66.10 268.46 258.80 1,050.36
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 × 1.83% = $17.29 5. EI = $1,130.00 × 1.83% = $20.68 6. EI = $1,067.00 × 1.83% = $19.53
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Net Pay 726.16 858.37 838.57 798.54 3,221.64
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Accounting Principles, Sixth Canadian Edition
*PROBLEM 10-10A (Continued) (b) Semi-monthly Payroll Ending June 15, 2012:
Employee
Gross Salary
Gross Pay
CPP 4.95%
EI 1.83%
S. Goodspeed M. Giancarlo H. Radley
$43,440 64,770 76,880
$1,810.00 2,698.75 3,203.33
$ 82.38 1 126.37 2 151.35 3
$33.12 4 49.39 5 58.62 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 × 1.83% = $33.12 5. EI = $2,698.75 × 1.83% = $49.39 6. EI = $3,203.33 × 1.83% = $58.62 (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 2012. M. Giancarlo: Pay period in which CPP maximum is reached = $2,306.70 ÷ $126.37 = 18.25; rounded up to pay period 19 (October 15).
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*PROBLEM 10-10A (Continued) (c) (Continued) Pay period in which EI maximum is reached = $839.97 ÷ $49.39 = 17.01; rounded up to pay period 18 (September 30). H. Radley: Pay period in which CPP maximum is reached = $2,306.70 ÷ $151.35 = 15.24; rounded up to pay period 16 (August 31). Pay period in which EI maximum is reached = $839.97 ÷ $58.62 = 14.33; rounded up to pay period 15 (August 15). 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
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 1/14 Sept. 1/14 Nov. 1/14 May 31/14 Oct. 1/14 Mar. 31/13
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
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, 2014
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PROBLEM 10-1B (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 10-2B (a)
2013: Dec. 1 Interest Expense ($15,000 × 6% × 1/12)................. 75 Interest Payable......................... 375 Note Payable.............................. 15,000 Cash....................................... 2014: 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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PROBLM 10-2B (Continued) (b) MILEHI MOUNTAIN BIKES (Partial) Balance Sheet October 31, 2014 Current liabilities Notes payable ............................................................. Current portion of long-term notes payable ............. Interest payable .......................................................... Total current liabilities........................................... Long-term liabilities Notes payable .......................................... Less current portion ................................
$75,000 18,000 888 $93,888
$90,000 (18,000 ) $72,000
(c) MILEHI MOUNTAIN BIKES (Partial) Income Statement Year ended October 31, 2014 Other expenses Interest expense .........................................................
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$3,749*
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PROBLM 10-2B (Continued) (c) (Continued)
Date Dec. 1 July 31 Aug. 31 Oct. 1 Oct. 31
Date Nov. 1 Dec. 1 Apr. 1 May 31 Aug. 31 Oct. 1
Interest Expense Explanation Ref. Debit Credit 75 1,313 160 1,313 888
Explanation
Notes Payable Ref. Debit 15,000 8,000
Balance 75 1,388 1,548 2,861 3,749
Credit Balance 15,000 0 75,000 75,000 8,000 83,000 75,000 90,000 165,000
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 10-3B (a) Jan. 5 Cash ................................................. 17,854 Sales ....................................... HST Payable ($15,800 × 13%) .
15,800 2,054
12 Unearned Revenue ........................... 7,000 HST Payable ($6,195 × 13%) ... Service Revenue ($7,000 ÷ 1.13)
805 6,195
14
HST Payable .................................. 11,390 Cash .........................................
11,390
CPP Payable.................................. EI Payable...................................... Income Tax Payable ..................... Cash .........................................
2,152 1,019 4,563 7,734
16 Cash............................................... Notes Payable .........................
18,000
15
17
18,000
Accounts Payable ......................... 35,000 Cash .........................................
35,000
Accounts Receivable.................... 33,900 Sales (500 × $60) ..................... HST Payable ($30,000 × 13%) .
30,000 3,900
30 Redemption Rewards Liability..... 1,750 HST Payable ($1,549 × 13%) ... Service Revenue ($1,750 ÷ 1.13)
201 1,549
20
31 Sales Discount for Redemptions Reward Issued .............................. Redemption Rewards Liability (50,000 × 10% × $1)
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PROBLEM 10-3B (Continued) (a) (Continued) Jan. 31 Warranty Liability ...................... Repair Parts Inventory ......... 31
31
(b)
875 875
Salaries Expense....................... 25,350 CPP Payable.......................... EI Payable.............................. Income Tax Payable ............. Salaries Payable ...................
1,183 464 4,563 19,140
Salaries Payable ........................ 19,140 Cash.......................................
19,140
Jan. 31 Interest Expense ....................... Interest Payable .................... [($18,000 × 6% × 1/12) × 1/2]
45
31 Warranty Expense ..................... Warranty Liability.................. (500 × 6% × $10)
300
31
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Employee Benefits Expense..... 2,847 CPP Payable.......................... EI Payable ($464 × 1.4) ......... Vacation Pay Payable ($25,350 × 4%)
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300
1,183 650 1,014
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PROBLEM 10-3B (Continued) (c) ZAUR COMPANY (Partial) Balance Sheet January 31, 2014 Liabilities Current liabilities Accounts payable ($63,700 – $35,000) ...................... Notes payable ............................................................. Vacation pay liability ($9,120 + $1,014) ..................... Unearned revenue ($16,000 – $7,000) ....................... HST payable ($11,390 + $2,054 + $805 – $11,390 + $3,900 + $201)...................................................... Redemption rewards liability ($2,150 – $1,750 + $5,000).................................................................. Warranty liability ($5,750 – $875 + $300) ................... Income taxes 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 6,960 5,400 5,175 4,563 2,366 1,114 45 $91,457
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 10-4B (a)
Warranty expense 2012 – (1,200 × 5% × $25) = $1,500 2013 – (1,320 × 5% × $25) = $1,650 2014 – (1,420 × 5% × $25) = $1,775 Warranty liability at year end 2012 – ($0 – $1,275 + $1,500) = $225 2013 – ($225 – $1,600 + $1,650) = $275 2014 – ($275 – $1,960 + $1,775) = $90
Note: See analysis of warranty liability account in (b) below. (b) 2012 Warranty Liability ................................ Repair Parts Inventory...................
1,275
Dec. 31 Warranty Expense (1,200 × 5% × $25) Warranty Liability...........................
1,500
1,275
1,500
2013 Warranty Liability ................................ Repair Parts Inventory...................
1,600
Dec. 31 Warranty Expense (1,320 × 5% × $25) Warranty Liability...........................
1,650
1,600
1,650
2014 Warranty Liability ................................ Repair Parts Inventory...................
1,960
Dec. 31 Warranty Expense (1,420 × 5% × $25) Warranty Liability...........................
1,775
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1,775
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PROBLEM 10-4B (Continued) (b) (Continued)
Date 2012 During Dec. 31 2013 During Dec. 31 2014 During Dec. 31 (c)
Warranty Liability Explanation Ref. Debit
Credit
1,275
Balance
1,500
1,275 Dr 225
1,650
1,375 Dr 275
1,775
1,685 Dr 90
1,600
1,960
Percentage of units returned for repair = Number of units returned ÷ Number of units sold Returned 2012 60 2013 70 2014 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
2012 2013 2014
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 10-4B (Continued) Taking It Further: Revisions of estimates are applied prospectively. This means that the changes in estimates will be applied to 2014 only. The January 1, 2014 opening balance in the Warranty Liability account remains at $275. The revised warranty expense for 2014 is calculated as follows: Warranty expense 2014: 1,420 × 7% × $25 = $2,485 Warranty liability at December 31, 2014: $275 – $1,960 + $2,485 = $800
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PROBLEM 10-5B (a)
1. 2. 3. 4.
Reduces revenues and profit* No effect on revenues, expenses and profit No effect on revenues, expenses and profit Increases revenues, expenses (cost of goods sold) and profit *Instructors note: coupons are issued under the assumption that sales revenues and therefore profits will rise in the future. But the act of issuing the coupon will reduce both net revenues and profits as it creates an obligation.
(b)
2013: 1 Sales Discount for Redemption Rewards Issued (750,000 × $0.025). Redemption Rewards Liability..... 2
Cash...................................................... Redemption Rewards Liability ............ Service Revenue ........................... 2014: 3 Sales Discount for Redemption Rewards Issued (810,000 × $0.025). Redemption Rewards Liability..... 4
18,750 18,750 17,850 5,950 23,800
20,250 20,250
Cash...................................................... Redemption Rewards Liability ............ Sales ..............................................
20,730 9,500
Cash...................................................... Unearned Revenue .......................
3,950
Unearned Revenue .............................. Sales ..............................................
1,500
5
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1,500
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PROBLEM 10-5B (Continued) (c) Date 2013 During Dec. 31 2014 During Dec. 31
Date 2014 During Dec. 31
Redemption Rewards Liability Explanation Ref. Debit Credit 18,750
18,750 12,800
20,250
33,050 23,550
Credit
Balance
3,950
3,950 2,450
5,950
9,500 Unearned Revenue Explanation Ref. Debit
1,500
Balance
Taking It Further: Management should consider the following factors: The historical rate of redemption on the service coupons. Some coupons will never be redeemed and management needs to determine over time, if some of the amounts allocated to the liability account can be recognized as revenues if the coupons become unlikely to be redeemed. 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 that are unlikely to be used should be transferred to a revenue account.
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PROBLEM 10-6B 1.
Note disclosure: It does not appear that it is likely that the company will have an obligation for its customer’s bank loan.
2.
Note disclosure: Since the amount of the liability cannot be reliably measured, the lawsuit cannot be recorded, but it should be disclosed.
3.
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.
4.
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 costs 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 10-7B (a) SCOOT SCOOTERS Payroll Register Week Ending February 17, 2012
Earnings
Deductions Gross Income United Employee Hours Regular Overtime CPP EI Pay Tax Way P. Kilchyk 40 610.00 0 610.00 26.86 11.16 76.60 5.00 B. Quon 42 600.00 45.00 645.00 28.60 11.80 83.70 7.25 C. Pospisil 40 650.00 0 650.00 28.84 11.90 84.00 5.50 B. Verwey 44 580.00 87.00 667.00 29.6812.21 87.10 8.25 Totals 2,440.00 132.00 2,572.00 113.98 47.07 331.40 26.00
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Total Net Pay 119.62 490.38 131.35 513.65 130.24 519.76 137.24 529.76 518.45 2,053.55
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PROBLEM 10-7B (Continued) (b) Feb.15
Salaries Expense ......................... 2,572.00 CPP Payable.......................... 113.98 EI Payable.............................. 47.07 Income Tax Payable ............. 331.40 United Way Contributions Payable 26.00 Salaries Payable ................... 2,053.55
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 .......................... 2,053.55 Cash....................................... 2,053.55
(d) Mar.15
CPP Payable ($113.98 + $113.98). 227.96 EI Payable ($47.07 + $65.90) ........... 112.97 Income Tax Payable ........................ 331.40 Cash.......................................
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PROBLEM 10-7B (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 10-8B (a) Apr.
4
7
13
Union Dues Payable ........................... Cash................................................
1,285
Disability Insurance Payable ............. Life Insurance Payable ...................... Cash................................................
1,134 756 1,890
CPP Payable ....................................... 6,907 EI Payable ........................................... 3,320 Income Tax Payable ........................... 14,364 Cash................................................
20 Workers’ Compensation Payable ...... Cash................................................ 28
1,285
3,780 3,780
Salaries Expense................................ 83,160 CPP Payable................................... EI Payable....................................... Income Tax Payable ...................... Union Dues Payable ...................... Disability Insurance Payable......... Salaries Payable ............................
28 Salaries Payable ................................. Cash................................................
10-83
3,799 1,522 15,800 1,414 1,257 59,368
59,368
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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59,368
3,799 2,131 4,158 3,326 832
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PROBLEM 10-8B (Continued) (b) Canada Pension Plan Payable Explanation Ref. Debit Credit
Date Apr.
1 13 28 28
1 13 28
Date Apr.
1 13 28 28
Date Apr.
3,799 3,799
6,907 0 3,799 7,598
Credit
Balance
15,800
14,364 0 15,800
Employment Insurance Payable Explanation Ref. Debit Credit
Balance
6,907
Income Tax Payable Explanation Ref. Debit
Date Apr.
Balance
1 20 28
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Balance
Balance
14,364
Balance
1,522 2,131
3,320 0 1,522 3,653
Workers’ Compensation Payable Explanation Ref. Debit Credit
Balance
3,320
Balance
3,780 4,158
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3,780 0 4,158
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PROBLEM 10-8B (Continued) (b) (Continued) Union Dues Payable Explanation Ref. Debit
Date Apr.
1 4 28
Date Apr.
1 7 28
1 28
1 7 28
Disability Insurance Payable Explanation Ref. Debit Credit
Balance
1,285
Balance
1 28 28
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1,257
1,134 0 1,257
Credit
Balance
3,326
3,024 6,350
Credit
Balance
832
756 0 832
Credit
Balance
59,368
0 59,368 0
1,134
Balance
Balance
756
Salaries Payable Explanation Ref. Debit
Date Apr.
1,414
1,285 0 1,414
Balance
Life Insurance Payable Explanation Ref. Debit
Date Apr.
Balance
Vacation Pay Payable Explanation Ref. Debit
Date Apr.
Credit
Balance
59,368
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PROBLEM 10-8B (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 10-9B (a)
BCE INC. (Partial) Balance Sheet December 31, 2011
Current liabilities Trade payables and other liabilities ..................... Current tax liabilities ............................................. Dividends payable ................................................. Interest payable ..................................................... Debt due within one year ...................................... Total current liabilities...................................... (b)
$4,056 47 415 134 2,106 $6,758
Current ratio: $4,178 ÷ $6,758 = 0.62:1 Current assets: $130 + $45 + $427 + $152 + $262 + $3,162 = $4,178 Acid-test ratio: ($130 + $45 + $152 + $3,162) ÷ $6,758 = 0.52:1
(c)
Current ratio Dec. 31, 2010: $4,655 ÷ $6,954 = 0.67:1 Acid-test ratio Dec. 31, 2010: $3,795 ÷ $6,954 = 0.55:1 Both the current and acid-test ratios weakened during 2011.
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PROBLEM 10-9B (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 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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*PROBLEM 10-10B (a)
SLOVAK PLUMBING COMPANY Payroll Register Week Ending May 11, 2012
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 Ontario Total Federal EI Income Tax Income Tax Deductions 5 115.35 59.00 237.81 18.03 6 119.15 60.40 246.53 18.98 7 136.00 67.20 273.09 19.76 8 93.45 50.45 204.98 17.39 74.16 463.95 237.05 962.41
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 × 1.83% = $18.03 6. EI = $1,037.00 × 1.83% = $18.98 7. EI = $1,080.00 × 1.83% = $19.76 8. EI = $950.00 × 1.83% = $17.39
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Net Pay 747.19 790.47 806.91 745.02 3089.59
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*PROBLEM 10-10B (Continued) (b) Semi-monthly Payroll Ending May 15, 2012:
Employee B. Dolina H. Koleno A. Krneta
Gross 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 1.83% $61.53 4 47.66 5 33.64 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 × 1.83% = $61.53 5. EI = $2,604.17 × 1.83% = $47.66 6. EI = $1,838.33 × 1.83% = $33.64 (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 = $2,306.70 ÷ $159.23 = 14.49; rounded up to pay period 15 (August 15th). Pay period in which EI maximum is reached = $839.97 ÷ $61.53 = 13.65; rounded up to pay period 14 (July 31st).
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*PROBLEM 10-10B (Continued) (c) (Continued) H. Koleno: Pay period in which CPP maximum is reached = $2,306.70 ÷ $121.69 = 18.96; rounded up to pay period 19 (October 15). Pay period in which EI maximum is reached = $839.97 ÷ $47.66 = 17.62; rounded up to pay period 18 (September 30). 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 2012. 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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CONTINUING COOKIE CHRONICLE 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 service of cookie-making lessons and supplies to the customers who have prepaid. This is the same rationale as deposits received for cookie-making lessons.
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 cookie-making lessons are provided to customers. The gift certificate does not represent a good or service but rather an entitlement to receive services 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 cards being redeemed. She can then recognize revenue on gift cards unlikely to be redeemed.
3.
There is not really a way to ensure that gift certificates get used. Some companies place a time limit on when the card can be used although this can be unpopular with customers and not permitted in some provinces. The longer a gift card remains unused, the more likely that it will not be redeemed and this results in additional revenue for the company. It may be to Natalie’s advantage to not limit the time over which the cards can be redeemed. To ensure that cards are not duplicated and used again, Natalie can use pre-numbered cards. She would then keep a
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CONTINUING COOKIE CHRONICLE (continued) 3 (continued) record of the numbers and values of cards issued and record the redemption of the card.
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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.............................. 5,600 Accumulated Depreciation —Equipment ......................... 5,120 Accumulated Amortization 15,000 —Patent ................................. Calculations Building ($155,000 − $15,000) ÷ 25 years = $5,600 Equipment ($25,000 − $12,200) × 40% (2 × 1 ÷ 5 years) = $5,120 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) ..........
8.
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31
Operating Expenses.................. Warranty Liability..................
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621 621 1,975 1,975
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CUMULATIVE COVERAGE (Continued) (b) LEBRUN COMPANY Adjusted Trial Balance July 31, 2014 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
450,000
181,220
750,000 (4) 6,700
456,700
(2) 1,850 (5) 5,500 (8) 1,975 (1) 50
1,850
188,745
(6)15,000
15,000
(6)10,720
10,720
400
(3)
67
467
6,830 1,124,200
(7) 621 1,124,200 43,133
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CUMULATIVE COVERAGE (Continued) (c) LEBRUN COMPANY Income Statement Year Ended July 31, 2014 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, 2014 S. LeBrun, capital, August 1, 2013 ................................. Add: Profit........................................................................ Less: Drawings................................................................ S. LeBrun, capital, July 31, 2014 ....................................
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$124,700 70,001 194,701 54,000 $140,701
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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet July 31, 2014 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.............................................................. $75,000 Less: Accumulated amortization............... 30,000
45,000
Total assets........................................................................ $352,397
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CUMULATIVE COVERAGE (Continued) (c) (Continued) LEBRUN COMPANY Balance Sheet (Continued) July 31, 2014 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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BYP 10-1 FINANCIAL REPORTING PROBLEM (a)
Total current liabilities at January 28, 2012, were $89,132,000. There was a $2,177,000 decrease from the previous year ($91,309,000 – $89,132,000), which was equivalent to a 2% decrease ($2,177,000 ÷ $91,309,000).
(b) The components of total current liabilities on January 28, 2012 were trade and other payables, derivative financial liability, deferred revenue, income taxes payable and current portion of long-tem debt. (c)
Current ratio: 2012 $366,983,000 ÷ $89,132,000 = 4.12:1 Current ratio: 2011 $389,005,000 ÷ $91,309,000 = 4.26:1 Acid-test ratio: 2012 ($196,835,000 + $71,442,000 + $3,033,000) ÷ $89,132,000 = 3.04:1 Acid-test ratio: 2011 ($230,034,000 + $70,413,000 + $2,866,000) ÷ $91,309,000 = 3.32:1 Receivables turnover: 2012 $1,019,397,000 ÷ [($3,033,000 + $2,866,000) ÷ 2] = 345.62 Receivables turnover: 2011 $1,059,000,000 ÷ [($2,866,000 + $2,926,000) ÷ 2] = 365.68 Inventory turnover: 2012 $363,333,000 ÷ [($78,285,000 + $73,201,000) ÷ 2] = 4.80 Inventory turnover: 2011 $350,671,000 ÷ [($73,201,000 + $63,127,000) ÷ 2] = 5.14
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BYP 10-1 (Continued) Operating cycle: 2012 (365 ÷ 345.62) + (365 ÷ 4.80) = 77.1 days Operating cycle: 2011 (365 ÷ 365.68) + (365 ÷ 5.14) = 72.01 days
Ratio: Current ratio Acid-test ratio Receivables turnover Inventory turnover Operating cycle
Summary 2012 4.12:1 3.04:1 345.62 4.80 77.1 days
2011 4.26:1 3.32:1 365.68 5.14 72.01 days
Reitman’s overall liquidity has decreased slightly in 2012. All of the liquidity ratios have shown a slightly decline during 2012. The company however shows a very high level of liquidity. Its acid-test ratio is close to the current ratio indicating a high proportion of liquid current assets. (d)
Reitmans reports guarantees in note 24 to its financial statements. Contingencies include guarantees of third-party contractual obligations. The maximum potential liability was $5,083,000. In the opinion of management, the company does not expect to make any payments under these guarantees and has not recorded any liability.
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BYP 10-2 INTERPRETING FINANCIAL STATEMENTS (a)
Canadian Tire 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 does not consider it probable that a liability has been incurred. 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.
(b) The company may be required to incur significant legal costs of representation in order to defend itself regardless of the outcome of the legal proceedings. Since Canadian Tire is able to estimate these amounts, and it is probable that it will have pay these legal costs then Canadian Tire has a future obligation which must be recorded as a liability along with the related expense.
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BYP 10-3 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 10-4 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 which 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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BYP 10-5 ETHICS CASE (a)
The stakeholders in this situation include: Shareholders Creditors Employees Government inspectors Public
(b) The alternative reporting options the company can use are: 1. Accrue the estimated cost in the financial statements. 2. Disclose the liability in the notes to the financial statements. 3. Do not accrue or disclose the liability in the financial statements. (c)
Accruing the estimate will result in increased liabilities, lower profit and lower shareholders’ equity on the financial statements. Disclosure of the liability will not directly affect the financial position, but users of the statements may adjust the financial position based on the information in the note. If the liability is not accrued or disclosed, it will not impact the financial position reported.
(d) It would be unethical not to disclose the liability. The company is responsible for the clean up and will incur some costs. Hiding this information from stakeholders would be dishonest. (e)
I recommend the company accrue the minimum amount of $50 million and disclose in the notes that the actual cost may be higher.
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BYP 10-6 “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: CPP Contribution EI Contribution Income taxes Cash received (net pay)
$3,000.00 $134.06 54.90 407.95
596.91 $2,403.09
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 ($407.95 × 12) Cash received (net pay)
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$36,000.00 1,608.72 658.80 4,895.40 $28,837.08
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BYP 10-6 (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 2012 maximum pensionable earnings of $50,100, 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 2012 maximum insurable earnings of $45,900, 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 instalment payments to CRA for income tax. The amount paid in income taxes may differ depending on the expenses that you can 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 10-6 (Continued) (e)
(f)
Consulting revenue ($3,000 × 12) Less deductions: Income tax ($407.95 × 12) CPP Contribution ($134.06 × 12 × 2) Net pay
$36,000.00 4,895.40 3,217.44 $27,887.16
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 would be deductible for income tax purposes and would decrease the amount of taxes paid.
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CHAPTER 11 Financial Reporting Concepts ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief Exercises
1. Explain the importance of having a conceptual framework of accounting, and list the key components.
1
1
2. Identify and apply the objective of financial reporting, as well as the underlying assumption and cost constraint used by accountants.
2, 3, 4, 5, 11
2, 3, 4, 6, 7
3. Describe the fundamental and enhancing qualitative characteristics of financial reporting.
6, 7, 8, 9, 10, 11, 12, 22
4. Identify and apply the basic recognition and measurement concepts of accounting.
13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23
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Exercises
Proble ms Set A
Problems Set B
3
3
1, 2, 4, 5, 6
1, 2, 4, 5, 10
1, 2, 4, 5, 10
5, 6, 7
3, 4, 5
1, 2, 3, 4
1, 2, 3, 4
7, 8, 9, 10, 11, 12, 13, 14
5, 6, 7, 8, 9, 10, 11
3, 4, 5, 6, 7, 8, 9, 10,
3, 4, 5, 6, 7, 8, 9, 10,
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ASSIGNMENT CHARACTERISTICS TABLE
Comment on objective of financial reporting, and qualitative characteristics. Assumptions and concepts – going concern, full disclosure. Comment on objective of financial reporting, qualitative characteristics, and constraints.
Moderate
Time Allotted (min.) 15-20
Moderate
15-25
Moderate
15-20
Identify concept or assumption violated and prepare entries. Identify assumption or concepts and correct entries. Identify point of revenue recognition.
Moderate
20-30
Moderate
15-25
Moderate
15-20
Calculate revenue, cost of goods sold, and gross profit. Revenue recognition criteria – sale of goods.
Moderate
20-30
Moderate
20-30
9A
Calculate revenue, expense, and gross profit – percentage-of-completion method.
Moderate
20-30
10A
Objective of financing reporting, identifying elements, and revenue and expense recognition.
Moderate
20-30
1B
Comment on objective of financial reporting, and qualitative characteristics.
Moderate
15-20
2B
Assumptions and concepts – going concern, full disclosure. Comment on objective of financial reporting, qualitative characteristics, and constraints.
Moderate
15-25
Moderate
15-20
4B
Identify concept or assumption violated and prepare entries.
Moderate
20-30
5B
Identify assumption or concepts and correct entries. Identify point of revenue recognition.
Moderate
15-25
Moderate
15-20
Calculate revenue, cost of goods sold, and gross profit. Revenue recognition criteria – sale of goods.
Moderate
20-30
Moderate
20-30
9B
Calculate revenue, expense, and gross profit – percentage-of-completion method.
Moderate
20-30
10B
Objective of financing reporting, identifying elements, and revenue and expense recognition.
Moderate
20-30
Problem Number 1A 2A 3A
4A 5A 6A 7A 8A
3B
6B 7B 8B
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Difficulty Level
Description
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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material. Study Objectives
Knowledge
1. Explain the importance of having a conceptual framework of accounting, and list the key components.
BE11-1
Q11-1 P11-3A P11-3B
2. Identify and apply the objective of financial reporting, as well as the underlying assumption and cost constraint used by accountants.
Q11-2 BE11-3
Q11-3 Q11-4 Q11-5 Q11-11 BE11-2 BE11-6 BE11-7 E11-2 E11-4 P11-1A P11-1B
BE11-4 E11-1 E11-5 P11-2A P11-10A P11-2B P11-10B
E11-6 P11-4A P11-5A P11-4B P11-5B
3. Describe the fundamental and enhancing qualitative characteristics of financial reporting.
Q11-6 Q11-8 Q11-9 BE11-5
E11-5 P11-2A P11-2B
P11-4A P11-4B
4. Identify and apply the basic recognition and measurement concepts of accounting.
Q11-14 Q11-15 Q11-18 Q11-19 Q11-21 Q11-23
Q11-7 Q11-10 Q11-11 Q11-12 BE11-6 BE11-7 E11-3 E11-4 P11-1A P11-3A P11-1B P11-3B Q11-13 Q11-22 BE11-7 E11-7 E11-8
Broadening Your Perspective
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Comprehension
P11-3A P11-6A P11-3B P11-6B
Application
BE11-20 BE11-8 BE11-9 BE11-10 BE11-11 BE11-12 BE11-13 E11-5 E11-9 E11-10 E11-11
P11-7A P11-8A P11-9A P11-10A P11-7B P11-8B P11-9B P11-10B
BYP11-4 Continuing Cookie Chronicle
BYP11-3
11-3
Analysis
Synthesis
Evaluation
BE11-16 BE11-17 E11-6 P11-4A P11-5A P11-4B
BYP11-1 BYP11-2 BYP11-6
BYP11-5
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
ANSWERS TO QUESTIONS 1.
(a) 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, decisions about alternative ways of reporting economic events, and the selection of appropriate ways of communicating such information. (b)
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)
3.
The conceptual framework is applicable to companies reporting under IFRS and ASPE.
The objective identifies the specific users to ensure that all possible points of view are included in fulfilling the needs of users.
(a) Going Concern: The company will continue operating for the foreseeable future – long enough to achieve its goals and respect its commitments. The going concern assumption is necessary because many accounting principles require us to assume that a company is going to continue to operate in the future. For example, if a company was not going to continue to operate into the future, depreciation of long-lived assets would not be justifiable and appropriate. (b)
The going concern assumption supports reporting the cost of an asset because if a company is not going to sell its assets, cost (the amount given up to acquire the asset) becomes more relevant than fair values. When a company is no longer a going concern, assets would be valued at fair or liquidation values rather than at historical cost. The timing of when the asset will be converted to cash or used in operations and when liabilities are to be paid determines their classification on the statement of financial position. Since the business is expected to remain in operation for the foreseeable future, these elements can continue to be reported in accordance with their respective current or non-current classifications.
Solutions Manual .
11-4
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
Questions (Continued) 4.
The cost constraint means that the costs of obtaining the accounting information should not exceed the benefits derived from it. For example, a small company could issue interim statements monthly instead of quarterly, but the benefits provided to users would probably be outweighed by the additional costs associated with preparing and presenting the extra information.
5.
I disagree. The costs of applying IFRS to small or non-publicly traded companies exceed the benefits. As a result, a simplified version of GAAP has been developed and set in place for these companies, referred to as ASPE.
6.
The fundamental qualitative characteristics 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. 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.
7.
(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 prudent investor or creditor. For example, the expensing of a $20 calculator would not 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. (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).
Solutions Manual .
11-5
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
Questions (Continued) 8.
The four enhancing qualitative characteristics verifiability, timeliness and understandability.
are
comparability,
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 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. 9.
The two fundamental qualitative characteristics should be applied first before the four enhancing characteristics. Relevance should be applied first, followed by faithful representation. Relevance is applied first to identify which information would impact a user’s decision. Faithful representation is applied second to ensure the relevant information represents its substance. Comparability, verifiability, timeliness and understandability enhance the communication of information that is relevant and representationally faithful.
10. While the conceptual framework for IFRS identifies two fundamental and four enhancing characteristics, the framework for ASPE identifies four principal qualitative characteristics: understandability, relevance, reliability, and comparability. ASPE also recognizes conservatism as a qualitative characteristic of financial information. 11. In general terms, in order for financial information to be useful, it must be complete. To achieve completeness, accountants could record or disclose every financial event that occurs and every uncertainty that exists. However, providing this information increases reporting costs. The benefits of providing more information, in some cases, may be less than the costs. 12.
Yes. Rounded figures provide enough information to be useful for decision-making and are less distracting to the reader than are too many digits in a number. In fact, including specific dollar figures can imply a false sense of accuracy that is simply not the case in financial statements where estimates and other judgements are made.
Solutions Manual .
11-6
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
Questions (Continued) 13. 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. The application of these criteria involves judgement. In addition, activities that generate revenues have become a lot more innovative and complex than in the past, making the point where revenues meet these guidelines much harder to determine. 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. 15. The five conditions that must be met for revenue to be recognized include: the risks and rewards of ownership must be transferred; the seller does not have control over the goods; the amount of revenue can be reliably measured; collection must be reasonably assured; and costs can be reliably measured. 16. I disagree. The risks and rewards of ownership did not get transferred to the buyer until the customer took possession of the shipment. This transfer did not legally occur in 2013 and so the sale should not have been included in the December 31, 2013 income statement. There exists an added risk to recording the sale in December which could bring about an error. Since the goods were not shipped as of the end of the fiscal year, they would be included in the physical count of inventory. Consequently, the inventory would be included on JRT’s balance sheet as well as the accounts receivable from the sale. This error has a significant effect on gross profit and profit for the year, making the results misleading to any reader. 17. (a) The $10,000 cash receipt on March 24, 2014 should be recorded as unearned revenue as no landscaping services have yet been performed. The unearned revenue should appear as a current liability on Greenthumb’s balance sheet at April 30, 2014. (b)
Since Greenthumb’s practice is to prepare monthly financial statements, 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 2014 at the rate of $2,000 per month.
Solutions Manual .
11-7
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
Questions (Continued) 18. (a) Revenue from long-term service and construction contracts should be recognized as the revenue is earned, as long as the revenue recognition criteria are met. (b)
The three steps in the percentage-of-completion method include: 1. Progress toward completion is measured often by comparing the costs incurred in a period with the total estimated costs for the entire project. This indicates the percentage of the work that is complete. 2. This percentage is multiplied by the total revenue for the project, to determine the amount of revenue to be recognized for the period. 3. The costs incurred are then subtracted from the revenue recognized to arrive at the gross profit for the current period.
19. When goods are sold together with a service component, the amount collected from the sale must be divided between the two sources of revenue. The revenue from the sale of the goods should be recognized at the point of sale, while the service component must be recognized over the period in which the services are delivered. 20. Unless the company can reasonably and reliably estimate the amount of the returns it expects following the sale, in order to accrue the returns at the point of sale, the company should postpone the recognition of the sale until the return period has expired. Failing to do so would be in violation of the revenue recognition criteria. 21.
Expenses should be recognized when there is a decrease in an asset or increase in a liability, excluding transactions with owners. The timing of expenses recognition on the income statement depends on the nature of the expense. If there is a direct association between the cost and revenue, the expense is recognized on the income statement in the same period as the related revenue. Where there is no direct relationship between expense and revenue, a rational and systematic allocation process is adopted. In addition, for expenditures that do not qualify for recognition as assets, or previously recognized assets that cease to have future benefits, expenses are recognized immediately.
Solutions Manual .
11-8
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
Questions (Continued) 22.
In order to be relevant for decision making, the measurement of elements of financial statements need to reflect amounts that are reliable. For assets that are intended to be sold, the current fair value of the assets becomes the most relevant measurement as it approximates the current amount of cash that could be obtained on the sale of the asset. On the other hand, for assets held for use by the corporation, the value at resale is not as relevant to the financial statement user. In that case the cost of the assets is the better measurement for reporting the financial statement element. For example, inventory will become cost of goods sold when sold. It is relevant to compare the actual cost of the inventory to the amount of the revenue generated from its sale. Using the cost basis of accounting gives a faithful representation of the transaction that has occurred from the sale of inventory.
23.
Profits might be overstated on purpose by management to satisfy the owners’ expectations of performance or to allow certain members of the management to earn a bonus which is based on profits. For example, the seller might recognize sales revenues for goods that are shipped FOB destination when the goods are shipped instead of when the customer receives the goods. This would overstate revenues if the goods were shipped just prior to the company’s fiscal year end and received by the customer after the year end. Another means of overstating profits is to recognize revenue from the sale of extended warranties when the cash is collected instead of when the work is performed.
Solutions Manual .
11-9
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 11-1 (a) (b) (c) (d) (e) (f) (g)
F T F T F T T
BRIEF EXERCISE 11-2 (a) Yes (b) Yes (c) No
BRIEF EXERCISE 11-3 (a) (b) (c) (d) (e) (f)
4. 2. 1. 5. 3. 1.
Revenues Liabilities Assets Expenses Owner’s equity Assets
BRIEF EXERCISE 11-4 (a) No (b) Yes (c) Yes
Solutions Manual .
11-10
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 11-5 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)
4 6 3 5 7 10 1 9 8 2 11
BRIEF EXERCISE 11-6 (a) (b) (c) (d) (e)
1. 2. 3. 6. 4.
Going concern assumption Economic entity concept Full disclosure Materiality Cost
BRIEF EXERCISE 11-7 (a) (b) (c) (d) (e) (f) (g)
3. 5. 1. 6. 4. 1. 2.
Full disclosure Expense recognition Revenue recognition Fair value Cost Revenue recognition Matching
Solutions Manual .
11-11
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 11-8 Revenue of $250,000; the value of the work completed in March. Salaries expense of $75,000.
BRIEF EXERCISE 11-9 The company should recognize sales for the full $450,000 in the month of September. All of the merchandise is sold FOB shipping point, which means that ownership has been transferred at the point when the goods left the seller. None of the merchandise in transit was owned by Mullen. Bad Debts Expenses in the amount of $4,500 need to be accrued. Sales Returns can be estimated at 2% of sales (2% × $450,000 = $9,000). If sales returns are material in amount and can be reasonably estimated, they should be accrued in the same period as the related sale and a liability for the estimated returns recognized. If they are not material, they are frequently recorded as they occur.
BRIEF EXERCISE 11-10 Sales ($350,000 – $40,000) Cost of goods sold ($200,000 – $23,000) Gross profit
$310,000 177,000 $133,000
The company can only recognize the sale when the ownership of the goods is transferred. For the goods in transit, since the shipping terms are FOB destination, Abbotsford Ltd. still owns the merchandise. Based on the concept of matching costs with revenues, the cost of goods is recognized on the income statement in the same period as the related sale. The cost of goods in transit would remain on the balance sheet as part of inventory. Solutions Manual .
11-12
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 11-11 Revenue from Sales of $400,000 should be recorded for the month of December. The $25,000 for the sale of extended warranties should be initially recorded as unearned warranty revenue to recognize that Willow Appliances Company has an obligation (liability) to provide warranty service in the future. Warranty revenue will be recognized when the Willow satisfies its obligation by providing warranty service.
BRIEF EXERCISE 11-12 Costs Incurred
Year 2013 2014 2015
$ 840,000 1,120,000 840,000 $2,800,000
Year 2013 2014 2015
Total Percentage Estimated Cost = Complete × $2,800,000 2,800,000 2,800,000
Revenue Recognized
Total Revenue
30% 40% 30%
Costs Incurred
−
$1,260,000 1,680,000 1,260,000 $4,200,000
Revenue = Recognized
$4,200,000 4,200,000 4,200,000
=
$ 840,000 1,120,000 840,000 $2,800,000
$1,260,000 1,680,000 1,260,000 $4,200,000
Gross Profit $ 420,000 560,000 420,000 $1,400,000
BRIEF EXERCISE 11-13 Operating expenses from adjusted trial balance Add: Loss on damaged inventory Accrual of sales commissions expense Total operating expenses
Solutions Manual .
11-13
$55,000 4,000 2,500 $61,500
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 11-14 1.
The measurement criteria for 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 as of 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.
Solutions Manual .
11-14
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 11-1 (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 information to determine the amount of risk the bank is taking if it is to extend a loan to Marc for his inventory expansion. (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 economic 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 which is necessary to operate the store. These assets would be depreciated and would be reported on the balance sheet at their carrying amount. As for the inventory, the measurement of this current asset should be at the lower of cost and net realizable value.
Solutions Manual .
11-15
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-2 (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 assure 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 .
11-16
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-3 (a) (b) (c) (d) (e) (f) (g) (h)
3 4 6 6 2 7 1 5
EXERCISE 11-4 (a) (b) (c) (d) (e) (f)
2. 5. 3. 1. 6. 4.
Economic entity concept Cost constraint Completeness Going concern assumption Materiality Cost
EXERCISE 11-5 1. Revenue recognition criteria 2. Full disclosure 3. Expense recognition criteria 4. Going concern assumption; full disclosure principle 5. No violation (lower of cost and net realizable value) 6. Timeliness characteristic 7. Cost concept 8. Economic entity concept 9. Cost constraint
Solutions Manual .
11-17
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 economic 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.
This is a violation of the cost measurement and matching concepts. Since the advertising has already appeared on television, the cost should be expensed immediately. The correct journal entry is: Advertising Expense ............................. Cash................................................
5,000 5,000
4.
There is no violation of generally accepted accounting principles. The merchandise inventory is properly reported at the lower of cost and net realizable value.
5.
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 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 ...............................................
Solutions Manual .
11-18
50 50 Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-6 (Continued) 6.
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 .
11-19
650 650
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-7 1.
Since the service is not provided until the flight actually occurs, revenue should not be recognized until December. This will record the revenue in the period the expense occurs, as well.
2.
If collection can be reasonably assured and an estimate of uncollectible amounts can be made, then revenue can be recognized at the point of sale. Otherwise, the revenue should be recognized at the time cash is collected. However, it is highly unlikely that Cygman would sell to customers with no credit check and that it would not be able to reasonably estimate its doubtful accounts based on past experience.
3.
Revenue should be recognized on a per game basis over the season from April to October.
4.
If collection can be reasonably assured and an estimate of uncollectible amounts can be made, then revenue can be recognized when the merchandise is received by the customer.
5.
Tuition revenue should be recognized evenly over the term, from September through December. This will record the revenue in the period the expenses (e.g., teaching salaries, utilities expense, etc.) occur, as well.
6.
If the Bookstore can estimate the volume of returns, revenue should be recorded at the point of sale along with an allowance for returns. Otherwise, recognition should be delayed until the right of return expires.
Solutions Manual .
11-20
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-7 (Continued)
7.
The portion of the sales that is attributed to the three-year service contract should be deferred and recorded to unearned revenue and subsequently adjusted to revenue as the services are provided over the three year period, when the updates are delivered. The rest of the sale can be recognized at the point of delivery.
Solutions Manual .
11-21
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-8 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
Solutions Manual .
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
11-22
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-9 1.
$2,000 × 4 = $8,000. By applying the revenue recognition criteria, one can determine that 3 months of rent (or $6,000) should be recognized as revenue in 2014, while the remaining amount of $2,000 is revenue in 2015.
2.
$16,000. Ownership of the property transfers at December 31, 2014 because the terms are FOB shipping point. Thus, a sale took place in 2014 and revenue of $16,000 and the cost of goods sold in the amount of $9,000 should be recorded in 2014.
3.
$2,000,000 × ($300,000 ÷ $1,400,000) = $428,517. If 3/14ths or 21.4% of the costs have been incurred, then the same percentage of the total revenue should be recognized, using the percentage-of-completion method.
4.
$0. No revenue should be recognized since the right of return cannot be reliably measured. This means that the amount of revenue cannot be reliably measured. In addition, collectability is not reasonably certain since the customers have an extended payment period. There is no indication that Mitrovica does credit checks on its customers to ensure that payment will be made.
5.
$5,000 × 4% × 4/12 = $67. Interest revenue should be recognized for the four months the note was outstanding in 2014.
6.
$0. Even though collection is assured, the revenue has not been earned. The ownership of the product is not transferred until 2015.
Solutions Manual .
11-23
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-10 (a) Costs Incurred
Year 2012 2013 2014
$ 25,000,000 55,000,000 20,000,000 $100,000,000
Total Estimated Cost
2012 2013 2014
Total Revenue
25% 55% 20%
$150,000,000 150,000,000 150,000,000
$100,000,000 100,000,000 100,000,000
Revenue Recognized
Year
Percentage = Complete × During Year
Actual Cost Incurred
−
$ 37,500,000 82,500,000 30,000,000 $150,000,000
Solutions Manual .
$ 25,000,000 55,000,000 20,000,000 $100,000,000
11-24
=
Revenue = Recognized $ 37,500,000 82,500,000 30,000,000 $150,000,000 Gross Profit Recognized $12,500,000 27,500,000 10,000,000 $50,000,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 11-11 1.
Byer’s Innovations Co. should record rent expense in 2014 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 2014 in the amount of $5,000 ($55,000 ÷ 5). 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 2014 fiscal year as the packaging equipment was not yet available for use.
Solutions Manual .
11-25
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 11-1A The objective of financial reporting is to provide useful information for decision-making. The major user groups of Reitmans (Canada) Limited include present and potential shareholders as well as creditors. These users need information to assess the company’s future commitments for payments in order to assess the company’s ability to pay dividends and repay debt. This information is relevant to the users’ needs. Because the information relates to future periods, it is predictive in nature and provides a basis for predicting future earnings and cash flows. Taking It Further: Reitmans (Canada) Limited also discloses future cash payments for principal repayment on long-term debt in note 14 to the financial statements.
Solutions Manual .
11-26
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-2A (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 .
11-27
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-3A Private companies generally become public companies to increase their access to capital by issuing additional shares. Humpty’s Restaurants International Inc. had not been issuing new shares for financing in many years, nullifying the need for it to be a public company. The owners of Humpty’s likely decided to go private to save money and regain control over the business. Producing information for financial disclosure comes at a cost for companies. The International Financial Reporting Standards violate the cost constraint for most private enterprises as these companies have few users and their information needs are usually simpler. Their users usually consist of few creditors and investors, as opposed to thousands of investors for public companies. Producing the financial information required under IFRS places many private companies under significant financial burden because of the information systems required to accumulate the information, and the need to have sufficient knowledgeable personnel to prepare the information. The preparation of the detailed required disclosure under IFRS would also take significant amounts of time and would make the information less timely. Taking It Further: A Canadian private company may choose to report under IFRS under different scenarios: If it anticipates becoming a public company in the near future. If it is a subsidiary of a public company using IFRS. If it wants to access international markets and have comparable financial reporting.
Solutions Manual .
11-28
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-4A (a) and (b) 1.
Expense recognition criteria (matching concept). The cost of 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: 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
Measurement criteria (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 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 .
43,000
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36,000 36,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-4A (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.
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-4A (Continued) (a) and (b) (Continued)
6.
Measurement criteria (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.
7.
Revenue recognition criteria. Kwick Kopy will not begin to perform the service until January 2015. Therefore the revenue has not been earned in 2014 and it would be inappropriate for the company to record any revenue in 2014. No entry is necessary in 2014.
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.
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11-31
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-5A
(a) and (b) 1.
The sale should be recorded in the next year instead of the current year. Legal title of the goods does not change hands until the next year. Therefore, the revenue recognition criteria are violated. It should be noted that if the company is employing a perpetual inventory system in dollars and quantities, a debit to cost of goods sold and a credit to inventory are also necessary in the next year. Correcting entry required: Sales............................................................ Accounts Receivable ......................... Unearned Revenue .............................
2.
80,000 10,000
The $5,000 for the sale of extended warranties should be recorded as unearned revenue to recognize that Durkovitch Company has an obligation (liability) to provide warranty service in the future. Warranty revenue will be recognized when the company satisfies its obligation by providing warranty service. Correcting
entry
Sales............................................................ Unearned Revenue .............................
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90,000
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required: 5,000 5,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-5A (Continued) (a) and (b) (Continued)
3.
Depreciation is a means of cost allocation. Assets are not depreciated on the basis of the level of profitability, but are depreciated on the basis of systematic charges of expired costs against revenues. Recording additional depreciation to manipulate the current and future profit performance shows a violation of the representational faithfulness of the events that actually occurred and the expenses that were incurred to earn revenue. Correcting entry to reverse entry made is required: Accumulated Depreciation ........................ Depreciation Expense.........................
4.
60,000 60,000
This entry violates the expense recognition criteria. The merchandise has not been sold and should not be shown on the income statement until it is sold. This will match the cost of merchandise sold against the revenue when recorded. Since the merchandise has probable future economic benefits, it should be shown on the balance sheet as an asset. Correcting entry required: Inventory ..................................................... Cost of Goods Sold ............................
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78,000 78,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-5A (Continued) (a) and (b) (Continued)
5.
Durkovitch Company has not adopted the revaluation model of accounting for its property, plant, and equipment. A loss should not be recognized based on the cost measurement criteria. In some circumstances, land may be written down if it is considered impaired. Correcting entry required: Land ........................................................... 30,000 Loss on Fair Value Adjustment of Land 30,000
Taking It Further: Yes, the answer would have been different. If the Durkovitch Company was a real estate company, the land would be inventory rather than property, plant, and equipment. For inventory, the measurement basis is cost combined with fair value, as lower of cost and net realizable value. This modified basis is considered more relevant to users’ needs because it provides information on the company’s liquidity and solvency. As part of inventory, the expectation is that the land will be sold in the short-term and its future economic benefits will be realized in the coming year. Any declines in value below original cost affect those future benefits in the current year, and should be recorded as such.
Solutions Manual .
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-6A The revenue recognition criteria states that revenue cannot be recognized until it can be objectively measured. Since the production and sales effort is not substantially completed until the tree matures and is sold, revenue cannot be measured and recognized until that point. Since no buyer is identified during the period of growth, Santa’s Christmas Tree Farm retains the risks and rewards of ownership until the trees are sold. Santa’s Christmas Tree Farm, as seller, has control over the goods and has continuing managerial involvement over the years of growth. Taking It Further: In accordance with the matching concept, the annual costs of fertilizing, pruning and maintaining the trees are unexpired costs with future revenue producing potential. They should be recorded on the balance sheet as inventory and recognized as part of the cost of the goods sold in the same period as the related revenues.
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-7A Net sales to November 30, 2014 Add: Gross sales for December, 2014
$1,200,000 125,000 $1,325,000
Less: Sales returns, December, 2014 Goods sold FOB shipping point Estimated sales returns Net sales
$20,000 12,000 11,000
Cost of goods sold to November 30, 2014 Add: Cost of goods sold for Dec. 2014
$635,000 66,250
Less: Cost of goods returned, Dec. 2014 Goods sold FOB shipping point Estimated cost of goods return Cost of goods sold Gross profit
$10,600 6,300 5,800
43,000 $1,282,000
$701,250
22,700 678,550 $603,450
Taking It Further: If sales returns did not result in goods being returned to inventory for resale, the cost of these goods would not be deducted in the calculation of the cost of goods sold. Consequently, the results of the calculation would be as follows: Net sales Cost of goods sold to November 30, 2014 Add: Cost of goods sold for Dec. 2014 Less: Goods sold FOB shipping point Cost of goods sold Gross profit
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$1,282,000 $635,000 66,250
$701,250 6,300 694,950 $587,050
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-8A (a)
(b)
Dave’s Deep Discount Furniture Store’s source of revenue comes from the sale of goods. Revenue is recognized when all of the following conditions are met: The seller has transferred the significant risks and rewards of ownership – this condition is usually met when the customer takes possession of the furniture. In Dave’s case, it appears that delivery is included in the furniture purchase. Ownership would be transferred when the furniture arrives at the customer’s home. The seller does not have control over the goods or continuing managerial involvement. This criterion does not apply specifically to the sale of furniture. Control of the goods is transferred when the customer takes possession of the goods. The amount of the revenue can be reliably measured. This criterion is satisfied when there is an agreed-upon price, usually at the point of sale. It is probable cash will be collected. For Dave’s, collectability seems to be reasonably assured since they conduct credit checks of their customers. Costs relating to the sale of the goods can be reliably measured. For furniture sales, the costs usually relate to the cost of sales, sales commissions and delivery costs. These costs can be measured and matched to revenue. The critical factors are the transfer of ownership and collectability. For the sale of merchandise, the point where legal ownership is transferred is a critical factor since it represents the point where the risks and rewards of ownership are transferred. It also usually indicates the end of the earning process in that no future costs are associated with the process.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-8A (Continued) (b) (Continued) In some cases, costs such as warranty costs occur after the transfer of ownership, but revenue is recognized when ownership is transferred if these costs can be reliably estimated and recognized in the same period as the revenue. If collectability is reasonably ensured at the transfer of ownership, revenue is recognized at this point. The risk of non-collection can be reliably measured as bad debts expense and recognized in the same period as the sale. If the risk of non-collection cannot be reliably estimated, revenue recognition should be deferred until cash is received. (c)
Revenue of $310,000 should be recognized = Total sales $325,000 – $15,000 goods delivered in January 2013.
Taking It Further: Yes. The amount of revenue that Dave’s should recognize in 2012 would be $60,000. This is the amount of revenue for furniture delivered before year-end that has been collected in full. A thorough credit check is a critical factor since it provides support that cash will be collected, or that bad debts will be minimal and can be reasonably estimated and accrued. Since Dave’s opened for business in 2012, they do not have any prior experience to determine collectability on its credit sales.
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-9A
Total Estimated Cost
Year
Costs Incurred
2012 2013 2014 2015 Totals
$ 12,000,000 20,000,000 10,000,000 18,000,000 $60,000,000
$60,000,000 60,000,000 60,000,000 60,000,000
Revenue Recognized
Year 2012 2013 2014 2015 Totals
=
$ 18,000,000 30,000,000 15,000,000 27,000,000 $90,000,000
–
Percentage Complete × During Year
Total Revenue
20.00% 33.33% 16.67% 30.00%
$90,000,000 90,000,000 90,000,000 90,000,000
Actual Cost Incurred $12,000,000 20,000,000 10,000,000 18,000,000 $60,000,000
=
Revenue = Recognized $18,000,000 30,000,000 15,000,000 27,000,000 $90,000,000
Gross Profit Recognized $ 6,000,000 10,000,000 5,000,000 9,000,000 $30,000,000
Note that the cash collections are not relevant in the percentage-of-completion method. Taking It Further: The revenue recognition criteria require that costs relating to the sale of the goods be reliably measured. Since Cosky can no longer rely on the original estimate of total costs for the construction project, it cannot use the percentage of completion method to recognize revenue for this contract.
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-10A (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 Kamloop’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 will request that the financial statements be reviewed by an independent accountant.
Solutions Manual .
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-10A (Continued) (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
Net sales Less: Accrued sales returns (3) Sale has not occurred, no transfer of ownership (2) Revised net 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
$ 80,000 15,000 $ 95,000
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, 2014. 2. Kamloops 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. 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.
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Chapter 11
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-10A (Continued) 4. The promotional expense recorded as a prepaid expense must be expensed and there is no measurable future benefit realized as of December 31, 2014.
Solutions Manual .
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-10A (Continued) Taking It Further: (a)
Current ratio
=
$ 120,000 $ 80,000
=
1.50:1
(b)
Current ratio
=
$ 121,800 $ 95,000
=
1.28:1
As a result of the required adjustments, Kamloops’ 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 a 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 .
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-1B Reitmans’ management is required to use estimates in order to provide information that is both relevant and timely to the users’ decision-making. Under the accrual accounting assumption, management is required to present events and transactions when they occur and not when cash is affected. Certain types of transactions and events have some level of uncertainty with respect to the amount or their ultimate resolution. In order to provide faithful representation and complete information of Reitmans’ transactions and events, some estimates are required so that the information is presented before their ultimate resolution. Taking It Further: The qualitative characteristic of faithful representation (under IFRS) and reliability (under ASPE) may be sacrificed if the estimates differ materially from actual results. Faithful representation and reliability involve completeness and accuracy of information, which is satisfied by disclosing information using estimates, but it also involves the concept that the information should be free from material error.
Solutions Manual .
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-2B (a)
Air Canada prepared its financial statement using the cost model because it satisfied the going concern assumption for its operations.
(b)
Air Canada 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 Air Canada 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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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-3B Privately owned companies reporting under ASPE should be given choices between different accounting methods to report certain events or transactions. Depending on the industry and financial environment in which the business operates, it might be worthwhile for the company to adopt an accounting policy or method that is consistent with that used by other companies in the same industry. Although this choice might require the business to incur additional costs, these costs are justified by making the performance measures of the business consistent with the industry, thereby enhancing comparability. On the other hand, if there is no reason for the adoption of a more complex and difficult method of accounting, the business should be allowed to choose the simpler method, based on the cost constraint, as long as the method allows for relevant and reliable information.
Taking It Further: Producing the financial information required under IFRS places a private company under significant financial burden because of the information systems required to accumulate the information, and the need to have sufficient knowledgeable personnel to prepare the information. In spite of the additional costs, a private company may choose to report under IFRS under different scenarios: If it anticipates becoming a public company in the near future. If it is a subsidiary of a public company using IFRS. If it wants to access international markets and have comparable financial reporting.
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Chapter 11
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-4B (a) and (b) 1.
Measurement criteria (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. 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 (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
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:
Solutions Manual .
18,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-4B (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 2014. 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 2014. No entry necessary.
7.
Revenue recognition criteria. Desktop will not transfer ownership of the merchandise until January 2014. Therefore the revenue has not been earned in 2013 and it would be inappropriate for the company to record any revenue in 2013. No entry is necessary in 2013.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-4B (Continued) 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.
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Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-5B (a) and (b) 1.
The entry violates the expense recognition criteria as cost of goods sold are not stated at cost. The cost basis is also violated concerning measurement of the merchandise inventory. Correcting entry required: Cost of Goods Sold .................................... Merchandise Inventory .......................
15,000 15,000
2. The sale should be recorded in the next year instead of the current year. Title to the inventory will not pass to the customer until next year. Therefore, the revenue recognition criteria would be violated if the sale is recorded in the current year. It should be noted that if the company is employing a perpetual inventory system in dollars and quantities, a debit to cost of goods sold and a credit to inventory are also necessary in the next year. Correcting entry required: Sales............................................................ Accounts Receivable .......................... Unearned Revenue .............................
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35,000 30,000 5,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-5B (Continued) (a) and (b) (Continued)
3. This entry violates the expense recognition criteria. Expenses are recognized when there is a decrease in an asset, in this case, prepaid insurance. The decrease in prepaid insurance will take place in the following year, as the insurance coverage is consumed. Correcting entry required: Prepaid Insurance ...................................... Insurance Expense .............................
24,000 24,000
4. The measurement criterion indicates that assets and liabilities are to be accounted for on the basis of cost. It should further be noted that the revenue recognition criteria provides the answer to when revenue (or a gain) should be recognized. Revenue should be recognized when it is earned. In this situation, an earnings process has definitely not taken place. Correcting entry required: Gain on Fair Value Adjustment of Equipment .......................................... Equipment ...........................................
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75,000 75,000
Chapter 11
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-5B (Continued) (a) and (b) (Continued)
5. This violates the expense recognition criteria. Expenses are recognized when there is a decrease in an asset or an increase in a liability. Since utilities were used in December, an expense and a liability have been incurred and need to be recognized. Correcting entry required: Utilities Expense......................................... Accounts Payable ...............................
4,200 4,200
Taking It Further: No. For the majority of items, an accrual can be made by estimating the amount involved. This is possible by examining the expenses for recent months, or looking at the expense from the previous year. In some cases, an estimate may not be possible, but this would be a very rare circumstance. Usually, utilities may not be a material amount and the financial statements would not be materially misstated by omitting the expense and liability.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-6B The revenue recognition criteria states that revenue cannot be recognized until it can be objectively measured. Since the production and sales effort is not substantially completed until the salmon matures and is sold, revenue cannot be measured and recognized until that point. Since no buyer is identified during the period of growth, Superior Salmon retains the risks and rewards of ownership until the fish are sold. Superior Salmon, as seller, has control over the goods and has continuing managerial involvement over the years of growth. In addition, collectability is not reasonably assured since the salmon are not sold, and no buyer is identified. Taking It Further: In accordance with the matching concept, the annual costs of feeding, monitoring and maintaining a healthy fish are unexpired costs because they have future revenue producing potential. They should be recorded on the balance sheet as inventory and recognized as part of the cost of goods sold in the same period that the revenue is recognized.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-7B Net sales to November 30, 2014 Add: Sales for December, 2014
$2,500,000 230,000 $2,730,000
Cost of goods sold to November 30, 2014 $1,500,000 Add: Cost of goods sold for Dec. 2014 138,000 $1,638,000 Warranty revenue to November 30, 2014 Add: Warranty services rendered Dec.
$15,000 10,000
$25,000
Service revenue to November 30, 2014 Add: Revenue for December, 2014 Less: Outstanding installation
$100,000 9,500 (1,200)
$108,300
Unearned revenue to November 30, 2014 Add: Collections for warranties Dec. 2014 Less: Warranty services rendered Dec.
$75,000 6,000 (10,000)
$71,000
Taking It Further: Sales commission expense should be accrued in the same period as the sale on which the commission is calculated. The fact that the commission is paid when the collection from the customer occurs does not change the need to match the expense to the revenue. The calculation of the amount of commission expense to be accrued at December 31, 2014 follows: Accounts receivable balance December 31, 2014 Less estimate of uncollectible receivables @ 2% Amount subject to 5% commission: Commission expense to accrue $186,200 × 5% =
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$190,000 3,800 $186,200 $ 9,310
Chapter 11
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-8B
(a)
I do not agree. For revenue to be recognized, collectability must be reasonably assured and all costs relating to the sale must be reliably measured. For this particular transaction, retailers can return the unsold vitamins up to March 31, 2014. Returns would reduce gross sales and accounts receivable. Vita X is a new product for the company and this form of promotion is new. This implies that Vitamins R Us does not have experience in determining the rate of return on this product or on the promotional extended right of return. Collectability may also be affected due to the extended payment terms provided to the retailers. Vitamins R Us does not have past experience to determine the increased risk from noncollection resulting from the extended payment terms. It is also not clear if the retailers have received the vitamins before December 31st since the goods were shipped during December on a FOB destination basis. This means that ownership is transferred when the retailers receive the product.
(b)
Revenue should be deferred until the right of return expires and payments are due on March 31, 2014.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-8B (Continued) Taking It Further: Yes. The same promotion on another product would give Vitamins R Us past experience to gauge the rate of return and collectability of outstanding receivables. Caution must be exercised however, when applying past experience. The same promotion used on another similar product may not yield the same results if other factors have changed. For example, due to changed economic conditions, sales of expensive vitamins to consumers may be significantly lower than in the past and affect the rate of return and collectability of receivables from retailers. Vitamins R Us needs to determine if historical rates of return apply to the current promotion. Another factor that might affect the business’ estimate for the rate of returns is the size and dollar value of the shipments. If Vitamins R Us concludes that it can reliably estimate the rate of return of the shipment of vitamins, it can record the revenue along with the accrual of estimated returns, when each shipment reaches its.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-9B
Year
Costs Incurred
2012 2013 2014 2015 Totals
$ 24,000,000 18,000,000 30,000,000 48,000,000 $120,000,000
Percentage Complete During Year 20% 15% 25% 40%
×
÷
$152,000,000 152,000,000 152,000,000 152,000,000
Year 2012 2013 2014 2015 Totals
$30,400,000 22,800,000 38,000,000 60,800,000 $152,000,000
.
=
Percentage Complete During Year
$120,000,000 120,000,000 120,000,000 120,000,000
Total Revenue
Revenue Recognized
Solutions Manual
Total Estimated Cost
–
=
Revenue Recognized $30,400,000 22,800,000 38,000,000 60,800,000 $152,000,000
Actual Cost Incurred $24,000,000 18,000,000 30,000,000 48,000,000 $120,000,000
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20% 15% 25% 40%
=
Gross Profit Recognized $6,400,000 4,800,000 8,000,000 12,800,000 $32,000,000
Chapter 11
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 11-9B (Continued) Taking It Further: The revenue recognition criteria require that costs relating to the sale of the goods be reliably measured. Since MacNeil in no longer able to rely on the original estimate of total costs for the construction project, it cannot use the percentage of completion method to recognize revenue for this contract.
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PROBLEM 11-10B
(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 Add: Unearned revenue from contract (1) Unearned warranty sales (2) Revised current liabilities
$65,000 22,000 10,000 $87,000
Net sales and consulting revenue
$650,000
Less: Reduce for unearned warranty sales (2) Less: Unearned Revenue (1)
(10,000)* (22,000)
Revised net sales and consulting revenue
$618,000
Total operating expenses Add: Advertising expense (4) Revised total operating expenses
$106,000 4,800 $110,800
* ($500 × 20)
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Accounting Principles, Sixth Canadian Edition
PROBLEM 11-10B (Continued) 1. The service contract extends for a twelve month period and so 11 months or $22,000 remains unearned at December 31, 2014 ($24,000 × 11 ÷ 12).
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PROBLEM 11-10B (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. 4. The promotional expense recorded as a prepaid expense must be expensed and there is no measurable future benefit realized as of December 31, 2014. Taking It Further: My review of the required revisions to Eugene Company’s financial statements lead 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 $ 87,000
=
0.58: 1
As a result of the required adjustments, Eugene’s current ratio is considerably worse as it has reduced by from the initial 1.38 to 0.58. Since the adjustments that were required are in the same direction (reducing profit, decreasing current assets, and increasing current liabilities), there appears to be a 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 used. Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (a)
1. Katy Paterson 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.
Katy Paterson is not accounting for purchase of baking supplies correctly. Since Katy has taken possession of the goods, she must recognize the liability for the purchase for the supplies based on the shipping terms of delivery.
3.
The bank should be informed of the standing order for 1,500 cinnamon buns every week. This type of order is large and is also indicative of a steady source of revenue and cash flows for the future.
4.
It is not clear if Katy does or doesn’t understand the consequences of her decision and if her goal in recording this revenue as earned on the income statement is to deceive the 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. The conclusion to be reached is that Katy is being dishonest if she knowingly applied this accounting treatment with the sole purpose of deceiving the bank.
(b) Revenue will be earned when the goods will be delivered. Correspondingly, Katy’s customers will have an obligation to pay Katy for the goods when they are delivered and no earlier.
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (c)
The purchase of baking supplies should be recorded based on the delivery terms of the shipment. Once Katy takes possession of the baking supplies, she should record the supplies and the corresponding accounts payable.
(d) Although the contractual arrangement with Coffee to Go is not a transaction that is reported on the financial statements, Katy could inform the bank of this order by showing some additional documentation concerning this order in her application for the loan.
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Accounting Principles, Sixth Canadian Edition
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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Accounting Principles, Sixth Canadian Edition
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 accounting information has increased 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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Accounting Principles, Sixth Canadian Edition
BYP 11-1 FINANCIAL REPORTING PROBLEM (a)
Reitmans (Canada) Limited reports its short-term investments in marketable securities at their fair value because this basis of measurement is required under IFRS followed by Reitmans and because this is a more relevant measure for these particular assets which are expected to be sold in the near future.
(b)
Revenue is recognized from the sale of merchandise when a customer purchases and takes delivery of the merchandise. Reported sales are net of returns and estimated possible returns and exclude sales taxes. Gift cards sold are recorded as deferred revenue and revenue is recognized when the gift cards are redeemed. An estimate is made of gift cards not expected to be redeemed based on the terms of the gift cards and historical redemption patterns. Loyalty points and awards granted under customer loyalty programs are recognized as a separate component of revenue, and are deferred at the date of initial sale. Revenue is recognized when the loyalty points and awards are redeemed and the Company has fulfilled its obligation. The amount of revenue deferred is measured based on the fair value of loyalty points and awards granted, taking into consideration the estimated redemption percentage. The policies on revenue recognition do seem reasonable given the nature of gift cards and loyalty point programs and are in conformity with the revenue recognition criteria set out in GAAP.
(c)
The disclosure provided in Note 23 on Credit Facility is required as a result of the full disclosure principle. The information provides relevant information to users of the financial statements concerning Reitmans’ ability to meet it short term liquidity and financing needs.
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Accounting Principles, Sixth Canadian Edition
BYP 11-1 (Continued) (d)
The auditors’ report adds credibility to Reitmans’ 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 Reitmans (Canada) Limited as at January 28, 2012, January 29, 2011 and January 31, 2010 and its financial performance and its cash flows for the years ended January 28, 2012, January 29, 2011 in accordance with International Financial Reporting Standards.”
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Accounting Principles, Sixth Canadian Edition
BYP 11-2 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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Accounting Principles, Sixth Canadian Edition
BYP 11-3 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, Sixth Canadian Edition
BYP 11-4 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 these inventory of fur coats should be reported in the financial statements of Junk Grrlz for the year ending September 30, 2014.
(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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Accounting Principles, Sixth Canadian Edition
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, 2014. The items should be reported as the lower of cost or 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, 2014. 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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BYP 11-5
Accounting Principles, Sixth Canadian Edition
ETHICS CASE
(a) The stakeholders in this situation are: Carol DesChenes, accountant. Vice-president, Finance of Grocery Online All readers and users of Grocery Online’s financial statements, including the company’s shareholders. (b) It is neither illegal nor professionally unethical to adopt a new accounting recommendation early, nor to delay its implementation until the required date. However, since the new recommendation results in a much fairer presentation of Grocery Online's financial condition, early adoption might be beneficial to the shareholders. (c) Carol appears to have little to gain except the satisfaction of issuing a set of financial statements that apparently result in a much fairer presentation of the company's financial condition and performance. Because it affects profit, the decision concerning the implementation date will primarily affect the shareholders. Managers whose remuneration is based on profit may be adversely affected by early implementation. Other parties with a financial interest in the company will also be affected, to a lesser extent.
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Accounting Principles, Sixth Canadian Edition
BYP 11-6 “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. (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. Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
CHAPTER 12 Accounting for Partnerships ASSIGNMENT CLASSIFICATION TABLE
Exercises
Problems Set A
Problems Set B
1
1
1, 6
1, 6
5, 6, 7
2, 3
2
2, 6, 12
2, 6, 12
3. Allocate and record profit or loss to partners.
8, 9, 10
4, 5, 6, 7, 8
3, 4, 5, 6
3, 4, 5, 6, 9, 12
3, 4, 5, 6, 9, 12
4. Prepare partnership financial statements.
11, 12, 13
9
5, 6
2, 3, 4, 5, 6, 12
2, 3, 4, 5, 6, 12
5. Account for the admission of a partner.
14, 15, 16
10, 11
7, 8
7, 9, 12
7, 9, 12
6. Account for withdrawal of a partner.
17, 18, 19
12, 13,
9, 10
8, 9, 12
8, 9, 12
7. Account for liquidation of a partnership.
20, 21, 22, 23
14, 15, 16
11, 12, 13, 14
10, 11
10, 11
Study Objectives
Questions
1. Describe the characteristics of the partnership form of business organization.
1, 2, 3, 4
2. Account for the formation of a partnership.
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Brief Exercises
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Chapter 12
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Discuss advantages and disadvantages of partnerships and partnership agreements.
Simple
10-15
2A
Record formation of partnership and prepare balance sheet.
Simple
30-40
3A
Calculate and record division of profit. Prepare statement of partners’ equity.
Moderate
30-40
4A
Calculate division of profit or loss. Prepare income statement, statement of partners’ equity, and closing entries.
Moderate
25-35
5A
Prepare financial statements and closing entries.
Moderate
30-40
6A
Moderate
30-40
7A
Prepare entries to form a partnership, allocate profit, and close temporary account; prepare financial statements. Record admission of partner.
Moderate
20-20
8A
Record withdrawal of partner.
Moderate
20-20
9A
Record withdrawal and admission of partner; allocate profit.
Complex
25-35
10A
Prepare and post entries for partnership liquidation.
Moderate
20-30
11A
Record liquidation of partnership.
Moderate
30-40
12A
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 partnership agreements. Record formation of partnership and prepare balance sheet.
Complex
40-50
Simple
10-15
Simple
30-40
3B
Calculate and record division of profit. Prepare statement of partners’ equity.
Moderate
4B
Calculate division of profit or loss. Prepare income statement, statement of partners’ equity, and closing entries.
Moderate
1B 2B
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Chapter 12
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
5B
Prepare financial statements and closing entries.
Moderate
30-40
6B
Moderate
30-40
7B
Prepare entries to form a partnership, allocate profit, and close temporary account; prepare financial statements. Record admission of partner.
Moderate
20-20
8B
Record withdrawal of partner.
Moderate
20-30
9B
Record withdrawal and admission of partner; allocate profit.
Moderate
25-35
10B
Prepare and post entries for partnership liquidation.
Moderate
20-30
11B
Record liquidation of partnership.
Moderate
25-35
12B
Account for the formation of a partnership, allocation of profits, and admission and withdrawal of partners; prepare partial balance sheet.
Complex
40-50
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Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material. Study Objective 1. Describe the characteristics of the partnership form of business organization. 2. Account for the formation of a partnership.
Knowledge Q12-3 Q12-4 BE12-1
Comprehension Q12-1 Q12-2 P12-1A P12-1B
Q12-5 Q12-6 Q12-7
Application P12-6A P12-6B
BE12-2 BE12-3 E12-2 P12-2A P12-6A
P12-12A P12-2B P12-6B P12-12B
3.
Allocate and record profit or loss to partners.
Q12-8 Q12-9 Q12-10
BE12-4 BE12-5 BE12-6 BE12-7 BE12-8 E12-3 E12-4 E12-5 E12-6
4.
Prepare partnership financial statements.
Q12-11 Q12-12 Q12-13
BE12-9 E12-5 E12-6 P12-2A P12-3A P12-4A P12-5A
5.
Account for the admission of a partner.
Q12-15 Q12-16
Q12-14 BE12-10 BE12-11 E12-7 E12-8 P12-7A
P12-3A P12-4A P12-5A P12-6A P12-9A P12-12A P12-3B P12-4B P12-9B P12-12B P12-6A P12-12A P12-2B P12-3B P12-4B P12-5B P12-6B P12-12B P12-9A P12-12A P12-6B P12-7B P12-9B P12-12B
6.
Account for the withdrawal of a partner.
Q12-17 Q12-18 Q12-19
BE12-12 BE12-13 E12-9 E12-10 P12-8A
P12-9A P12-12A P12-8B P12-9B P12-12B
7.
Account for the liquidation of a partnership.
Q12-21
Q12-20 Q12-22 Q12-23
BE12-14 BE12-15 BE12-16 E12-11 E12-12 E12-13
E12-14 P12-10A P12-11A P12-10B P12-11B
BPY12-2
BYP12-1
BYP12-3 BYP12-6 Continuing Cookie Chronicle
Broadening Your Perspective
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Analysis E12-1
Synthesis Evaluation
BYP12-4
BYP12-5
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Accounting Principles, Sixth Canadian Edition
ANSWERS TO QUESTIONS 1.
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.
2.
Each partner is jointly and severally liable for all partnership liabilities. Harjinder 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, Harjinder has more assets to lose than his partner Gurprinder, who is less cautious about handing expenses.
3.
Other forms of partnership organization include limited partnerships and limited liability partnerships. In a limited partnership, one or more of the partners have unlimited liability. This type of partner is called a general partner. General partners are normally actively involved in the business. One or more other partners, called limited partners, have liability that is limited to the amount of capital they have contributed to the partnership. Normally, limited partners contribute assets to the business but are not actively involved in it. Limited liability partnerships are designed to protect innocent partners from actions of the other partners that result in lawsuits against the partnership. Partners have unlimited liability for their own negligence but limited liability for negligence of the other partners.
4.
(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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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 5.
(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.
6.
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.
7.
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.
8.
Hark and Green should not wait to see who has worked the hardest before agreeing on how to share the profit of their partnership. Although this allows for the flexibility of using hindsight in applying some sort of salary allowance formula in their profit allocation, it also has the disadvantage of allowing a dispute to happen in the future, at which time there will be no opportunity to rectify the agreement on profit allocation.
9.
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 he puts forth for the business.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 10. 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. 11. The statement of partner’s 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. 12. 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. 13. 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. 14. 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. 15. 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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 16. 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. 17. (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.
18. 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. 19. The purpose of obtaining life insurance is to ensure that the partnership has sufficient funds to settle with the deceased partner’s estate and to spend money recruiting and attracting another partner as a replacement. 20. Liquidation of a partnership ends both the legal and economic life of the organization. In the dissolution of a partnership, the economic life of the organization continues. 21. The steps to liquidate a partnership are: (1) (2) (3) (4)
Solutions Manual .
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.
12-8
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 22. 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. 23. No, Joe is not correct. All gains and losses on liquidation should be allocated to the partners on the basis of their profit and loss sharing ratio. However, final cash distributions should be based on their capital balances.
Solutions Manual .
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Chapter 12
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Accounting Principles, Sixth 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 July 1
1
Solutions Manual .
Cash .................................................... 10,000 Equipment .......................................... 4,000 R. Black, Capital ............................ Accounts Receivable ......................... 2,400 Cash .................................................... 12,000* Allowance for Doubtful Accounts B. Rivers, Capital ........................... *[$14,000 – ($2,000 – $400) = $12,000
12-10
14,000
400 14,000
Chapter 12
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-3 BLACK RIVER PARTNERSHIP Balance Sheet (partial) July 1, 2014 (a) Assets Current assets Cash.............................................................................. $22,000 Accounts receivable ....................................... $2,400 Less: Allowance for doubtful accounts ....... 400 2,000 Total current assets ...................................... 24,000 Property, plant, and equipment Equipment .................................................................... 4,000 Total assets .................................................................. $28,000 (b) Partners’ Equity R. Black, capital ........................................................... $14,000 B. Rivers, capital ........................................................... 14,000 Total partners’ equity .................................................. $28,000
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%
4/9 & 3/9 & 2/9
44.45% & 33.33% & 22.22%
¼&½&¼
25% & 50% & 25%
(d)
4:3:2
(e)
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1:2:1
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-5 (a) A. Scrimger D. Woods (b)
$84,000 × 37.5% = $31,500 $84,000 × 62.5% = $52,500
Income Summary ........................................ 84,000 A. Scrimger, Capital................................ D. Woods, Capital ...................................
31,500 52,500
A. Scrimger, Capital .................................... 35,000 D. Woods, Capital ........................................ 35,000 A. Scrimger, Drawings ........................... D. Woods, Drawings ...............................
35,000 35,000
BRIEF EXERCISE 12-6 MET CO. Division of Profit M. TungJ. Moses T. Eaton Ching Profit ..................................... Salary allowance J. Moses ........................... $24,000 T. Eaton ........................... $30,000 M. Tung-Ching.................. Total ............................. Profit remaining for allocation Fixed ratio 5,500 J. Moses ($11,000 × 50%) T. Eaton ($11,000 × 30%) . 3,300 M. Tung-Ching ($11,000 × 20%) Total ............................. Profit remaining for allocation Profit allocated to partners.. $29,500 $33,300
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12-12
Total $70,000
$5,000 59,000 11,000
2,200 11,000 $ 0 $7,200 $70,000
Chapter 12
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-7 THE MILLSTONE PARTNERSHIP Division of Profit Year Ended February 28, 2014 H. Mills
S. Stone
Total $60,000
Profit................................................. Salary allowance H. Mills .......................................... $45,000 S. Stone ....................................... $25,000 Total ........................................ 70,000 Profit (deficiency) remaining for allocation ............. (10,000) Interest allowance H. Mills ($72,000 × 5%)................ 3,600 S. Stone ($47,000 × 5%) .............. 2,350 Total ........................................ 5,950 Profit (deficiency) remaining for allocation ............. (15,950) Fixed ratio H. Mills [$(15,950) × 50%] ................ (7,975) S. Stone [$(15,950) × 50%].......... (7,975) Total ........................................ (15,950) Profit (deficiency) remaining for allocation ............. $ 0 Profit allocated to the partners....... $40,625 $19,375 $60,000
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Chapter 12
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-8 (a) TOGNAZZINI COMPANY Division of Profit – Oct. 31, 2014 Tognazzini Total Lilia Terry Loss.................................................. $(15,000) Salary allowance L. Tognazzini ................................ $25,000 T. Tognazzini ............................... $16,000 41,000 Total ........................................ (56,000) Deficiency remaining for allocation Interest allowance L. Tognazzini ............................... 5,000 T. Tognazzini ............................... 9,000 14,000 Total ........................................ (70,000) Deficiency remaining for allocation Fixed ratio L. Tognazzini [$(70,000) × 75%] . (52,500) T. Tognazzini [$(70,000) × 25%] . (17,500) (70,000) Total ........................................ Loss remaining for allocation ........ $ 0 Loss allocated to the partners........ $(22,500) $7,500 $(15,000)
(b)
A. Scrimger, Capital ..................................... 22,500 D. Woods, Capital........................................ Income Summary....................................
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12-14
7,500 15,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-9 (a) DRS. JARRATT AND BRAMSTRUP Income Statement Year Ended April 30, 2014 Service revenue ................................................................ $375,000 Operating expenses ......................................................... 145,000 Profit .................................................................................. $230,000 (b) DRS. JARRATT AND BRAMSTRUP Statement of Partners’ Equity Year Ended April 30, 2014
Capital, May 1, 2013 .................... Add: Profit.................................... Less: Drawings............................ Capital, April 30, 2014 .................
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12-15
W. M. Jarratt Bramstrup Total $ 35,000 $ 50,000 $ 85,000 115,000 115,000 230,000 150,000 165,000 315,000 125,000 120,000 245,000 $ 25,000 $ 45,000 $ 70,000
Chapter 12
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-9 (Continued) DRS. JARRATT AND BRAMSTRUP Balance Sheet April 30, 2014
Assets Current assets Cash................................................................ Property, plant, and equipment Equipment ...................................................... $75,000 Less: Accumulated depreciation .................. 15,000 Total assets ........................................................
$35,000
60,000 $95,000
Liabilities and Partners’ Equity Current liabilities Accounts payable .......................................... Partners’ equity W. Jarratt, capital ........................................... $25,000 M. Bramstrup, capital .................................... 45,000 Total liabilities and partners’ equity .................
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12-16
$25,000
70,000 $95,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-10 (a) June 9 K. Carter, Capital .............................. 18,000 D. Dutton, Capital ........................ ($36,000 × ½ = $18,000)
18,000
(b) June 9 A. Ali, Capital .................................... 15,000 D. Dutton, Capital ........................ ($30,000 × ½ = $15,000)
15,000
BRIEF EXERCISE 12-11 (a) Investment of $40,000 Oct. 1 Cash .................................................... 40,000 J. Edie, Capital (62.5% × $8,000*) ........ 5,000 K. Zane, Capital (37.5% × $8,000*) ....... 3,000 J. Kerns, Capital (40% × $120,000)
48,000
* [($40,000 + $48,000 + $32,000) × 40%] – $40,000 = $8,000 (b) Investment of $60,000 Oct. 1 Cash .................................................... 60,000 J. Edie, Capital (62.5% × $4,000*) K. Zane, Capital (37.5% × $4,000*) J. Kerns, Capital (40% × $140,000)
2,500 1,500 56,000
* [($60,000 + $48,000 + $32,000) × 40%] – $60,000 = $(4,000)
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-12 (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. (c) Dec. 31
T. Morden, Capital .......................... 25,000 R. Neepawa, Capital ................
25,000
BRIEF EXERCISE 12-13 (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
Solutions Manual .
T. Morden, Capital .......................... 25,000 R. Neepawa, Capital (62.5% × $5,000) S. Altona, Capital (37.5% × $5,000) Cash .........................................
12-18
3,125 1,875 20,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-14 (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
Solutions Manual .
D. Dupuis, Capital ($12,000 + $1,000) 13,000 V. Dueck, Capital ($10,000 + $1,000) . 11,000 4,000 B. Veitch, Capital ($3,000 + $1,000) ... Cash ($8,000 + $20,000).................
28,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-15 (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 2,000 B. Veitch, Capital ($3,000 – $1,000) ... Cash ($8,000 + $14,000).................
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22,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 12-16 (a) (1) Apr. 30 Cash .................................................. 4,000 G. Lodge, Capital ...................... (2)
4,000
30 L. McDonald, Capital ...................... 20,000 A. Norin, Capital ............................. 24,000 Cash ($40,000 + $4,000) ............
44,000
(1) Apr. 30 L. McDonald, Capital ($4,000 × 3/5)................................ 2,400 A. Norin, Capital ($4,000 × 2/5)................................ 1,600 G. Lodge, Capital ......................
4,000
(b)
(2)
Solutions Manual .
30 L. McDonald, Capital ($20,000 – $2,400) ...................... 17,600 A. Norin, Capital ($24,000 – $1,600) ...................... 22,400 Cash ...........................................
40,000
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Accounting Principles, Sixth 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, Sixth Canadian Edition
EXERCISE 12-2 (a) Jan. 1
Jan. 1
Cash......................................................... 10,000 Equipment ............................................... 6,000 Hollis Sourman, Capital .....................
16,000
Cash......................................................... 7,000 Accounts Receivable.............................. 6,500 Allowance for Doubtful Accounts ..... Heidi Sweetgrass, Capital..................
1,500 12,000
(b) SOUR AND SWEET PARTNERSHIP Balance Sheet (partial) January 1, 2014
Assets Current assets Cash................................................................ $17,000 Accounts Receivable ....................................... $6,500 Less Allowance for doubtful accounts ........ 1,500 5,000 Total current assets .................................. 22,000 Property, plant, and equipment Equipment ...................................................... 6,000 Total assets ............................................... $28,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-3 (a) (1) HUMA AND HOW Division of Profit Year Ended June 30, 2015 R. Huma Profit................................................. Salary allowance R. Huma ....................................... $30,000 W. How ....................................... Total ........................................ Profit remaining for allocation ....... Interest allowance R. Huma ($60,000 × 5%).............. 3,000 W. How ($55,000 × 5%) ............... Total ........................................ Profit remaining for allocation ....... Fixed ratio R. Huma ($12,250 × 60%)............ 7,350 W. How ($12,250 × 40%) ............. Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $40,350
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12-24
W. How
Total $70,000
$22,000 52,000 18,000
2,750 5,750 12,250
4,900 12,250 $ 0 $29,650 $70,000
Chapter 12
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-3 (Continued) (a) (Continued) (2) HUMA AND HOW Division of Profit Year Ended June 30, 2015 R. Huma Profit................................................. Salary allowance R. Huma ....................................... $30,000 W. How ....................................... Total ........................................ Profit remaining for allocation ....... Interest allowance R. Huma ($60,000 × 5%).............. 3,000 W. How ($50,000 × 5%) ............... Total ........................................ Profit (deficiency) remaining for allocation ............ Fixed ratio R. Huma ($2,750 × 60%).............. (1,650) W. How ($2,750 × 40%) ............... Total ........................................ Profit remaining for allocation ....... Profit allocated to the partners....... $31,350
W. How
Total $55,000
$22,000 52,000 3,000
2,750 5,750 (2,750)
(1,100) (2,750) $ 0 $23,650 $55,000
(b) (1) June 30 Income Summary ........................... 70,000 R. Huma, Capital ....................... W. How, Capital .........................
40,350 29,650
(2) June 30 Income Summary ........................... 55,000 R. Huma, Capital ....................... W. How, Capital .........................
31,350 23,650
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EXERCISE 12-4 (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 ................................
15,000
(c) Had there not been a partnership agreement in place to outline how the profit and loss would be allocated to each partner, any profit or loss would be shared equally.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-5 (a) COPPERFIELD DEVELOPMENTS Statement of Partners’ Equity Year Ended December 31, 2014
Capital, January 1........................ Add: Investment .......................... Profit............................................. Less: Drawings............................ Capital, December 31 ..................
A. E. Total Rodriguez Carrieri $61,000 $79,000 $140,000 4,000 4,000 33,000 * 44,000 ** 77,000 94,000 127,000 221,000 32,000 55,000 87,000 $62,000 $72,000 $134,000
* $77,000 × 3/7 = $33,000 ** $77,000 × 4/7 = $44,000 (b) COPPERFIELD DEVELOPMENTS Balance Sheet (partial) December 31, 2014
Partners' equity Alvaro Rodriguez, capital ............................................... $62,000 Elisabetta Carrieri, capital ............................................ 72,000 Total partners' equity ........................................................ $134,000 (c)
Income Summary ........................................ 77,000 A. Rodriguez, Capital.............................. E. Carrieri, Capital ..................................
33,000 44,000
A. Rodriguez, Capital .................................. 32,000 E. Carrieri, Capital ....................................... 55,000 A. Rodriguez, Drawings ......................... E. Carrieri, Drawings ..............................
32,000 55,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-6 (a) DRS. KOVACIK AND DONOVAN Income Statement Year Ended November 30, 2014 Fees earned ...................................................................... $422,000 Expenses Salaries expense......................................... $ 78,500 Operating expenses ...................................... 81,500 Interest expense ........................................... 5,000 165,000 Profit .................................................................................. $257,000
DRS. KOVACIK AND DONOVAN Statement of Partners’ Equity Year Ended November 30, 2014
Capital, December 1, 2013 .......... Add: Profit.................................... Less: Drawings............................ Capital, November 30, 2014 ........
J. S. Kovacik Donovan Total $ 58,000 $ 32,000 $ 90,000 154,200* 102,800 257,000 212,200 134,800 347,000 140,000 90,000 230,000 $ 72,200 $ 44,800 $117,000
* $257,000 × 60% = $154,200
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-6 (Continued) (a) (Continued) DRS. KOVACIK AND DONOVAN Balance Sheet November 30, 2014
Assets Current assets Cash............................................................. Supplies....................................................... Total current assets ............................... Property, plant, and equipment Equipment .................................................... $175,500 Less: Accumulated depreciation ............... 41,250 Total assets ............................................
$32,000 15,750 47,750
134,250 $182,000
Liabilities and Partners’ Equity Current liabilities Accounts payable ....................................... Long-term liabilities Note payable, due 2018 .............................. Total liabilities ........................................ Partners’ equity J. Kovacik, capital .......................................... $72,200 S. Donovan, capital..................................... 44,800 Total liabilities and partners’ equity .....
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12-29
$15,000 50,000 65,000
117,000 $182,000
Chapter 12
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-6 (Continued) (b) Closing entries dated November 30, 2014 Fees Earned ................................................... 422,000 Income Summary.................................... 422,000 Income Summary ........................................... 165,000 Salaries Expense .................................... Operating Expenses ............................... Interest Expense.....................................
78,500 81,500 5,000
Income Summary ........................................... 257,000 J. Kovacik, Capital .................................. 154,200 S. Donovan, Capital ................................ 102,800 J. Kovacik, Capital ......................................... 140,000 J. Kovacik, Drawings .............................. 140,000 S. Donovan, Capital ......................................... 90,000 S. Donovan, Drawings ...........................
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90,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-7 (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 .............
21,000
18,750
(3) Sept. 1 Cash ....................................... 25,000 S. Weiss, Capital ............. 25,000 [($25,000 + $42,000 + $33,000) × 25%] = $25,000 (b) Alternative 1 Beginning balance S. Weiss admission Ending balance Alternative 2 Beginning balance S. Weiss admission Ending balance Alternative 3 Beginning balance S. Weiss admission Ending balance
Solutions Manual .
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
A. Veveris J. Rubenis Capital Capital $ 42,000 $ 33,000
S. Weiss Capital
$ 42,000
$ 33,000
12-31
$ 21,000 $ 21,000
$ 18,750 $ 18,750
$ 25,000 $ 25,000
Total Capital $ 75,000 $ 75,000 Total Capital $ 75,000 $ 75,000 Total Capital $ 75,000 25,000 $100,000
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EXERCISE 12-8 (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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EXERCISE 12-8 (Continued) (b) Alternative 1 Beginning balance I. Xanthos admission Ending balance
Alternative 2 Beginning balance I. Xanthos admission Ending balance
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
Total Capital $160,000 65,000 $225,000
Total Capital $160,000 95,000 $255,000
(c) Total capital of existing partnership .......................... $160,000 Divide by 66 2/3% for combined partnership capital $240,000 I. Xanthos’ required investment for 33 1/3% interest: $240,000 - $160,000 = $80,000 Alternately: Total capital of existing partnership ....................... Investment by new partner, I. Xanthos ................... Total capital of new partnership..............................
$160,000 80,000 $240,000
I. Xanthos’ capital credit (33 1/3% × $240,000) .......
$80,000
The amount of cash to be paid is therefore ...........
$80,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-9 (a) 1. Dec. 31 A. Noll, Capital ............................... 30,000 J. Lane, Capital.......................... S. Miles, Capital......................... 2.
3.
4.
15,000 15,000
Dec. 31 A. Noll, Capital ............................... 30,000 S. Miles, Capital.........................
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 4 Beginning balance A. Noll withdrawal Ending balance
Solutions Manual .
J. Lane Capital $ 50,000 15,000 $ 65,000
S. Miles Capital $ 40,000 15,000 $ 55,000
A. Noll Capital $ 30,000 (30,000) 0
Total Capital $120,000
J. Lane Capital $ 50,000 (3,125) $ 46,875
S. Miles Capital $ 40,000 (1,875) $ 38,125
A. Noll Capital $ 30,000 (30,000) 0
Total Capital $120,000 (35,000) $ 85,000
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$120,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-10 (a) 1. Sept. 30 K. White, Capital ............................ 73,000 D. Nagel, Capital .............................. 8,000 I. Mbango, Capital ............................ 4,000 Cash ...........................................
85,000
Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to retiring partner .........................................
$73,000 85,000 $12,000
Allocation of bonus: D. Nagel, Capital ($12,000 × 4/6) ................... $8,000 I. Mbango, Capital ($12,000 × 2/6) ................. 4,000
$12,000
Sept. 30 K. White, Capital ............................ 73,000 D. Nagel, Capital........................ I. Mbango, Capital ..................... Cash ...........................................
3,333 1,667 68,000
Capital balance of withdrawing partner .................. Payment to withdrawing partner ............................. Bonus to remaining partners...................................
$73,000 68,000 $ 5,000
Allocation of bonus: D. Nagel, Capital ($5,000 × 4/6) ........................$3,333 I. Mbango, Capital ($5,000 × 2/6) ..................... 1,667
$5,000
Sept. 30 K. White, Capital ............................ 73,000 E. Wolstenholme, Capital .........
73,000
2.
3.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-10 (Continued) (b) Condition 2 Beginning balance K. White withdrawal Ending balance
Condition 3 Beginning balance K. White withdrawal Ending balance
Solutions Manual .
D. Nagel Capital $95,000 3,333 $ 98,333
D. Nagel Capital $95,000 $95,000
K. White Capital $73,000 (73,000) -
K. White Capital $73,000 (73,000) -
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I. Mbango Capital $65,000 1,667 $66,667
I. Mbango Capital $65,000 $65,000
Total Capital $233,000 (68,000) $165,000 E. Wolstenholme Capital $ 73,000 $ 73,000
Total Capital $233,000 $233,000
Chapter 12
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-11 (a)
Partners' Capital Cash
Windl
Houghton Pesowski
Capital
Capital
Capital
Total Capital
$34,500
$51,750
$172,500
(34,500) $ 0
(51,750) (172,500) $ 0 $ 0
Balance before liquidation $172,500 $86,250 Final (172,500) (86,250) liquidation Final balances $ 0 $ 0
(b)
Partners' Capital Cash
Windl
Houghton Pesowski
Capital
Capital
Capital
Total Capital
Balance before liquidation $172,500 $ 86,250 $34,500 $51,750 $172,500 Sale of assets share of loss (33,000) (11,000) (11,000) (11,000) (33,000) Balance 139,500 75,250 23,500 40,750 139,500 Final (139,500) (75,250) (23,500) (40,750) (139,500) liquidation Final balances $ 0 $ 0 $ 0 $ 0 $ 0
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-12 Summary (a), (b) and (c)
Account balances prior to liquidation Sale of assets and share of gain Balances Payment of liabilities Balances Distribution of cash to partners Final balances
Cash
BAYLEE COMPANY Liquidation Schedule December 31 Assets = Liabilities + Partners' Capital Acc. Depr. H. Bayer J. Leech Total Equipment Equipment Capital Capital Capital
$40,000
$ 130,000
$ (40,000)
100,000 140,000
(130,000) 0
(55,000) 85,000 (85,000) $ 0
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
0
(50,000) $ 0
0
$
(35,000) (85,000) $ 0 $ 0
(a) Gain of $10,000 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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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-13 (a) Dec. 31
Accumulated Depreciation ......... 40,000 Cash ............................................. 100,000 Equipment ............................... Gain on Realization.................
(b) Dec. 31 Gain on Realization ..................... H. Bayer, Capital ($10,000 × 50%) ....................... J. Leech, Capital ($10,000 × 50%) ....................... (c) Dec. 31 (d) Dec. 31
Solutions Manual .
130,000 10,000
10,000 5,000 5,000
Liabilities...................................... 55,000 Cash .........................................
55,000
H. Bayer, Capital .......................... 55,000 J. Leech, Capital .......................... 35,000 Cash .........................................
85,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-14
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
$15,000
$ 120,000
84,000 99,000
LOL PARTNERSHIP Liquidation Schedule December 31 = Liabilities + Partners' Capital O. Low A. Olson S. Lokum Total Capital Capital Capital Capital $20,000
$ 45,000
$ 60,000
$10,000
$115,000
(120,000) 0
20,000
(12,000) 33,000
(12,000) 48,000
(12,000) (2,000)
(36,000) 79,000
0
(20,000) 0
33,000
48,000
(2,000)
79,000
2,000 0
2,000 81,000
0
(81,000) $ 0
(20,000) 79,000 2,000 81,000 (81,000) $ 0 $
0
0 $
0
33,000
48,000
0
(33,000) $ 0
(48,000) $ 0 $
_ Solutions Manual
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Accounting Principles, Sixth Canadian Edition
EXERCISE 12-14 (Continued) (a) Proceeds from the sale of noncash assets Book value of noncash assets Loss on sale of noncash assets
$84,000 120,000 $36,000
Cash balance after paying the liabilities Refer to Liquidation Schedule above
$79,000
(b) Refer to Liquidation Schedule above (c) Dec. 31 Cash ............................................... S. Lokum, Capital ......................
2,000
31 O. Low, Capital............................... A. Olson, Capital............................ Cash ...........................................
33,000 48,000
(d) Dec. 31 O. Low, Capital ($2,000 × 50%) ..... A. Olson, Capital ($2,000 × 50%)... S. Lokum, Capital ......................
1,000 1,000
2,000
81,000
2,000
31 O. Low, Capital ($33,000 – $1,000) 32,000 A. Olson, Capital ($48,000 – $1,000) 47,000 79,000 Cash ...........................................
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 12-1A (a) Advantages of forming a partnership instead of a corporation include: i. A partnership is easily formed and less expensive to establish than a corporation. ii. A partnership is controlled by fewer government regulations and restrictions than a corporation is. iii. Decisions can be made quickly on important matters that affect the firm. Disadvantages of forming a partnership instead of a corporation include: i. Mutual agency provides for the risk of the actions taken by any of the partners that affects all partners. The action of any partner is binding on all other partners. ii. Limited life since the ownership of the business is not easily transferred by the sale of shares as is the case for corporations. iii. Unlimited liability in general partnerships. Each partner is jointly and severally (individually) liable for all partnership liabilities.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 12-1A (Continued) (b) The partnership agreement should specify the main location of the firm, the purpose of the business, and the date of inception. In addition, relationships among the partners must be specified, such as: 1. The names and capital contributions of partners 2. The rights and duties of partners 3. The basis for sharing profit or loss 4. Provisions for a withdrawal of assets 5. Procedures for submitting disputes to arbitration 6. Procedures for the withdrawal, or addition, of a partner 7. The rights and duties of surviving partners if a partner dies 8. Procedures for the liquidation of the partnership 9. The process used to solve ethical and legal problems Taking It Further: In order to reduce the effects of mutual agency, many large partnerships elect from among the partners, individuals who will be assigned the authority to make major purchases, incur debt, sign leases, and so on. The duties and responsibilities assigned to such a managing partner would be similar to those assigned to the chief executive officer or president of a corporation.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 12-2A (a) Jan.
(b) Jan.
Solutions Manual .
1 Cash .................................................. 9,000 Accounts Receivable ..................... 13,500 Merchandise Inventory .................. 14,000 Equipment ...................................... 18,000 Allowance for Doubtful Accounts Accounts Payable ................... I. Domic, Capital ......................
4,500 11,000 39,000
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
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PROBLEM 12-2A (Continued) (c) DOMIC DASILVA PARTNERSHIP Balance Sheet January 1, 2014
Assets Current assets Cash ($9,000 + $10,000 + $14,000) ............................. Accounts receivable ($13,500 + $24,000) ..... $37,500 Less: Allowance for doubtful accounts ($4,500 + $3,000) .................................. 7,500 Merchandise inventory ($14,000 + $13,000) .............. Total current assets ...............................................
$ 33,000 30,000 27,000 90,000
Property, plant, and equipment Equipment ($18,000 + $15,000) .................................... 33,000 Total assets .............................................................. $123,000 Liabilities and Partners' Equity Current liabilities Accounts payable ($11,000 + $34,000).......................... 45,000 Total current liabilities .............................................. 45,000 Partners' equity I. Domic, capital .......................................................... 39,000 P. Dasilva, capital ($25,000 + $14,000) ...................... 39,000 Total partners' equity ............................................. 78,000 Total liabilities and partners' equity............................... $123,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 12-2A (Continued) 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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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
CNW COMPANY Division of Profit Year Ended December 31, 2014 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 ($20,000 × 1/3) ........... 6,667 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
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Accounting Principles, Sixth 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
CNW COMPANY Division of Profit Year Ended December 31, 2014 J. Chapman -Brown C. Duperé H. Weir Profit............................... Interest allowance J. Chapman-Brown ($30,000 × 5%) ........... $1,500 C. Duperé ($40,000 × 5%) $2,000 H. Weir ($50,000 × 5%) $2,500 Total ...................... Profit remaining for allocation ............. Salary allowance J. Chapman-Brown ... 15,000 C. Duperé .................. 20,000 H. Weir ....................... 18,000 Total ...................... Profit (deficiency) remaining for allocation Fixed ratio (remainder shared equally) Chapman-Brown [$(19,000) × 5/10] ....... (9,500) Duperé [$(19,000) × 3/10] (5,700) H. Weir [$(19,000) × 2/10] (3,800) Total ...................... Profit remaining for allocation ............. _ _ _ Profit allocated to the partners ........... $7,000 $16,300 $16,700 Solutions Manual .
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Total $40,000
6,000 34,000
53,000 (19,000)
(19,000) 0 $40,000 Chapter 12
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Accounting Principles, Sixth Canadian Edition
PROBLEM 12-3A (Continued) (b) Dec. 31 J. Chapman-Brown, Capital .......... 10,000 C. Duperé, Capital .......................... 8,000 H. Weir, Capital .............................. 6,000 J. Chapman-Brown, Drawings.. C. Duperé, Drawings ................. H. Weir, Drawings......................
10,000 8,000 6,000
(c) CNW COMPANY Statement of Partners’ Equity Year Ended December 31, 2014
J. ChapmanBrown C. Duperé Capital, January 1 $30,000 $40,000 Add: Profit 7,000 16,300 37,000 56,300 Less: Drawings 10,000 8,000 Capital, December 31 $27,000 $48,300
H. Weir Total $50,000 $120,000 16,700 40,000 66,700 160,000 6,000 24,000 $60,700 $136,000
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, Sixth Canadian Edition
PROBLEM 12-4A (a) STOREY ROGERS PARTNERSHIP Income Statement Year Ended December 31, 2014 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, 2014 V. Storey G. Rogers Loss................................................ Salary allowance ........................... V. Storey ........................................$30,000 G. Rogers .................................. Total ...................................... Deficiency remaining for allocation Interest allowance V. Storey ($80,000 × 4%)........... 3,200 G. Rogers ($100,000 × 4%) ....... Total ...................................... Deficiency remaining for allocation Fixed ratio V. Storey [$(117,200) × 2/5].......... (46,880) G. Rogers [$(117,200) × 3/5] ..... Total ...................................... Loss remaining for allocation .......... Loss allocated to the partners...... $(13,680)
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Total $(40,000)
$40,000 70,000 (110,000)
4,000 7,200 (117,200)
(70,320) (117,200) 0 $(26,320) $(40,000)
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Accounting Principles, Sixth Canadian Edition
PROBLEM 12-4A (Continued) (c) STOREY ROGERS PARTNERSHIP Statement of Partners’ Equity Year Ended December 31, 2014 G. Rogers $100,000 32,000 26,320 58,320 $ 41,680
Total $180,000 56,000 40,000 96,000 $ 84,000
(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
Capital, January 1................... Less: Drawings...................... Loss ............................. Capital, December 31 .............
31
31
Solutions Manual .
V. Storey $ 80,000 24,000 13,680 37,680 $ 42,320
V. Storey, Capital .......................... 13,680 G. Rogers, Capital.......................... 26,320 Income Summary ......................
40,000
V. Storey, Capital ........................... 24,000 G. Rogers, Capital.......................... 32,000 V. Storey, Drawings................... G. Rogers, Drawings .................
24,000 32,000
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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 in the immediate subsequent year.
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PROBLEM 12-5A (a) KANT-ADDER PARTNERSHIP Income Statement Year Ended March 31, 2014
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, 2014 U. Adder Capital, April 1 ........................... $30,000 Add: Investment ........................ 0 Profit* ................................ 80,667 110,667 Less: Drawings.......................... 60,000 Capital, March 31....................... $ 50,667 * U. Adder: I. Kant:
Solutions Manual .
I. Kant $ 25,000 5,000 40,333 70,333 90,000 $(19,667)
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, 2014
Assets Current assets Cash............................................................................. $ 14,000 Accounts receivable ................................................... 61,000 Supplies....................................................................... 1,500 Total current assets ............................................... 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 note payable ..................................... 1,500 Total current liabilities ........................................... 27,000 Long-term liabilities Note payable, net of current portion .............................. 48,500 Total liabilities ........................................................... 75,500 Partners' equity U. Adder, capital ......................................................... 50,667 I. Kant, capital deficiency ........................................... (19,667) Total partners' equity ............................................. 31,000 Total liabilities and partners' equity............................... $106,500
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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 U. Adder, Capital ....................... I. Kant, 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 larger than the capital balances in the case of I. Kant. The amount of the drawings taken by individual partners can be any amount that the partners agree to, but a deficit position in any capital account, should only occur on the approval of all partners. Creditors generally would not like to see any of the partners’ capital accounts in a deficit position, and a deficit may lead to difficulties in obtaining credit, especially since the note payable is already quite high.
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PROBLEM 12-6A (a) Jan. 1
Cash ........................................................... 2,000 Equipment ................................................. 2,000 T. Gilligan, Capital..............................
4,000
Cash ........................................................... 1,000 Vehicles ................................................... 10,000 M. Melnyk, Capital ..............................
11,000
(b) Dec. 31 T. Gilligan, Drawings............................... 20,000 M. Melnyk, Drawings ............................... 10,000 Salaries Expense................................
30,000
Jan. 1
(c)
Profit as reported:................................... Add back salaries expense .................... Revised Profit .........................................
$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. (d) TY & MATT SNOW REMOVAL SERVICES Statement of Partners’ Equity Year Ended December 31, 2014 T. Gilligan Capital, Jan. 1 ............................ 0 Add: Investment ............................ $ 4,000 Profit .................................... 20,800 24,800 Less: Drawings ............................ 20,000 Capital, March 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
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PROBLEM 12-6A (Continued) (e) TY & MATT SNOW REMOVAL SERVICES Balance Sheet December 31, 2014 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 ....................................................... M. Melnyk, capital ...................................................... Total partners' equity ...................................................... (f) Dec. 31
Service Revenue ............................ 50,000 Income Summary ......................
31 Income Summary ........................... Depreciation Expense ............... Supplies Expense......................
$ 4,800 21,800 $26,600 50,000
8,400 2,400 6,000
31 Income Summary ........................... 41,600 T. Gilligan, Capital ..................... M. Melnyk, Capital .....................
20,800 20,800
31 T. Gilligan, Capital ......................... 20,000 M. Melnyk, Capital.......................... 10,000 T. Gilligan, Drawings ................. M. Melnyk, Drawings .................
20,000 10,000
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PROBLEM 12-6A (Continued) 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 equal allocation of their profit to be made 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, 2014. Tyler and Matt should come to some agreement to a fair allocation of profit for the coming year and document their agreement details in writing.
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PROBLEM 12-7A
(a)
(b)
(c)
May 1 W. Sanga, Capital ($60,000 × 50%) 30,000 N. Osvald, Capital......................
30,000
May 1 K. Osbourne, Capital ($20,000 × 50%) ...................... 10,000 N. Osvald, Capital......................
10,000
May 1 Cash................................................ R. Sanga, Capital ($6,000 × 3/9) .................................. K. Osborne, Capital ($6,000 × 2/9) .................................. W. Sanga, Capital ($6,000 × 4/9) .................................. N. Osvald, Capital......................
76,000
Solutions Manual .
70,000 2,000 1,333 2,667
Total capital of existing partnership.......... Investment by N. Osvald ............................ Total capital of new partnership ................
$120,000 70,000 $190,000
N. Osvald's capital credit ($190,000 × 40%)
$76,000
Investment by N. Osvald ............................ N. Osvald's capital credit ........................... Bonus to new partner .................................
$70,000 76,000 $ 6,000
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PROBLEM 12-7A (Continued) (d)
May 1 Cash .................................................. 40,000 R. Sanga, Capital ($8,000 × 3/9).............................. K. Osborne, Capital ($8,000 × 2/9).............................. W. Sanga, Capital ($8,000 × 4/9).............................. N. Osvald, Capital......................
2,667 1,778 3,555 32,000
Total capital of existing partnership ............ $120,000 Investment by N. Osvald ............................... 40,000 Total capital of new partnership................... $160,000 N. Osvald's capital credit ($160,000 × 20%)
$32,000
Investment by N. Osvald ................................. $40,000 N. Osvald's capital credit ................................ 32,000 Bonus to old partners................................. $ 8,000 (e)
May 1 Cash .................................................. 30,000 N. Osvald, Capital......................
30,000
Total capital of existing partnership ............ $120,000 Investment by N. Osvald ............................... 30,000 Total capital of new partnership................... $150,000 N. Osvald's capital credit ($150,000 × 20%) No bonus to new or existing partners
$30,000
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.
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PROBLEM 12-8A (a) Dec. 31
R. Antoni, Capital ........................... 49,000 H. Fercho, Capital...................... P. Jiang Capital .........................
24,500 24,500
R. Antoni, Capital ........................... 49,000 P. Jiang, Capital ........................
49,000
(c) Dec. 31 R. Antoni, Capital ........................... 49,000 H. Fercho, Capital ($9,000 × 6/9) .................................. 6,000 P. Jiang, Capital ($9,000 × 3/9) .................................. 3,000 Cash ...........................................
58,000
(b) Dec. 31
R. Antoni’s capital balance ............ $49,000 Payment to R. Antoni ..................... 58,000 Bonus to R. Antoni ........................ $ 9,000 (d) Dec. 31
R. Antoni, Capital ........................... 49,000 H. Fercho, Capital ($10,800 × 6/9)............................ P. Jiang, Capital ($10,800 × 3/9)............................ Cash ...........................................
7,200 3,600 38,200
R. Antoni's capital balance ............ $49,000 Payment to R. Antoni ..................... 38,200 Bonus to remaining partners ........ $10,800
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PROBLEM 12-8A (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 12-9A (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 .............................
16,000 8,000 $86,600 47,400 $134,000
(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............
94,050
Total capital of existing partnership.......... Investment by C. Mawani ........................... Total capital of new partnership ................
$134,000 75,000 $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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PROBLEM 12-9A (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 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 the withdrawing partner to ensure they leave. A bonus to a withdrawing partner is also paid when the book value of the partnership’s assets is less than fair value.
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PROBLEM 12-10A (a) 1. May 4
2. May 6
Cash................................................ 18,000 Allowance for Doubtful Accounts. 1,700 Loss on Realization ....................... 3,800 Accounts Receivable ................
23,500
Cash................................................ Accumulated Depreciation............ Loss on Realization ....................... Inventory.................................... Equipment..................................
47,100 28,600
6 A. Hoffer, Capital ($12,700 × 50%) ...................... K. Lonseth, Capital ($12,700 × 30%) ...................... D. Posca, Capital ($12,700 × 20%) ..................... Loss on Realization................... 3. May 7
4. May 9
50,000 16,800 8,900
6,350 3,810 2,540 12,700
Accounts Payable .......................... 30,200 Cash ...........................................
30,200
Cash ($1,300 – $2,540) ................... D. Posca, Capital .......................
1,240
1,240
5. May 12 A. Hoffer, Capital ($42,100 – $6,350) .................. 35,750 K. Lonseth, Capital ($18,800 – $3,810) .................. 14,990 Cash ($11,700 + $18,000 + $50,000 – $30,200 + $1,240) ....................
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PROBLEM 12-10A (Continued) (b) Cash
A. Hoffer, Capital
Apr. 30 Bal. 11,700 May 7 30,200 May 4 18,000 May 12 50,740 May 5 50,000 May 9 1,240
May 6 6,350 Apr. 30 Bal. 42,100 May 12 35,750
0
0
K. Lonseth, Capital
D. Posca, Capital
May 6 3,810 Apr. 30 Bal.18,800 May 12 14,990
May 6 2,540 Apr. 30 Bal. May 9
0 (c) 1.
2.
May 9 A. Hoffer, Capital ($1,240 × 5/8)..... K. Lonseth, Capital ($1,240 × 3/8) . D. Posca, Capital .......................
0
775 465
12 A. Hoffer, Capital ($42,100 – $6,350 – $775) ................. 34,975 K. Lonseth, Capital ($18,800 – $3,810 – $465) ................. 14,525 Cash ($11,700 + $18,000 + $50,000 – $30,200)............
1,240
49,500
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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1,300 1,240
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PROBLEM 12-11A (a) Aug.
(1) Cash ................................................. 430,000 Gain on Realization................. Supplies...................................
30,000 400,000
Gain on Realization........................... 30,000 H. Brumby, Capital ($30,000 × ⅓) R. Criolio, Capital ($30,000 × ⅓) A. Paso, Capital ($30,000 × ⅓)
10,000 10,000 10,000
Bank Loan Payable ......................... 125,000 Cash .........................................
125,000
H. Brumby, Capital ($230,000 + $10,000)............... 240,000 R. Criolio, Capital ($170,000 + $10,000)............... 180,000 A. Paso, Capital ($25,000 + $10,000) .................. 35,000 Cash ($150,000 + $430,000 – $125,000).........................
455,000
(2) 8 Cash ................................................ 310,000 Loss on Realization ........................ 90,000 Supplies...................................
100,000
H. Brumby, Capital ($90,000 × ⅓) .. 30,000 R. Criolio, Capital ($90,000 × ⅓)..... 30,000 A. Paso, Capital ($90,000 × ⅓) ....... 30,000 Loss on Realization ................
90,000
Bank Loan Payable......................... 125,000 Cash .........................................
125,000
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8
8
8
8
Aug.
8
8
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PROBLEM 12-11A (Continued) (a) (2) Continued Aug.
8
8
(b) Aug.
8
8
Cash ..................................................... 5,000 A. Paso, Capital ($25,000 – $30,000)...............
5,000
H. Brumby, Capital ($230,000 – $30,000) ................ 200,000 R. Criolio, Capital ($170,000 – $30,000) ................ 140,000 Cash ($150,000 + $310,000 – $125,000 + 5,000) ..........
340,000
H. Brumby, Capital ($5,000 × 50%) 2,500 R. Criolio, Capital ($5,000 × 50%) ....... 2,500 A. Paso, Capital ($25,000 – $30,000) ...........
5,000
H. Brumby, Capital ($230,000 – $30,000 – $2,500) ............. 197,500 R. Criolio, Capital ($170,000 – $30,000 – $2,500) ............. 137,500 Cash ($150,000 + $310,000 – $125,000) .......................
335,000
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 12-12A (a) 2013 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
Z. Moreau, Drawings ............................. K. Krneta, Drawings .............................. V. Visentin, Drawings ............................ Cash..................................................
30,000 30,000 30,000
2
2
Dec. 20
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, 2013 Investments Drawings Profit Ending Balance
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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 12-12A (Continued) 2014 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 55,000 Z. Moreau, Capital ($123,750 × 4/9) . V. Visentin, Capital ($123,450 × 5/9) 68,750 2015 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)]......... Investment by new partner, D. Hirjikaka ................. Total capital of new partnership..............................
$129,000 31,000 $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 12-12A (Continued) (b) MKV PERSONAL COACHING Balance of Partners’ Capital Accounts January 4, 2015
Balance Dec. 31, 2013 Withdrawal of partner Drawings 2014 Profit 2014 Balance Dec. 31, 2014 Admission new partner Balance Jan. 4, 2015
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D. Hirjikaka
Z. Moreau
K. Krneta
V. Visentin
$19,500 (19,500)
$40,000 $40,000
$44,250 2,250 (42,750) 55,000 58,750 (4,000) $54,750
$44,250 2,250 (45,000) 68,750 70,250 (5,000) $65,250
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Total $108,000 (15,000) (87,750) 123,750 129,000 31,000 $160,000
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PROBLEM 12-12A (Continued) (b) (Continued) MKV PERSONAL COACHING Balance Sheet (partial) January 4, 2015 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
(a) Advantages of forming a partnership instead of a corporation include: i. A partnership is easily formed and less expensive to establish than a corporation. ii. A partnership is controlled by fewer government regulations and restrictions than a corporation is. iii. Decisions can be made quickly on important matters that affect the firm. Disadvantages of forming a partnership instead of a corporation include: i. Mutual agency provides for the risk of the actions taken by any of the partners that affects all partners. The action of any partner is binding on all other partners. ii. Limited life since the ownership of the business is not easily transferred by the sale of shares as is the case for corporations. iii. Unlimited liability in general partnerships. Each partner is jointly and severally (individually) liable for all partnership liabilities. (b) One alternative available to Max and Rubin in running their lawn and yard maintenance company, besides using the corporate structure, is operating the business as a limited partnership. One of the owners will need to be the general partner and the remaining owner can enjoy the benefits of being the limited partner whose liability is limited to the amount of capital that he has contributed to the partnership. It might not be obvious to either of the two partners which one will enjoy the reduced risk as a limited partner and who will have to shoulder the risk that the general partner role brings. Another alternative is the limited liability partnership structure which is most often used in partnerships of professionals such as lawyers and accountants.
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PROBLEM 12-1B (Continued) (c) The partnership agreement should specify the main location of the firm, the purpose of the business, and the date of inception. In addition, relationships among the partners must be specified, such as: 1. The names and capital contributions of partners 2. The rights and duties of partners 3. The basis for sharing profit or loss 4. Provisions for a withdrawal of assets 5. Procedures for submitting disputes to arbitration 6. Procedures for the withdrawal, or addition, of a partner 7. The rights and duties of surviving partners if a partner dies 8. Procedures for the liquidation of the partnership 9. The process used to solve ethical and legal problems
Taking It Further: Considering the size and nature of their business, Max and Rubin should probably dismiss the possibility of using the limited partnership or limited liability partnership structure for their lawn and yard maintenance business. The additional costs and concerns that come with these alternative structures are not justified under these circumstances.
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PROBLEM 12-2B (a) Jan. 1 Cash .................................................... 9,500 Accounts Receivable ....................... 15,000 Merchandise Inventory .................... 20,000 Equipment ........................................ 18,000 Allowance for Doubtful Accounts Accounts Payable ....................... F. Visanji, Capital.........................
3,500 25,000 34,000
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
(b) Jan. 1 Cash ($34,000 – $29,500) ................... 4,500 P. Vanbakel, Capital ....................
4,500
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PROBLEM 12-2B (Continued) (c) VARSITY PARTNERSHIP Balance Sheet January 1, 20XX
Assets Current assets Cash ($9,500 + $5,000 + $4,500) ........................ $ 19,000 Accounts receivable ($15,000 + $20,000) .......... $35,000 Less: Allowance for doubtful accounts ($3,500 + $4,500) ..................................... 8,000 27,000 Merchandise inventory ($20,000 + $15,000) ..... 35,000 Total current assets .................................. 81,000 Property, plant, and equipment Equipment ($18,000 + $14,000) ..................... Total assets ...............................................
32,000 $113,000
Liabilities and Partners' Equity Current liabilities Accounts payable ($25,000 + $20,000)......................... Total current liabilities .............................................
45,000 45,000
Partners' equity F. Visanji, Capital ........................................................ 34,000 P. Vanbakel, Capital ($29,500 + $4,500)..................... 34,000 Total partners' equity ............................................. 68,000 Total liabilities and partners' equity...................... $113,000
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PROBLEM 12-2B (Continued) 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 12-3B (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, 201 S. L. P. Little Brown Gerhardt Total 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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PROBLEM 12-3B (Continued) (a) (Continued) 2.
Dec. 31 Income Summary........................... 25,000 S. Little, Capital.............................. 5,125 L. Brown, Capital....................... P. Gerhardt, Capital...................
11,667 18,458
LBG COMPANY Division of Profit Year Ended December 31, 2014 S. L. P. Little Brown Gerhardt Total Profit............................... $25,000 Interest allowance S. Little ($65,000 × 5%) $3,250 L. Brown ($45,000 × 5%) $2,250 P. Gerhardt ($25,000 × 5%) $1,250 Total ...................... 6,750 Profit remaining for allocation 18,250 Salary allowance L. Brown .................... 15,000 P. Gerhardt ................ 20,000 Total ...................... 35,000 Profit (deficiency) remaining for allocation (16,750) Fixed ratio (remainder shared equally) S. Little [$(16,750) × 3/6]......... (8,375) L. Brown (5,583) [$(16,750) × 2/6]......... P. Gerhardt (2,792) [$(16,750) × 1/6]......... Total ...................... (16,750) Profit remaining _ _ _ 0 for allocation ............. Profit allocated to the partners ........... $(5,125) $11,667 $18,458 $25,000 Solutions Manual .
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PROBLEM 12-3B (Continued) (b) Dec. 31
S. Little, Capital.............................. 20,000 L. Brown, Capital ........................... 15,000 P. Gerhardt, Capital ....................... 10,000 S. Little, Drawings ..................... L. Brown, Drawings................... P. Gerhardt, Drawings ..............
20,000 15,000 10,000
(c) LBG COMPANY Statement of Partners’ Equity Year Ended December 31, 2014
Capital, January 1 Add: Profit Less: Drawings Capital, December 31
S. Little $65,000 (5,125) 59,875 20,000 $39,875
L. Brown $45,000 11,667 56,667 15,000 $41,667
P. Gerhardt Total $25,000 $135,000 18,458 25,000 43,458 160,000 10,000 45,000 $33,458 $115,000
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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PROBLEM 12-4B (a) LAM TAN PARTNERSHIP Income Statement Year Ended January 31, 2014 Sales................................................................................. Cost of goods sold.......................................................... Gross profit...................................................................... Operating expenses ........................................................ Loss..................................................................................
$395,000 275,000 120,000 150,000 $( 30,000)
(b) LAM TAN PARTNERSHIP Division of Loss Year Ended January 31, 2014 T. Lam
C. Tan
Total $(30,000)
Loss................................................ Salary allowance T. Lam........................................ $25,000 C. Tan ........................................ $35,000 Total ...................................... 60,000 Deficiency remaining for allocation (90,000) Interest allowance T. Lam ($110,000 × 6%)............. 6,600 C. Tan ($130,000 × 6%) ............. 7,800 Total ...................................... 14,400 Deficiency remaining for allocation (104,400) T. Lam [($104,400 × 3/7)] .......... (44,743) C. Tan [($104,400 × 4/7)] ........... (59,657) Total ...................................... (104,400) Loss remaining for allocation ...... _ _ 0 Loss allocated to the partners $(13,143) $(16,857) $(30,000)
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PROBLEM 12-4B (Continued) (c) LAM TAN PARTNERSHIP Statement of Partners’ Equity Year Ended January 31, 2014
Capital, February 1, 2013 ............ Less: Drawings........................... Loss .................................. Capital, January 31, 2014............
T. Lam $110,000 25,000 13,143 38,143 $ 71,857
C. Tan Total $130,000 $240,000 35,000 60,000 16,857 30,000 51,857 90,000 $ 78,143 $150,000
(d) Jan. 31 Sales ............................................. 395,000 Income Summary ....................
395,000
31 Income Summary ......................... 425,000 Cost of Goods Sold................. Operating Expenses ...............
275,000 150,000
31
31
T. Lam, Capital ............................. 13,143 C. Tan, Capital.............................. 16,857 Income Summary ....................
30,000
T. Lam, Capital ............................. 25,000 C. Tan, Capital.............................. 35,000 T. Lam, Drawings .................... C. Tan, Drawings .....................
25,000 35,000
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, 2014 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, 2014 G. Clay M. Ogletree Total Capital, October 1, 2013............ $ 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, 2011 ..... $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, 2014
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 note payable .................................... 5,000 Total current liabilities ........................................... 50,500 Long-term liabilities Note 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, 2014 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) Jan. 1
Cash......................................................... 1,000 Equipment ............................................... 1,500 C. Maguire, Capital .............................
2,500
Cash......................................................... 750 Vehicles................................................... 8,000 F. Whelan, Capital ..............................
8,750
(b) Dec. 31 C. Maguire, Drawings.............................. 12,000 F. Whelan, Drawings ................................. 8,000 Salaries Expense................................
20,000
Jan. 1
(c)
Profit as reported:................................... Add back salaries expense .................... Revised Profit .........................................
$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. (d) MAGUIRE & WHELAN CLEANING SERVICES Statement of Partners’ Equity Year Ended December 31, 2014
C. Maguire F. Whelan Capital, Jan. 1 ............................ 0 0 Add: Investment ........................ $ 2,500 $8,750 Profit ................................. 15,050 15,050 17,550 23,800 Less: Drawings.......................... 12,000 8,000 Capital, March 31....................... $ 5,550 $15,800
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Total 0 $11,250 30,100 41,350 20,000 $21,350
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PROBLEM 12-6B (Continued) (e) MAGUIRE & WHELAN CLEANING SERVICES Balance Sheet December 31, 2014 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 ...................................................... F. Whelan, capital ...................................................... Total partners' equity ...................................................... (f) Dec. 31
Service Revenue ............................ 35,000 Income Summary ......................
31 Income Summary ........................... Depreciation Expense ............... Supplies Expense......................
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C. Maguire, Capital......................... 12,000 F. Whelan, Capital .......................... 8,000 C. Maguire, Drawings ................ F. Whelan, Drawings ................. 12-87
35,000
4,900
31 Income Summary ........................... 30,100 C. Maguire, Capital .................... F. Whelan, Capital ..................... 31
$ 5,550 15,800 $21,350
1,900 3,000 15,050 15,050
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PROBLEM 12-6B (Continued) 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 equal allocation of their profit to be made 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, 2014. Caitlin and Fiona should come to some agreement to a fair allocation of profit for the coming year and document their agreement details in writing.
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PROBLEM 12-7B
(a) Oct. 1
A. Nolan, Capital ($62,000 × 25%) ..... 15,500 C. Santos, Capital ......................... 15,500
(b) Oct. 1
D. Elder, Capital ($48,000 × 1/3) ........ 16,000 C. Santos, Capital ......................... 16,000
(c) Oct. 1
Cash ................................................... 80,000 A. Nolan, Capital (50% × $18,800) 9,400 D. Elder, Capital (40% × $18,800) . 7,520 T. Wuhan, Capital (10% × $18,800) 1,880 C. Santos, Capital ......................... 61,200
Total capital of existing partnership ................ Investment by C. Santos ................................... Total capital of new partnership.......................
$124,000 80,000 $204,000
C. Santos' capital credit ($204,000 × 30%) .......
$61,200
Investment by new partner, C. Santos ............. C. Santos’ capital credit .................................... Bonus to old partners .......................................
$80,000 61,200 $18,800
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PROBLEM 12-7B (Continued) (d) Oct. 1
Cash..................................................... 36,000 A. Nolan, Capital ($12,000 × 50%) ... 6,000 D. Elder, Capital ($12,000 × 40%) .... 4,800 T. Wuhan, Capital ($12,000 × 10%) . 1,200 C. Santos, Capital ....................... 48,000
Total capital of existing partnership .............. Investment by C. Santos ................................. Total capital of new partnership.....................
$124,000 36,000 $160,000
C. Santos’ capital credit ($160,000 × 30%).....
$48,000
Investment by new partner ............................. C. Santos’ capital credit .................................. Bonus to new partner......................................
$36,000 48,000 $12,000
(e) Solve for x 30% × ($124,000 + x) = x $37,200 + .3x = x $37,200 = .7x x = $53,143 Proof: ($124,000 + $53,143) × 30% = $53,143 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 12-8B (a) Dec. 31
(b) Dec. 31 (c) Dec. 31
R. Dixon, Capital .......................... 37,500 B. Vuong, Capital .................... G. Khan, Capital ......................
18,750 18,750
R. Dixon, Capital .......................... 37,500 G. Khan, Capital ......................
37,500
R. Dixon, Capital .......................... 37,500 B. Vuong, Capital ($10,000 × 5/8) 6,250 G. Khan, Capital ($10,000 × 3/8).. 3,750 Cash .........................................
47,500
Dixon's capital balance ............... Payment to Dixon ........................ Bonus to Dixon ............................
$37,500 47,500 $10,000
(d) Dec. 31 R. Dixon, Capital .......................... 37,500 B. Vuong, Capital ($8,000 × 5/8) G. Khan, Capital ($8,000 × 3/8) Cash ......................................... Dixon's capital balance ............... Payment to Dixon ........................ Bonus to old partners .................
5,000 3,000 29,500
$37,500 29,500 $ 8,000
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 12-9B (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
30,000 15,000 $115,000 64,000 $179,000
Cash.............................................. 110,000 S. Kopel, Capital ($20,050 × 2/3) . 13,367 E. Falkenberg, Capital ($20,050 × 1/3) ....................... 6,683 D. Malkin, Capital..............
130,050
Total capital of existing partnership.......... Investment by D. Malkin ............................. Total capital of new partnership ................
$179,000 110,000 $289,000
D. Malkin’s capital credit ($289,000 × 45%) $130,050 Investment by D. Malkin ............................. D. Malkin’s capital credit ............................ Bonus to new partner .................................
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$110,000 130,050 $ 20,050
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PROBLEM 12-9B (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 which 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 12-10B (a) (1) June 2 Cash....................................................... 20,000 Allowance for Doubtful Accounts ....... 1,200 Loss on Realization .............................. 8,800 Accounts Receivable ....................... (2) 3 Cash....................................................... 48,000 Accumulated Depreciation................... 6,600 Loss on Realization .............................. 12,000 Inventory........................................... Equipment ........................................ (3) 3 L. Sciban, Capital ($20,800 × 5/10)....... V. Subra, Capital ($20,800 × 3/10) ........ C. Werier, Capital ($20,800 × 2/10) ....... Loss on Realization .........................
4
6
20,800
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53,160
320
(6) 9 L. Sciban, Capital ($39,600 – $10,400) . 29,200 V. Subra, Capital ($25,200 – $6,240) .... 18,960 Cash ..................................................
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41,400 25,200
10,400 6,240 4,160
(4) Accounts Payable................................. 53,160 Cash .................................................. (5) Cash....................................................... C, Werier, Capital ............................. ($3,840 – $4,160) = $320
30,000
320
48,160
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PROBLEM 12-10B (Continued) (b) Cash Bal. 33,000 (1) 20,000 (2) 48,000 (4) 320
L. Sciban, Capital (3) 10,400 Bal. (5) 29,200
39,600
(4) 53,160 (5) 48,160
0
0
V. Subra, Capital (3) 6,240 Bal. (5) 18,960
C. Werier, Capital
25,200
(3)
4,160 Bal. (4)
0
3,840 320 0
(c) (1) June 9 L. Sciban, Capital ($320 × 5/8) ......... V. Subra, Capital ($320 × 3/8) ............ C. Werier, Capital ..........................
200 120
(2) June 9 L. Sciban, Capital ($29,200 – $200)... V. Subra, Capital ($18,960 – $120) .... Cash ...............................................
29,000 18,840
320
47,840
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.
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PROBLEM 12-11B (a) Sept. 30
(1) 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
(2) Sept. 30 Cash ................................................ 25,000 Loss on Realization ........................ 85,000 Merchandise Inventory ...........
110,000
30
30
30
30
30
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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........................... Cash .........................................
90,000
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PROBLEM 12-11B (Continued) (a) (2) Continued Sept. 30
30
(b) Sept.
30
30
Cash..................................................... 1,250 A. Paso, Capital ($20,000 – $21,250)..................
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
M. Nokota, Capital ($1,250 × 2/3) ........................... S. Taishuh, Capital ($1,250 × 1/3) ........................... A. Paso, Capital ($20,000 – $21,250) ...........
1,250
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) .........................
35,000
Taking It Further: The reasons a partnership might decide to liquidate might 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 12-12B (a) 2013 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, 2013 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 12-12B (Continued) 2014 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) .... 2015 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 12-12B (Continued) (b) MKFW MARKETING Statement of Partners’ Equity Year ending December 31, 2014
Capital January 1 Admission of partner Add: Profit Less: Drawing 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, 2015
Balance Dec. 31, 2014 Withdrawal of partner Balance Jan. 2, 2015
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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 12-12B (Continued) Taking It Further: Often, partnerships agree not to change the name of the partnership each time a partner withdraws or is admitted. This is particularly the case in large partnerships where all of the names of the partners do not appear in the name. Doing so avoids disruption, additional costs and confusion with customers, suppliers and the general public. Generally, the name of some of the oldest partnerships in Canada is not based on the name of any living partner.
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CONTINUING COOKIE CHRONICLE (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. Katy Peterson would need to borrow $6,900. Total fair value of Cookie Creations’ net assets: ($8,050 + $800 + $1,200 + $450 + $1,500) $12,000 Total fair value of K. Peterson’s (The Baker’s Nook) net assets: ($1,500 + $5,250 + $500 + $350 + $7,500 – $10,000) 5,100 Difference $ 6,900
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CONTINUING COOKIE CHRONICLE (Continued) (a) (Continued) 3. Both the total amount of assets and the total amount of Katy Peterson’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. Katy Peterson 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 Katy Peterson, you (Natalie Koebel) should ask to see the financial statements of The Baker’s Nook 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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CONTINUING COOKIE CHRONICLE (Continued) (b) COOKIE CREATIONS AND MORE Balance Sheet August 1, 2014 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 K. Peterson, 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 K. Peterson’s proprietorship net assets ............ 5,100 Cash K. Peterson borrowed.......................................... 6,900 Cash from N. Koebel’s proprietorship ......................... 8,050 Cash from K. Peterson’s proprietorship .......................... 1,500 Total cash when partnership is formed............................ $16,450
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BYP 12-1 FINANCIAL REPORTING PROBLEM (a) The main deciding factor in choosing between the proprietorship and the corporate structure when the business was founded was likely the availability of cash needed to finance the business. If the majority of the cash came from personal family funds, there would not have been the need to obtain financing from a bank. The more likely situation is that creditors were involved from the start to finance the purchase of merchandise inventory necessary to start 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. (b) In order to have its shares traded on a stock exchange, Reitmans would have needed to adopt the corporate structure. The transfer of ownership from generation to generation, prior to Reitmans becoming a public company, 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. (c) 1) Statements of Earnings: 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) Balance Sheet: The equity section of the balance sheet 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 and Retained Earnings. 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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BYP 12-2 INTERPRETING FINANCIAL STATEMENTS (a) 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 day-to-day operations. (b) The reason for the restriction on the ability of the limited partners to be involved in matters involving the partnership or in determining who is the general partner is a matter of practicality. It is not realistic to expect the unitholders to be consulted repeatedly in matters over which they may have little interest or opinion. Like shareholders in a corporate structure of a public company, the shareholders that hold voting shares exercise their rights to vote in a very limited number of decisions, such as electing the board of directors and appointing the auditor.
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BYP 12-3 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 12-4 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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Accounting Principles, Sixth Canadian Edition
BYP 12-4 (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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BYP 12-5 ETHICS CASE (a) The stakeholders are Susan and Erin. (b) The problem with Susan’s actions is that they cause significant differences in the time worked between the partners and in the amount of drawings made by each partner. Sooner or later, this could cause difficulties for the business and friction between the partners. The differences here emphasize the importance of a written partnership agreement. Time to be worked by each partner and allowable drawings are two subjects that should be in the agreement. Based on the information given, ethical considerations rest primarily on the issue of fairness. Susan is not trying to hide anything from Erin. However, her actions do not seem to be fair given the fact that profit and loss is shared equally. (c) For the differences in time worked, two changes in the partnership agreement should be considered. First, Erin could be given a higher salary allowance than Susan. Second, because Erin is contributing more to profit than Susan, she could be given a higher percentage of profit after deducting salary allowances. For the differences in drawings, the partnership agreement could be altered to allow for interest on average monthly "net" partners’ capitals. Net partners’ capitals would be the difference between the balances of the capital and drawings accounts at the end of each month. If this is not agreeable to Susan, then the partnership agreement should be changed to limit the drawings of each partner to a fixed amount.
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BYP 12-6 “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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BYP 12-6 (Continued)
(e)
Should one of the band member want to leave, the issues that could come up and should be dealt with the partnership agreement on his 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 repercussion on reputation and future earning ability.
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BYP 12-6 (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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Accounting Principles, Sixth Canadian Edition
CHAPTER 13 Corporations: Organization and Share Capital Transactions
ASSIGNMENT CLASSIFICATION TABLE Problems Brief Set A Exercises Exercises
Problems Set B
1, 2, 3, 4, 10
1
1, 2
1
1
2. Account for the issuance of common and preferred shares.
5, 6, 7, 8, 9, 11
2, 3, 4, 5, 6
1, 3, 4, 5, 6, 8, 12
2, 3, 4, 7, 8, 12
2, 3, 4, 7, 8, 12
3. Prepare a corporate income statement.
12
7
7, 10, 12
5, 6, 9, 10, 12
5, 6, 9, 10, 12
4. Account for cash dividends. 5. Prepare a statement of retained earnings and closing entries for a corporation. 6. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.
13, 14, 15
8
8, 10, 12
16, 17
9, 10
9, 10, 12
4, 5, 6, 7, 8, 12 5, 6, 9, 10, 12
4, 5, 6, 7, 8, 12 5, 6, 9, 10, 12
18, 19, 20
11, 12
11, 12
7, 8, 9, 10, 11, 12
7, 8, 9, 10, 11, 12
Study Objectives
Questions
1. Identify and discuss the major characteristics of the corporate form of organization.
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Chapter 13
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Accounting Principles, Sixth 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
Adjust income tax, prepare income statement, statement of retained earnings, and closing entries.
Moderate
35-40
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 and closing entries.
Moderate
40-50
10A
Prepare financial statements and calculate return on equity.
Moderate
50-60
11A
Calculate return on assets and equity and comment.
Simple
10-15
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.
Simple
25-30
5B
Record dividends, prepare income statement and statement of retained earnings.
Simple
25-30
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Chapter 13
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Difficulty Level
Time Allotted (min.)
Adjust income tax, 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 and closing entries.
Moderate
40-50
10B
Prepare financial statements and calculate return on equity.
Moderate
50-60
11B
Calculate return on assets and equity and comment.
Simple
10-15
12B
Record transactions and adjustments, prepare financial statements.
Moderate
35-40
6B 7B
Description
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Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material. Study Objectives
Knowledge
Comprehension
1.
Identify and discuss the major characteristics of the corporate form of organization.
E13-1
Q13-1 Q13-2 Q13-3 Q13-4 BE13-1 E13-2
Q13-10
2.
Account for the issuance of common and preferred shares.
E13-1
Q13-5 Q13-6 Q13-7 Q13-9
Q13-8 Q13-11 BE13-2 BE13-3 BE13-4 BE13-5 BE13-6 E13-3 E13-4 E13-5 E13-6 E13-8 E13-12 P13-2A P13-3A P13-4A
P13-7A P13-8A P13-12A P13-2B P13-3B P13-4B P13-7B P13-8B P13-12B
3.
Prepare a corporate income statement.
Q13-12
BE13-7 E13-7 E13-10 E13-12 P13-5A P13-6A P13-9A P13-10A
P13-12A P13-5B P13-6B P13-9B P13-10B P13-12B
4.
Account for cash dividends
Q13-15
BE13-8 E13-8 E13-10 E13-12 P13-4A P13-5A P13-6A P13-7A P13-8A P13-12A
P13-4B P13-5B P13-6B P13-7B P13-8B P13-12B
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13-4
Application
Analysis
Synthesis
P13-1A P13-1B
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Evaluation
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Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE (Continued) 5.
Prepare a statement of retained earnings and closing entries for a corporation
6.
Prepare the shareholders’ equity section of the balance sheet and calculate return on equity.
Broadening Your Perspective
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Q13-18
Q13-16 Q13-17
BE13-9 BE13-10 E13-9 E13-10 E13-12 P13-5A P13-6A
P13-9A P13-10A P13-12A P13-5B P13-6B P13-9B P13-10B P13-12B
Q13-19 Q13-20
BE13-11 BE13-12 E13-11 E13-12 P13-7A P13-8A
P13-9A P13-10A P13-11A P13-12A P13-7B P13-8B P13-9B P13-10B P13-11B P13-12B
BYP13-1 BYP13-3
BYP13-2 Continuing Cookie Chronicle
13-5
BYP13-4
BYP13-5 BYP13-6
Chapter 13
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Accounting Principles, Sixth 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 Reitmans (Canada) Ltd., 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)
3.
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.
A corporation provides several advantages over proprietorships and partnerships. The separate legal existence of the corporation from its owners, as well as the limited liability protection offered to shareholders, allow the corporation to acquire capital more easily and in larger amounts than the other two forms of business. The corporate form of business also provides a continuous life beyond the life of the individuals who own it. Corporations also have more easily transferable ownerships rights and enjoy certain forms of income tax advantages. The disadvantages of corporations include increased administrative burden and cost due to additional government regulations and the potential for additional income taxes.
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Chapter 13
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) Question 3 (Continued) Small, privately held corporations are riskier than large publicly held ones and frequently do not enjoy the same advantages as larger corporations. Lenders will often require the owners to sign personal guarantees, thus eliminating the limited liability normally associated with corporations. Because the shares are not offered for sale to the general public, it is more difficult to raise capital. Small corporations may be run by the shareholders, rather than professional managers. This also means that if one of these shareholders sells his or her ownership interest, the corporation may be significantly affected. 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.
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Chapter 13
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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.
7.
The transaction would be recorded by debiting the equipment and crediting common shares. If the company follows IFRS, the transaction will be valued at the fair value of the equipment received. If this value cannot be determined, then the transaction is recorded at the fair value of the shares given in exchange. If the company follows ASPE, the transaction is valued at whichever amount can be more reliably determined; either the fair value of the equipment or the fair value of the shares given in exchange.
8.
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.
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QUESTIONS (Continued) 9.
Cumulative preferred shares are those that require preferred shareholders be paid both current year dividends and unpaid prior year dividends before common shareholders receive any dividends. In contrast, dividends not declared for noncumulative preferred shares are lost forever. Redeemable preferred shares can be purchased from the shareholders, by the issuing corporation, at the option of the corporation. If the shares are retractable they can be sold by the shareholder, to the issuing corporation, at the option of the shareholder. Convertible preferred shares are preferred shares that can be converted into common shares, at the option of the shareholder, at a specified ratio.
10. (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. 11. When convertible preferred shares are converted into common shares, the shareholder simply exchanges preferred shares for common shares, according to a predetermined rate. 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 cost 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. 12.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 13.
Pro rata means proportional. If you own 5% of the shares, you are entitled to 5% of the dividends that are declared.
14.
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 out.
15.
The requirement to have a positive (or credit) balance in retained earnings is usually a legal requirement set out in the incorporating act of most jurisdictions. Dividends are paid out of retained earnings and most incorporating acts restrict the payment of dividends if it creates or increases a deficit. These restrictions are for the protection of creditors and to ensure that the company can honour its obligations.
16.
A statement of retained earnings shows the increases to retained earnings from profits generated on the income statement (or decreases due to losses) and decreases from the declaration of dividends. The statement is similar to a statement of owner’s equity in that increases from profit and distributions to owners are shown on both statements. The statement of owner’s equity is different in that it also includes investments by owners.
17. 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 cash dividends.
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Chapter 13
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 18. The main components of shareholders' equity 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. 19. 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%. 20. Return on equity is the return earned by all the shareholders — both the preferred and common shareholders. It is calculated by dividing profit by the average shareholders’ equity. Common shareholders can obtain a more precise measure by calculating the return on common shareholders’ equity. Return on common shareholder’s equity is the return earned by the common shareholders. It is calculated by dividing the profit available to the common shareholders by the average common shareholders’ equity. Preferred dividends are deducted from profit to determine the numerator. The legal capital of the preferred shareholders is deducted from total shareholders’ equity before calculating the average common shareholders’ equity.
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Chapter 13
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 13-1 Characteristic 1. Continuous life 2. Unlimited liability 3. Ease of formation 4. Separate legal existence 5. Ability to acquire capital 6. Shared skills and resources 7. Fewer government regulations 8. Separation of ownership and management 9. Owners’ acts are binding 10. Easy transfer of ownership rights
Proprietorship Partnership Corporation X X X X X X
X
X
X
X
X
X X
X
X X
BRIEF EXERCISE 13-2 (a) Aug.
5
Sep. 10
Cash (2,000 × $12) ......................... Common Shares .......................
24,000
Cash (500 × $13) ............................ Common Shares .......................
6,500
24,000 6,500
(b) Average cost per share: ($24,000 + $6,500) ÷ (2,000 + 500) = $12.20
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BRIEF EXERCISE 13-3 (a) 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 12th is likely not a reliable indicator of fair value on September 10th. (b) The answer would not change since IFRS requires that the fair value of the goods received is used.
BRIEF EXERCISE 13-4 (a)
Jan. 13
(b)
Cash (3,000 × $90) ............................ 270,000 Preferred Shares......................
270,000
Total dividend: $4 per share × 3,000 shares = $12,000
BRIEF EXERCISE 13-5 (a) Dividends are in arrears by $225,000 ([45,000 × $2.50] × 2). 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.
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BRIEF EXERCISE 13-6 (a) May 10
(b) Nov. 21
Cash (25,000 × $35) .......................... 875,000 Preferred Shares......................
Preferred Shares (5,000 × $35) ........ 175,000 Common Shares ...................... (5,000 x 2 = 10,000 common shares)
875,000
175,000
BRIEF EXERCISE 13-7 (a) June 30 Income Tax Expense....................... 33,750 Income Tax Payable ................... ($800,000 − $575,000) × 15%
33,750
(b) VICERON INC. Income Statement Year Ended June 30, 2014 Revenues ................................................................ Expenses................................................................. Profit before income tax......................................... Income tax expense ............................................... Profit ........................................................................
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$800,000 575,000 225,000 33,750 $191,250
Chapter 13
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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, 2014 Retained earnings, January 1......................................... Add: Profit...................................................................... Less: Cash dividends .................................................... Retained earnings, December 31 ...................................
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$248,000 175,000 423,000 120,000 $303,000
Chapter 13
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 13-10 (a) Dec. 31
31
31
31
Sales ............................................. Income Summary.....................
745,000
Income Summary ......................... Cost of Goods Sold ................. Operating Expenses ................ Income Tax Expense ...............
620,000
Income Summary ......................... Retained Earnings ...................
125,000
745,000
450,000 135,000 35,000
Retained Earnings........................ 50,000 Cash Dividends—Common ($25,000 × 2)
125,000
50,000
(b) Clos. Clos.
Income Summary 620,000 Clos. 745,000 Bal. 125,000 125,000 Bal. -
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Retained Earnings Bal. 382,000 Clos. 50,000 Clos. 125,000 Bal. 457,000
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BRIEF EXERCISE 13-11 TRUE GREEN NURSERIES LTD. Balance Sheet (Partial) December 31, 2014
Shareholders' equity Share capital* $6.50 cumulative preferred shares, 1,000 issued Common shares, 15,000 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 (a) Return on equity $51,951 ($638,995 + $663,602) ÷ 2 (b)
= 7.98%
It would be the same because the company does not have any preferred shares.
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Chapter 13
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 13-1 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l)
8. 6. 11. 5. 2. 10. 12. 1. 4. 3. 7. 9.
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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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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-2 Report to: Client From: Insite Consulting Advice has been sought regarding the form of organization your new business should take. Based on the information provided, the corporate form of organization would best meet your business’s needs. A corporate structure has an indefinite life and the ownership structure consisting of shares will allow you to easily transfer ownership of your company to your children. You also mentioned that lawsuits occur frequently in the medical industry. A corporation will allow you to limit liability to lawsuits for shareholders. This advantage is not available if you operate your business as a partnership or as a sole proprietorship. A corporation is taxable as a separate legal entity. There may be opportunities to defer the payment of taxes by reinvesting the profits in the business since you expect to generate significant taxable income in the early years. Finally, a corporation will also allow you to raise capital by selling shares. Since you are anticipating growth, the corporate form of business will also allow you to more easily separate management from ownership and hire professional managers. Consider that selling shares will dilute your ownership and hiring professional managers will signify a less active role in the business on your part.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-3 (a) Jan. 12 24
July 11
Oct.
1
Cash (50,000 × $5) ................... Common Shares .................
250,000
Legal Fees Expense ................ Common Shares .................
4,500
Cash (1,000 × $25) ................... Preferred Shares .................
25,000
Land.......................................... Common Shares .................
55,000
250,000
4,500
25,000 55,000
(b)
The average cost for the common shares is $5.08 [($250,000 + $4,500 + $55,000) (50,000 + 950 + 10,000)].
(c)
The value assigned to the shares on October 1 would not change. Under IFRS, the value of the land received is used to assign the value to the common shares.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-4 (a) Shares issued to Mah.............................. Shares issued to Manji and MacDonald. Total number of shares issued...............
1,000 9,000 10,000
Ownership percentage to Mah = 1,000 / 10,000 = 10% Alternatively, total number of shares issued = 9,000 / (1 – 10%) = 10,000 shares (b) Jan.
1 Legal Fees Expense ................ 5,000 Common Shares ................. 5,000 Issued 1,000 common shares in payment of legal services.
(c) By issuing shares to Mah, Mah becomes one of the common shareholders of Southwest Corporation. Manji and MacDonald may not want to issue shares because this allows Mah to share in future dividend payments and future profits. This could increase the cost of Mah’s legal services. This would also mean that Mah would share in the decisionmaking.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 shares 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 = $11,000,000 (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.
EXERCISE 13-6 (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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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-7 SHRUNK INC. Income Statement Year Ended July 31, 2014 Sales................................................................................ Cost of goods sold......................................................... Gross profit..................................................................... Operating expenses: Salaries expense ...........................................140,000 Supplies expense......................................... 10,000 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ($200,000 × 20%) .......................... Profit................................................................................
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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$665,000 310,000 355,000
150,000 205,000 5,000 200,000 40,000 $160,000
10,000
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-8 (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) 2014 Oct. 30 Cash Dividends—Preferred* .............. 255,000 Cash Dividends—Common ................ 150,000 Dividends Payable ......................... *($210,000 + $45,000) Nov. 16
No journal entry.
Dec. 1
Dividends Payable .............................. 405,000 Cash................................................
405,000
405,000
(c) Dividends in arrears would be $10,000 ($210,000 owing to the preferred shareholders [$3.50 cumulative per share] – $200,000 maximum dividend).
Solutions Manual .
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-9 (a)
SHRUNK INC. Statement of Retained Earnings Year Ended July 31, 2014 Balance, August 1, 2013 ................................................. Add: Profit ..................................................................... Less: Cash dividends .................................................... Balance, July 31 ..............................................................
$352,000 160,000 512,000 60,000 $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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-9 (Continued) Income Summary Date
Explanation
Ref.
Debit
July 31 31 31
Closing entry Closing entry Closing entry
J1 J1 J1
505,000 160,000
Debit
Credit
Balance
665,000
665,000 160,000 0
Retained Earnings Date
Explanation
Ref.
Credit
Balance
Aug. 1 July 31 31
Balance Closing entry Closing entry
J1 160,000 J1 60,000
352,000 512,000 452,000
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-10 (a) DIDSBURY DIGITAL LTD. Income Statement Year Ended September 30, 2014 Service revenue.............................................................. Operating expenses ....................................................... Profit from operations.................................................... Interest expense ............................................................. Profit before income tax ................................................ Income tax expense ($84,500 × 15%) ............................ Profit................................................................................ Sep. 30
Income Tax Expense ............... Income Tax Payable............ ($84,500 × 15%) – $10,000 = $2,675
$529,000 442,000 87,000 2,500 84,500 12,675 $71,825
2,675 2,675
(b) DIDSBURY DIGITAL LTD. Statement of Retained Earnings Year Ended September 30, 2014 Retained earnings, October 1, 2013 .................... Add: Profit............................................................. Less: Cash dividends declared ........................... Retained earnings, September 30 .......................
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$237,500 71,825 309,325 40,000 $269,325
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-11 (a)
RAIDERS LIMITED Partial Balance Sheet December 31, 2014
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 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
the number of
(b) Return on equity
$125,000 ($742,000* + $792,000) ÷ 2
= 16.30%
* Shareholders’ equity December 31, 2013 = $455,000 share capital + $287,000 beginning retained earnings = $742,000.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-12 (a) 2014 Jan. 1
2 Dec. 1
Cash ......................................... Common Shares .................
150,000 150,000
Cash ......................................... 1,200,000 Preferred Shares ................. 1,200,000 Cash Dividends—Preferred 1 .. Cash Dividends—Common 2 .. Dividends Payable .............. 1 2
120,000 105,000 225,000
$4 × 30,000 shares = $120,000 $225,000 – $120,000 = $105,000
Dec. 13 No journal entry. 2015 Jan. 5 Dividends Payable ....................... 225,000 Cash.....................................
225,000
(b) OZABAL INC. Income Statement (partial) Year Ended December 31, 2014 Revenues ........................................................................ Operating expenses ....................................................... Profit before income tax ................................................ Income tax expense ($305,000 × 15%) .......................... Profit ............................................................................... Dec. 31
Solutions Manual .
Income Tax Expense ............... Income Tax Payable............
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$915,000 610,000 305,000 45,750 $259,250
45,750 45,750
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 13-12 (Continued) (c) OZABAL INC. Statement of Retained Earnings Year Ended December 31, 2014 Retained earnings, January 1.............................. Add: Profit ............................................................
$
Less: Preferred share dividends .................... $120,000 Common share dividends .................... 105,000 Retained earnings, December 31 .......................
0 259,250 259,250
225,000 $ 34,250
OZABAL INC. Partial Balance Sheet December 31, 2014
Shareholders' equity Share capital* $4 noncumulative 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 necessary to show authorized shares.
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the number of
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 it owners.
3.
Joanna will likely operate her cottage inspection service as a proprietorship because it is the simplest and least costly to form and maintain. If Joanna feels that she has legal exposure to lawsuits from her customers or as she expands her business, she may choose to incorporate in order to limit her liability.
4.
Joel will likely operate his roofing services as a proprietorship because it is the simplest and least costly to form and maintain. If he feels that he has legal exposure to lawsuits from customers, he may choose to incorporate in order to limit his liability.
5.
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 it 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.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-1A (Continued) Taking It Further: The corporation’s by-laws would detail who can act as 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.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-2A
GENERAL JOURNAL
(a)
J1
Date
Account Titles and Explanation
Debit
Credit
Feb. 10
Cash (80,000 × $4) .............................. 320,000 Common Shares ............................
320,000
Cash (5,000 × $115) ............................ 575,000 Preferred Shares............................
575,000
Mar.
Apr.
1
1 Land .................................................... Common Shares ............................
Jun. 20
July
7
Sep. 1
Nov. 1
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90,000 90,000
Cash (78,000 × $4.50) ......................... 351,000 Common Shares ............................
351,000
Legal Fees Expense ........................... 45,000 Common Shares ............................
45,000
Cash (10,000 × $5) .............................. 50,000 Common Shares ............................
50,000
Cash (1,000 × $117) ............................ 117,000 Preferred Shares............................
117,000
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-2A (Continued) (b) Preferred Shares Date Mar. Nov.
Explanation
Ref.
Debit
J1 J1
1 1
Credit
Balance
575,000 117,000
575,000 692,000
Credit
Balance
Common Shares Date Feb. 10 Apr. 1 June 20 July 7 Sept. 1
Explanation
Ref. J1 J1 J1 J1 J1
Debit
320,000 90,000 351,000 45,000 50,000
320,000 410,000 761,000 806,000 856,000
(c) Number of preferred shares = 5,000 + 1,000 = 6,000 shares
Average cost per preferred share = $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 cost per 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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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-2A (Continued) (e) 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 non-cumulative preferred shares, if no dividends are declared, the dividend entitlement lapses and is lost to the investor. Since this feature makes the shares more attractive, it also results in a higher price for the shares.
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 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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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 the shares.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-4A
(a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1 Debit
Credit
2013 Jan. 10 Cash Dividends—Preferred ................. 12,000 Cash................................................
12,000
2014 Jan. 10 Cash Dividends—Preferred* ................ 68,000 Cash Dividends—Common .................... 4,000 Cash................................................
72,000
* Arrears from 2013: 2013 Dividend: (8,000 × $5) ............ $40,000 Less: Dividend paid in 2013............ 12,000 Current year dividend (8,000 × $5) ........... Cash Dividend to Preferred.......................
$28,000 40,000 $68,000
Mar. 1 Preferred Shares (8,000 shares) .........528,000 Common Shares (16,000 shares).. (8,000 × $66)
528,000
(b) The company needs to disclose dividends in arrears of
$28,000 in 2013, in the notes to the financial statements.
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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-5A
(a)
GENERAL JOURNAL
Date
Debit
Credit
2014 June 30 Cash Dividends—Common ............... 25,000 Dividends Payable .........................
25,000
July
Account Titles and Explanation
J1
8 Dividends Payable.............................. Cash................................................
25,000
Dec. 31 Cash Dividends—Common ............... 25,000 Dividends Payable .........................
25,000
25,000
(b) ZURICH LIMITED Income Statement Year Ended December 31, 2014
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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Chapter 13
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-5A (Continued) (c) ZURICH LIMITED Statement of Retained Earnings Year Ended December 31, 2014
Balance, 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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Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-6A (a) MEMPHIS LIMITED Income Statement Year Ended October 31, 2014
Service revenue.............................................................. Operating expenses: Depreciation expense ................................... $34,375 Insurance expense .................................... 6,900 Rent expense ............................................. 28,800 Salaries expense.......................................... 195,000 Profit from operations.................................................... Interest expense............................................................. Profit before income tax ................................................ Income tax expense ($175,425 × 20%) .......................... Profit ............................................................................... 2014 Oct. 31 Income Tax Expense .............................10,085 Income Tax Payable ...................... ($35,085 – $25,000)
$445,000
265,075 179,925 4,500 175,425 35,085 $140,340
10,085
(b) MEMPHIS LIMITED Statement of Retained Earnings Year Ended October 31, 2014 Balance, November 1 ........................................... Add: Profit ............................................................ Less: Cash dividends .......................................... Retained earnings, October 31............................
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$ 430,000 140,340 570,340 80,000 $490,340
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-6A (Continued) GENERAL JOURNAL
(c) Date
J1
Account Titles and Explanation
Debit
Credit
Oct. 31 Service Revenue ................................. 445,000 Income Summary...........................
445,000
31 Income Summary ................................304,660 Depreciation Expense ................... Income Tax Expense ..................... Insurance Expense ........................ Interest Expense ............................ Rent Expense ................................. Salaries Expense ...........................
34,375 35,085 6,900 4,500 28,800 195,000
31 Income Summary................................ 140,340 Retained Earnings .........................
140,340
31 Retained Earnings ................................ 80,000 Cash Dividends—Common ...........
80,000
(d)
Income Summary Date
Explanation
Ref.
Debit
Oct. 31 31 31
Closing entry Closing entry Closing entry
J1 J1 J1
304,660 140,340
Debit
Credit 445,000
Balance 445,000 140,340 0
Retained Earnings Date
Explanation
Ref.
Oct. 31 31 31
Balance Closing entry Closing entry
J1 J1 J1
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80,000
Credit
Balance
140,340
430,000 570,340 490,340
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-6A (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 income before tax before finalizing the income tax expense for the year.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-7A
(a)
GENERAL JOURNAL
Date
Account Titles and Explanation
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
1 Cash Dividends—Preferred................ 100,000 Cash................................................
100,000
Aug. 12 Cash (100,000 × $1.70) ....................... 170,000 Common Shares ............................
170,000
July
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 Retained Earnings .............................. 100,000 Income Summary ...........................
100,000
Dec. 31 Retained Earnings .............................. 575,000 Cash Dividends—Preferred........... Cash Dividends—Common ...........
300,000 275,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-7A (Continued) (b) Preferred Shares Date Jan.
Explanation 2
Ref.
Debit
J1
Credit
Balance
5,000,000
5,000,000
Credit
Balance
170,000
1,500,000 1,670,000
Credit
Balance
300,000
100,000 200,000 300,000 0
Credit
Balance
275,000
275,000 0
Common Shares Date Jan. Aug.
1 1
Explanation
Ref.
Balance
J1
Debit
Cash Dividends—Preferred Date Apr. 1 July 1 Oct. 1 Dec. 31
Explanation
Ref.
Debit 100,000 100,000 100,000
Closing entry
J1 J1 J1 J1
Explanation
Ref.
Debit
Closing entry
J1 J1
Cash Dividends—Common Date Oct. 1 Dec. 31
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275,000
Chapter 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 13-7A (Continued) (b) (Continued) Retained Earnings Date
Explanation
Ref.
Debit
Jan. 1 Dec. 31 31
Balance Closing entry Closing entry
J1 100,000 J1 575,000
Credit
Balance 1,800,000 1,700,000 1,125,000
(c) SCHIPPER LTD. Balance Sheet (Partial) December 31, 2014 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 1,125,000 $7,795,000
* 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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-7A (Continued)
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)
GENERAL JOURNAL
Date
Account Titles and Explanation
Feb. 28
Cash ................................................. Preferred Shares ..........................
J1 Debit
Credit
275,000 275,000
Apr. 12 Cash ................................................. 3,200,000 Common Shares .......................... 3,200,000 May 25 Land ................................................. Common Shares ..........................
75,000
Jan.
Cash Dividends—Preferred ............ Cash [(10,000 + 5,000) × $2.50]....
37,500
Retained Earnings ........................... Income Summary .........................
50,000
Jan. 31 Retained Earnings ........................... Cash Dividends—Preferred.........
37,500
1
Jan. 31
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75,000
37,500
50,000 37,500
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PROBLEM 13-8A (Continued) (b) Preferred Shares Date
Explanation
Ref.
Debit
Feb. 1 Feb. 28
Balance
J1
Credit
Balance
475,000 275,000 750,000
Common Shares Date
Explanation
Ref.
Debit
Feb. 1 Apr. 12 May 25
Balance
J1 J1
Credit
Balance
1,050,000 3,200,000 4,250,000 75,000 4,325,000
Cash Dividends—Preferred Date Jan. 1 Jan. 31
Explanation
Ref.
Debit 37,500
Closing entry
J1 J1
Credit
Balance
37,500
37,500 0
Retained Earnings Date
Explanation
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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PROBLEM 13-8A (Continued) (c) CATTRALL CORPORATION Balance Sheet (Partial) January 31, 2015 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)] are in arrears at January 31, 2012. 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.
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PROBLEM 13-9A (a) CHOKE CHERRY LTD. Income Statement Year Ended December 31, 2014 Sales revenue ................................................................. Cost of goods sold......................................................... Gross profit..................................................................... Operating expenses: Depreciation expense ......................................20,000 Insurance expense ........................................... 8,200 Rent expense ...................................................32,600 Salaries expense ...........................................185,000 Supplies expense......................................... 12,500 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................
$515,000 159,000 356,000
258,300 97,700 1,800 95,900 14,385 $ 81,515
CHOKE CHERRY LTD. Statement of Retained Earnings Year Ended December 31, 2014 Balance, January 1............................................... Add: Profit............................................................. Less: Preferred share dividends ........................ $4,000 Common share dividends ........................ 50,000 Retained earnings, December 31 ........................
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$ 73,000 81,515 154,515 54,000 $100,515
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PROBLEM 13-9A (Continued) (a) (Continued) CHOKE CHERRY LTD. Balance Sheet December 31, 2014 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 note payable ................................... 12,000 Total current liabilities ........................................... 75,985 Long-term debt Note 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, not required to show the number authorized. Solutions Manual .
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PROBLEM 13-9A (Continued) (b) Dec. 31 Sales .................................................... 515,000 Income Summary ...........................
515,000
31 Income Summary................................ 433,485 Cost of Goods Sold ....................... Depreciation Expense ................... Insurance Expense ........................ Rent Expense ................................. Salaries Expense ........................... Supplies Expense .......................... Interest Expense ............................ Income Tax Expense .....................
159,000 20,000 8,200 32,600 185,000 12,500 1,800 14,385
31 Income Summary ............................... 81,515 Retained Earnings ......................... ($515,000 – $433,485) 31 Retained Earnings .............................. 54,000 Cash Dividends—Preferred........... Cash Dividends—Common ...........
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81,515
4,000 50,000
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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 partner’s 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 and voted 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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PROBLEM 13-10A (a) NORTHWOOD ARCHITECTS LTD. Income Statement Year Ended March 31, 2014
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 NORTHWOOD ARCHITECTS LTD. Statement of Retained Earnings Year Ended March 31, 2014 Balance, April 1 .................................................... Add: Profit............................................................. Less: Preferred share dividends ........................ $4,500 Common share dividends ........................ 40,000 Retained earnings, March 31 ...............................
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$ 64,800 59,590 124,390 44,500 $ 79,890
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PROBLEM 13-10A (Continued) (a)
NORTHWOOD ARCHITECTS LTD. Balance Sheet March 31, 2014 Assets Current assets Cash ......................................................................... Accounts receivable ................................................ Prepaid expenses .................................................... Total current assets ............................................ Property, plant, and equipment: Equipment .................................... $224,000 Less: Accumulated depreciation . (23,650) Total property, plant, and equipment Total assets..............................................................
$ 54,600 38,700 6,150 99,450
200,350 $299,800
Liabilities and Shareholders’ Equity Current liabilities Accounts payable .................................................... $ 21,350 Dividends payable ................................................... 15,000 Salaries payable....................................................... 2,310 Total current liabilities ........................................ 38,660 Long-term note payable............................................... 50,000 Total liabilities.......................................................... 88,660 Shareholders’ equity Share capital* 56,250 $3 cumulative preferred shares, 1,500 issued ..... Common shares, 75,000 issued ............................ 75,000 Total share capital.................................................. 131,250 Retained earnings.................................................... 79,890 Total shareholders’ equity.................................. 211,140 Total liabilities and shareholders’ equity ............... $299,800 * Under ASPE, not required to show the number authorized. Solutions Manual .
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PROBLEM 13-10A (Continued) (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 represent 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, Sixth Canadian Edition
PROBLEM 13-11A
(a)
2011 Canadian Pacific Railway Limited Return on assets 4.10% (1) Return on equity 12.03% (3)
4.68% (2) 13.73% (4)
Canadian National Railway Company Return on assets 9.59% (5) Return on equity 22.37% (7)
8.35% (6) 18.69% (8)
(1) (2) (3) (4) (5) (6) (7) (8)
2010
4.10% = $570 ÷ (($14,110 + $13,676) ÷ 2) 4.68% = $651 ÷ (($13,676 + $14,155) ÷ 2) 12.03% = $570 ÷ (($4,649 + $4,824) ÷ 2) 13.73% = $651 ÷ (($4,824 + $4,658) ÷ 2) 9.59% = $2,457 ÷ (($26,026 + $25,206) ÷ 2) 8.35% = $2,104 ÷ (($25,206 + $25,176) ÷ 2) 22.37% = $2,457 ÷ (($10,680 + $11,284) ÷ 2) 18.69% = $2,104 ÷ (($11,284 + $11,233) ÷ 2)
Canadian Pacific Railway Limited: The Return on assets ratio has deteriorated slightly as has the return on equity. Canadian National Railway Company: The Return on assets and return on equity ratios 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 2010 and 2011.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-11A (Continued)
(c) Canadian Pacific underperformed compared to the industry
average in 2011. By contrast, Canadian National significantly exceeded the industry average for return on equity in 2011.
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 2010 to 2011 and determine whether improvement or deterioration is occurring. In this case, the performance of Canadian Pacific is deteriorating whereas Canadian National is improving substantially. 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 and is showing an increasing trend whereas Canadian Pacific is showing a decreasing trend. Finally, the industry average comparison allows us to compare how each firm is performing within its industry and to note that Canadian Pacific underperforms compared to the industry but that Canadian National`s performance outperforms the industry.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-12A (a) Jan.
Jan.
1
2
Dec. 1
(b) 1. 2.
3.
4.
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Cash ................................................. Common Shares ..........................
50,000
Cash ................................................. Preferred Shares ..........................
35,000
Cash Dividends—Preferred*........... Cash Dividends—Common ............ Dividends Payable ....................... *(1,000 × $2.50)
2,500 10,000
Cash ................................................. Consulting Revenue ....................
349,000
Salaries Expense ............................. Rent Expense .................................. Office Expense ................................ Cash..............................................
184,200 48,000 15,000
Equipment........................................ Cash..............................................
150,000
Depreciation Expense ..................... Accumulated Depreciation ..........
15,000
Accounts Receivable ...................... Consulting Revenue ....................
16,000
Salaries Expense ............................. Salaries Payable...........................
5,800
Income Tax Expense ....................... Income Tax Payable..................... See part (d)
14,550
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50,000
35,000
12,500
349,000
247,200
150,000
15,000
16,000
5,800
14,550
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-12A (Continued) (c) Cash Date Jan. Jan. 1. 2. 3.
Explanation 1 2
Ref.
Debit
J1 J1 J1 J1 J1
50,000 35,000 349,000
Credit
247,200 150,000
Balance 50,000 85,000 434,000 186,800 36,800
(d)
MAPLE CORPORATION Income Statement Year Ended December 31, 2014 Consulting revenue ($349,000 + $16,000) ..................... Operating expenses: Salaries expense ($184,200 + 5,800) ........... $190,000 Rent expense ...................................................48,000 Office expense .................................................15,000 Depreciation expense .................................. 15,000 Profit from operations before income tax .................... Income tax expense (15% × $97,000) ............................ Profit................................................................................
$365,000
268,000 97,000 14,550 $ 82,450
MAPLE CORPORATION Statement of Retained Earnings Year Ended December 31, 2014 Balance, January 1............................................... Add: Profit............................................................. Less: Preferred share dividends ........................ $2,500 Common share dividends ........................ 10,000 Retained earnings, December 31 ........................ Solutions Manual .
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$ 0 82,450 82,450 12,500 $69,950 Chapter 13
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PROBLEM 13-12A (Continued) (d) (Continued) MAPLE CORPORATION Balance Sheet December 31, 2014 Assets Current assets Cash ......................................................................... Accounts receivable ................................................ Total current assets ............................................ Property, plant, and equipment: Equipment .................................... $150,000 Less: Accumulated depreciation . (15,000) Total property, plant, and equipment Total assets..............................................................
$ 36,800 16,000 52,800
135,000 $187,800
Liabilities and Shareholders’ Equity Current liabilities Dividends payable ................................................... $ 12,500 Salaries payable....................................................... 5,800 Income tax payable.................................................. 14,550 Total current liabilities ........................................ 32,850 Total liabilities.......................................................... 32,850 Shareholders’ equity Share capital* $2.50 cumulative preferred shares, 1,000 issued. 35,000 Common shares, 5,000 issued ................................ 50,000 Total share capital.................................................. 85,000 Retained earnings.................................................... 69,950 Total shareholders’ equity.................................. 154,950 Total liabilities and shareholders’ equity ............... $187,800 * Under ASPE, not required to show number of shares authorized. Solutions Manual .
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PROBLEM 13-12A (Continued) 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 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.
Income tax. The corporation is taxed as a separate legal entity on its own earnings. Income that is distributed to the shareholders is then taxed on their personal income tax returns. If Ping Yu had organized her business as a sole proprietorship, all the profit from the business would be taxed directly on her personal income tax return at her top personal tax bracket.
4.
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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-1B (Continued) 5.
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.
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, Sixth Canadian Edition
PROBLEM 13-2B (a)
GENERAL JOURNAL
Date
Account Titles and Explanation
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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PROBLEM 13-2B (Continued) (b) Preferred Shares Date Mar. Nov.
Explanation
Ref.
Debit
J1 J1
1 1
Credit
Balance
420,000 420,000 96,000 516,000
Common Shares Date Jan. 10 Mar. 31 Apr. 3 July 24
Explanation
Ref. 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 cost per preferred share = $516,000 ÷ 12,000 shares = $43.00 Number of common shares = 100,000 + 75,000 + 25,000 + 20,500 = 220,500 shares Average cost per common share = $571,000 ÷ 220,500 shares = $2.59 (d) The company is authorized to issue an additional 38,000 preferred shares (50,000 shares authorized – 12,000 shares issued) and an unlimited number of common shares.
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PROBLEM 13-2B (Continued)
(e) 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 non-cumulative 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.
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 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 Paid Preferred Year 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 the shares.
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PROBLEM 13-4B
(a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1 Debit
Credit
2013 Jan. 10 Cash Dividends—Preferred ................. 12,000 Cash................................................
12,000
2014 Jan. 10 Cash Dividends—Preferred* ................ 28,000 Cash Dividends—Common .................... 4,000 Cash................................................
32,000
* Arrears from 2010: 2013 Dividend: (5,000 × $4) .............. $20,000 Less Dividend paid in 2013 .............. 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 2013 in the notes to the financial statements.
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PROBLEM 13-4B (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 the market value of the common shares received exceed 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 the possibility for additional returns on their investment makes the convertible preferred shares more attractive to investors.
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PROBLEM 13-5B (a)
GENERAL JOURNAL
Date
J1 Debit
Credit
2014 June 26 Cash Dividends—Common ............... 80,000 Dividends Payable .........................
80,000
July
Account Titles and Explanation
9 Dividends Payable.............................. Cash................................................
80,000
Dec. 26 Cash Dividends—Common ............... 80,000 Dividends Payable .........................
80,000 80,000
HYPERCHIP LIMITED Income Statement Year Ended December 31, 2014
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, 2014
Balance, 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 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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PROBLEM 13-6B (a) HAYDEN INC. Income Statement Year Ended November 30, 2014
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 ($92,000 × 15%) ............................ Profit................................................................................ 2014 Nov. 30 Income Tax Receivable .......................... 1,200 Income Tax Expense ..................... ($15,000 – $13,800)
$425,000
325,500 99,500 7,500 92,000 13,800 $ 78,200
1,200
(b) HAYDEN INC. Statement of Retained Earnings Year Ended November 30, 2014 Balance, 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-6B (Continued) GENERAL JOURNAL
(c) Date
J1
Account Titles and Explanation
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
Explanation
Ref.
Debit
Nov. 30 30 30
Closing entry Closing entry Closing entry
J1 J1 J1
346,800 78,200
Debit
Credit
Balance
425,000
425,000 78,200 0
Retained Earnings Date
Explanation
Ref.
Nov. 30 30 30
Balance Closing entry Closing entry
J1 J1 J1
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Credit 78,200
120,000
Balance 339,500 417,700 297,700
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Accounting Principles, Sixth Canadian Edition
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)
GENERAL JOURNAL
Date Jan.
Account Titles and Explanation 2
Mar. 31
Apr. 18
June 30
Sep. 30
Dec. 31
Dec. 31
Solutions Manual .
J1 Debit
Credit
Cash (100,000 × $66) ...................... 6,600,000 Preferred Shares ......................... 6,600,000 Cash Dividends—Preferred ........... Cash............................................. (100,000 × $6 4)
150,000
Cash (250,000 × $1.30) ................... Common Shares .........................
325,000
Cash Dividends—Preferred ........... Cash.............................................
150,000
Cash Dividends—Preferred ........... Cash.............................................
150,000
Income Summary ........................... Retained Earnings ......................
160,000
Retained Earnings .......................... Cash Dividends—Preferred........
450,000
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150,000
325,000
150,000
150,000
160,000 450,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-7B (Continued) (b) Preferred Shares Date Jan.
Explana tion 2
Ref.
Debit
J1
Credit
Balance
6,600,000 6,600,000
Common Shares Date
Explanation
Ref.
Jan. 1 Apr. 18
Balance
J1
Debit
Credit
Balance
325,000
1,650,000 1,975,000
Balance
Cash Dividends—Preferred Date Mar. 31 June 30 Sep. 30 Dec. 31
Explanation
Ref.
Debit
Credit
150,000 150,000 150,000
Closing entry
J1 J1 J1 J1
150,000 300,000 450,000 450,000 0
Retained Earnings Date Jan. 1 Dec. 31 31
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Explanation Balance Closing entry Closing entry
Ref. J1 J1
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Debit
450,000
Credit
Balance 400,000 560,000 160,000 110,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-7B (Continued) (c) CONWAY LTD. Balance Sheet (Partial) December 31, 2014 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, 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. Also, the full dividend must be declared on the preferred shareholders before a common share dividend is declared. Since that did not happen, no dividend could have been declared for the common shares.
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PROBLEM 13-8B
(a)
GENERAL JOURNAL
Date Jan.
Account Titles and Explanation 1
J1 Debit
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.
1 1
Explanation
Ref.
Balance
J1
Debit
Credit
Balance
440,000 600,000 1,040,000
Common Shares Date
Explanation
Ref.
Debit
Jan. 1 Apr. 14 Aug. 22
Balance
J1 J1
Credit
Balance
1,050,000 560,000 1,610,000 150,000 1,760,000
Cash Dividends—Preferred Date June 30 Dec. 31
Explanation
Ref.
Debit 36,000
Closing entry
J1 J1
Credit
Balance
36,000
36,000 0
Retained Earnings Date
Explanation
Ref.
Debit
Jan. 1 Dec. 31 Dec. 31
Balance Closing Entry Closing Entry
J1 J1
800,000 582,000 1,382,000 1,346,000 36,000
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Credit
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PROBLEM 13-8B (Continued) (c)
LARGENT CORPORATION Balance Sheet (Partial) December 31, 2014
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, 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-9B (a) RUPERT ENGINEERING CORP. Income Statement Year Ended March 31, 2014 Consulting revenue........................................................ Operating expenses: Depreciation expense ......................................14,800 Rent expense ...................................................36,000 Salaries expense ...........................................140,300 Supplies expense......................................... 15,900 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................
$315,500
207,000 108,500 2,400 106,100 21,200 $ 84,900
RUPERT ENGINEERING CORP. Statement of Retained Earnings Year Ended March 31, 2014 Balance, 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-9B (Continued) (a) (continued) RUPERT ENGINEERING CORP. Balance Sheet March 31, 2014 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 note payable .......................... Total current liabilities .................................. Long-term debt Long-term note 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, not required to show the number authorized. Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-9B (Continued) (b) Dec. 31 Consulting revenue ............................ 315,500 Income Summary ...........................
315,500
31 Income Summary................................ 230,600 Depreciation Expense ................... Rent Expense ................................. Salaries Expense ........................... Supplies Expense .......................... Interest Expense ............................ Income Tax Expense .....................
14,800 36,000 140,300 15,900 2,400 21,200
31 Income Summary ............................... 84,900 Retained Earnings ......................... ($315,500 – $230,600) 31 Retained Earnings .............................. 54,000 Cash Dividends—Preferred........... Cash Dividends—Common ...........
84,900
1,875 53,125
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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-9B (Continued) Taking It Further (Continued): 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-10B (a) CARLOTTA’S CAKES INC. Income Statement Year Ended May 31, 2014 Sales revenue ................................................................. Cost of goods sold......................................................... Gross profit..................................................................... Operating expenses: Depreciation expense.................................... 42,000 Insurance expense ........................................ 7,500 Rent expense ................................................. 24,500 Salaries expense............................................ 67,800 Supplies expense........................................... 5,875 Profit from operations.................................................... Other expenses: Interest expense ........................................................ Profit before income tax ................................................ Income tax expense ....................................................... Profit................................................................................
$504,500 277,475 227,025
147,675 79,350 4,500 74,850 11,230 $ 63,620
CARLOTTA’S CAKES INC. Statement of Retained Earnings Year Ended May 31, 2014 Balance, 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-10B (Continued) (a)
(Continued) CARLOTTA’S CAKES INC. Balance Sheet May 31, 2014 Assets
Current assets Cash ......................................................................... $ 20,600 Accounts receivable ................................................ 15,300 Inventory .................................................................. 70,220 Total current assets ............................................ 106,120 Property, plant, and equipment: Equipment .............................................. $420,000 Less: Accumulated depreciation .......... (126,000) Total property, plant, and equipment .. ............. 294,000 Total assets.............................................................. $400,120 Liabilities and Shareholders’ Equity Current liabilities Accounts payable .................................................... Dividends payable ................................................... Total current liabilities ........................................ Long-term note payable............................................... Total liabilities ..................................................... Shareholders’ equity Share capital* $3 cumulative preferred shares, 2,500 issued .. Common shares, 50,000 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, not required to show the number authorized. Solutions Manual .
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PROBLEM 13-10B (Continued) (b) Return on equity = Profit ÷ Average shareholders’ equity $63,620 ($273,000* + $279,120) ÷ 2
= 23.05%
* $273,000 = Beginning Retained Earnings + Share Capital = $73,000 + $200,000
Taking It Further: If the company is generating a loss, the return on equity is still a useful measurement since it will show a negative return on shareholders’ equity. If however, total shareholders’ equity is in a deficit position (a negative balance), the formula is no longer useful as a measurement.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 13-11B (a)
2011
2010
Husky Energy Inc. Return on assets Return on equity
7.35% (1) 13.75% (3)
3.54% (2) 6.69% (4)
Suncor Energy Inc. Return on assets Return on equity
6.00% (5) 11.67% (7)
5.61% (6) 11.32% (8)
(1) (2) (3) (4) (5) (6) (7) (8)
7.35% = $2,224 ÷ (($32,426 + $28,050) ÷ 2) 3.54% = $947 ÷ (($28,050 + $25,508) ÷ 2) 13.75% = $2,224 ÷ (($17,773 + $14,574) ÷ 2) 6.69% = $947 ÷ (($14,574 + $13,716) ÷ 2) 6.00% = $4,304 ÷ (($74,777 + $68,607) ÷ 2) 5.61% = $3,829 ÷ (($68,607 + $67,799) ÷ 2) 11.67% = $4,304 ÷ (($38,600 + $35,192) ÷ 2) 11.32% = $3,829 ÷ (($35,192 + $32,485) ÷ 2)
Husky Energy Inc.: The Return on assets ratio has improved substantially as has the return on equity. Suncor Energy Inc.: The Return on assets and return on equity ratios have improved slightly. (b) Husky Energy`s return on assets and return on equity
ratios both underperformed those of Suncor Energy in 2010. In 2011, the two ratios improved substantially for Husky Energy and outperformed Suncor Energy. During the same year, Suncor Energy`s two ratios increased slightly, but not to the same extent as those for Husky.
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PROBLEM 13-11B (Continued)
(c) Both companies outperformed the industry average for
return on equity in 2011. Suncor Energy has outperformed the industry average for both 2010 and 2011, whereas Husky Energy underperformed in 2010 and increased its performance in 2011 to exceed the industry average.
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 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 2010 to 2011 and determine whether an improvement or deterioration is occurring. In this case, the performance of both companies is improving. 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 improvement is substantially better than 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 outperform the industry but that Husky’s improvement is greater than Suncor’s.
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PROBLEM 13-12B (a) Jan.
Jan.
1
2
Dec. 10
(b) 1. 2.
3.
4.
Solutions Manual .
Cash ................................................. Common Shares ..........................
60,000
Cash (1,000 × $62.50) ...................... Preferred Shares ..........................
62,500
Cash Dividends—Preferred*........... Cash Dividends—Common ............ Dividends Payable ....................... *(1,000 × $5.00)
5,000 12,000
Cash ................................................. Consulting Revenue ....................
268,000
Salaries Expense............................. Rent Expense .................................. Office Expense ................................ Cash..............................................
164,000 42,000 12,000
Equipment........................................ Cash..............................................
130,000
Depreciation Expense ..................... Accumulated Depreciation ..........
13,000
Accounts Receivable ...................... Consulting Revenue ....................
22,000
Salaries Expense ............................. Salaries Payable...........................
4,200
Income Tax Expense ....................... Income Tax Payable..................... See part (d)
8,220
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60,000
62,500
17,000
268,000
218,000
130,000
13,000
22,000
4,200
8,220
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PROBLEM 13-12B (Continued) (c) Cash Date Jan. Jan. 1. 2. 3.
Explanation 1 2
Ref.
Debit
J1 J1 J1 J1 J1
60,000 62,500 268,000
Credit
218,000 130,000
Balance 60,000 122,500 390,500 172,500 42,500
(d)
NYGREN CORPORATION Income Statement Year Ended December 31, 2014 Consulting revenue ($268,000 + $22,000) ..................... Operating expenses: Salaries expense ($164,000 + $4,200) ......... $168,200 Rent expense ...................................................42,000 Office expense .................................................12,000 Depreciation expense .................................. 13,000 Profit from operations before income tax .................... Income tax expense (15% × $54,800) ............................ Profit................................................................................
$290,000
235,200 54,800 8,220 $ 46,580
NYGREN CORPORATION Statement of Retained Earnings Year Ended December 31, 2014 Balance, January 1............................................... Add: Profit............................................................. Less: Preferred share dividends ........................ $5,000 Common share dividends ........................ 12,000 Retained earnings, December 31 ........................ Solutions Manual .
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$
0 46,580 46,580
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PROBLEM 13-12B (Continued) (d) (Continued) NYGREN CORPORATION Balance Sheet December 31, 2014 Assets Current assets Cash ......................................................................... Accounts receivable ................................................ Total current assets ............................................ Property, plant, and equipment: Equipment .................................... $130,000 Less: Accumulated depreciation . (13,000) Total property, plant, and equipment Total assets..............................................................
$ 42,500 22,000 64,500
117,000 $181,500
Liabilities and Shareholders’ Equity Current liabilities Dividends payable ................................................... $ 17,000 Salaries payable....................................................... 4,200 Income tax payable.................................................. 8,220 Total current liabilities ........................................ 29,420 Total liabilities.......................................................... 29,420 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 Total liabilities and shareholders’ equity ............... $181,500 * Under ASPE, not required to show the number authorized.
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PROBLEM 13-12B (Continued) 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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CONTINUING COOKIE CHRONICLE GENERAL JOURNAL Date (a) July 15
Account Titles and Explanation
J1 Debit
Cash Dividends—Common ............ Dividends Payable .......................
85,000
July 30 Dividends Payable .......................... Cash..............................................
85,000
Credit
85,000 85,000
Since only Janet and Brian own all of 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) KOEBEL’S FAMILY BAKERY LTD. Statement of Retained Earnings Year Ended July 31, 2014 Balance, August 1 ................................................ Add: Profit ($255,823 × [1 – 18%]) ....................... Less: Cash dividends .......................................... Retained earnings, July 31 ..................................
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$116,251 209,775 326,026 85,000 $241,026
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CONTINUING COOKIE CHRONICLE (Continued) (c) KOEBEL’S FAMILY BAKERY LTD. Balance Sheet (Partial) July 31, 2014 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) Aug.
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 relatively low number of shares issued to Natalie for the fair value of her assets.
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CONTINUING COOKIE CHRONICLE (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 shares of 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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BYP 13-1 FINANCIAL REPORTING PROBLEM (a) Per note 16 to the financial statements, Reitmans (Canada) Limited has 2 classes of shares. There is an unlimited number of Class A non-voting shares authorized and 52,146 issued; and an unlimited number of common shares authorized and 13,440 issued. (b) Both classes of shares rank equally with respect to the right to receive dividends and for distribution of assets. Class A non-voting shares have the right to receive Class A non-voting shares in the case of share dividends and common shares have the right to receive common shares in the case of share dividends. (c)
During the 2012 fiscal year, Reitmans issued 722 Class A non-voting shares for $11,056,000 from a share option program. The share option program is granted to key management and employees at the discretion of the board of directors.
(d) The average cost of the common shares is $35.86 ($482,000 ÷ 13,440). The average cost of the Class A nonvoting shares is $755.72 ($39,408,000 ÷ 52,146). (e)
Reitmans declared and paid $52,654,000 in dividends to common shares and Class A non-voting shares during fiscal 2012.
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BYP 13-1 (Continued) (f)
Return on equity = Profit ÷ Average shareholders’ equity (figures in thousands) Return on equity for 2011 = $88,985 ÷ ($512,800 + $498,252) 2 = 17.6% The company’s return on equity has deteriorated significantly over the past year from 17.6% in fiscal 2011 to 9.5% in fiscal 2012.
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BYP 13-2 INTERPRETING FINANCIAL STATEMENTS (a) Talisman’s profitability has declined from 2010 to 2011. Its profit margin has suffered a large decrease. Its return on assets and return on equity have also decreased in the same time period. (b) The fair value of Talisman’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. Consistent with the decline in profitability, the market price of the common shares has declined significantly from 2010 to 2011. (c) Issuing preferred shares does not dilute the voting percentages of existing common shareholders. It allows the company to raise funds from new shareholders without affecting the voting control of common shareholders. (d) Underwriting fees do not meet the definition of an expense. They are not incurred to generate revenues but rather to increase owners’ capital and relate to a transaction with owners. They are therefore recorded as a reduction in the proceeds from the issue of the shares. (e) The dividend rate of 4.2% is equivalent to $1.05 per preferred share (4.2% × $25 per share = $1.05). 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.
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BYP 13-2 (Continued)
(f)
Talisman 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 repurchase the shares to conserve its cash for the future.
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Accounting Principles, Sixth 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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BYP 13-4 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 no control over business and
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BYP 13-4 (Continued) 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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BYP 13-5 ETHICS CASE (a) The stakeholders in this situation are: The directors of the Simplex companies. The president of Simplex. The shareholders of the Simplex companies. Those who live in the environment to be sprayed by the new (un-tested) chemical. (b) The president is taking exceptional risks by allowing exposure to this new chemical, in order to enhance his company's sales and to preserve his job. Presidents and entrepreneurs frequently take risks in performing their leadership functions, but this action is both irresponsible and unethical. (c) A parent company may protect itself against loss and most reasonable business risks by establishing separate subsidiary corporations, but whether it can insulate itself against this type of action is a matter of international corporate law and criminal law.
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BYP 13-6 “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. Visitor service 6. 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 a 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:
Solutions Manual .
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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CHAPTER 14 Corporations: Additional Topics and IFRS ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
Brief Exercises
Problems Set A
Problems Set B
1. 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. 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, 12
4, 5, 7, 9, 10
3, 4, 5, 6, 8
3, 4, 5, 6, 8
4. Explain the accounting difference for different types of accounting changes and account for corrections of prior period errors.
12, 13, 14
9, 10
6, 7, 8
4, 5, 6, 7, 8, 12
4, 5, 6, 7, 8, 12
5. Prepare a statement of changes in shareholders’ equity.
15 , 16
11, 12
8, 9, 10
7, 8, 9
7, 8, 9
6. Evaluate earnings and dividend performance.
17, 18, 19, 20
13, 14, 15
11, 12, 13
10, 11, 12
10, 11, 12
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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. Show impact of transactions on accounts.
Moderate
30-40
5A
Prepare income statement with EPS and statement of comprehensive income.
Moderate
25-30
6A
Correct error from prior period; prepare statement of comprehensive income—all-inclusive format; show presentation of retained earnings.
Moderate
30-35
7A
Record and post transactions; prepare a statement of changes in shareholders’ equity.
Complex
30-40
8A
Record and post transactions; prepare financial statements.
Complex
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 with EPS and statement of comprehensive income.
Moderate
25-30
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
6B
Correct error from prior period; prepare statement of comprehensive income—all-inclusive format; show presentation of retained earnings.
Moderate
30-35
7B
Record and post transactions; prepare a statement of changes in shareholders’ equity.
Complex
30-40
8B
Record and post transactions; prepare financial statements.
Complex
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, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study Objectives 1.Account for stock dividends and stock splits, and compare their financial impact.
Knowledge Comprehension Q14-1 Q14-2 Q14-3
2. Account for the reacquisition of shares
Q14-5 Q14-6 Q14-7 Q14-8
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 accounting difference for different types of accounting changes and account for corrections of prior period errors 5. Prepare a statement of changes in shareholders’ equity
Q14-12 Q14-13 Q14-14
Q14-15 Q14-16
6. Evaluate earnings and dividend performance.
Q14-17 Q14-18 Q14-20
Broadening Your Perspective
BYP14-1
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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 E14-4 P14-2B E14-7 P14-3B E14-10 P14-4B P14-2A P14-6B P14-3A P14-7B P14-4A P14-8B BE14-6 P14-5A BE14-7 P14-6A BE14-8 P14-8A BE14-12 P14-5B E14-5 P14-6B E14-9 P14-8B E14-10
BE14-9 BE14-10 E14-6 E14-7 E14-8
BE14-11 BE14-12 E14-7 E14-8 E14-9 E14-10 Q14-19 BE14-13 BE14-14 BE14-15 E14-11 E14-12
P14-6A P14-7A P14-8A P14-12A P14-6B P14-7B P14-8B P14-12B
P14-7A P14-8A P14-9A P14-7B P14-8B P14-9B E14-13 P14-5A P14-10A P14-12A P14-5B P14-10B P14-12B Continuing Cookie Chronicle
14-4
Analysis Synthesis Evaluation
P14-11A P14-11B
BYP 14-2 BYP14-3
BYP14-4
BYP14-5 BYP14-6
Chapter 14
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Accounting Principles, Sixth 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
Stock Split N/E N/E N/E N/E 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 bonus and 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.
6.
If the reacquisition price is less than the average cost, the difference is considered contributed to the remaining shareholders. This amount is reported as contributed surplus from share reacquisition in the share capital section of shareholders’ equity. If the reacquisition price is more than the average cost, the difference is debited to Contributed Surplus from the same class of shares to the extent of any pre-existing balance in the contributed surplus account, and then debited to Retained Earnings.
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Accounting Principles, Sixth Canadian Edition
Questions (Continued) 7.
If there have been gains from similar transactions in the past, the resulting credit balance of the contributed surplus account is available to absorb some or all of the loss on reacquisition. However, the balance of the contributed surplus account cannot go below zero. If the loss exceeds the balance in the contributed surplus account, the excess amount is debited to retained earnings.
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 to “held for sale” of a component 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 changes that result 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. Other comprehensive income 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. 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. Other comprehensive income is closed to Accumulated Other Comprehensive Income, which appears in the equity section of the balance sheet, immediately after Retained Earnings.
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.
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Accounting Principles, Sixth Canadian Edition
Questions (Continued) 12.
A company is allowed to change an accounting policy when the change is required by generally accepted accounting principles 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.
Since revenue and expense accounts are closed at the end of each fiscal year, corrections related to a previous period cannot be made to those accounts. However, the balances in the permanent accounts must be restored to what they would have been, had the error not been made. If the error affected an income statement account, retained earnings will be adjusted for the after-tax impact of the error. Prior year statements that are issued with the current statement will be restated to eliminate the error, if needed. Restated financial statements are labelled as restated and notes to the financial statements explain the nature and effect of the restatement caused by the prior period error.
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Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
Questions (Continued) 15. Contributed Capital Profit Loss Issue shares Share reacquisition Other comprehensive gains Other comprehensive losses Dividend declaration Stock dividend Correction of prior period errors Cumulative effect of a change in accounting policy
Increase Decrease
Contributed Surplus
Retained Earnings Increase Decrease
Increase or Decrease
Decrease
Accum. Other Comp. Income
Increase Decrease Decrease Decrease Increase or Decrease Increase or Decrease
Increase
16.
Comprehensive income includes profit (or loss) and other comprehensive income (or loss). The profit or loss is reported in the retained earnings section of the statement of changes in shareholders’ equity. Other comprehensive income (or loss) is reported in the accumulated other comprehensive income section of the statement of changes in shareholders’ equity.
17.
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.
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Accounting Principles, Sixth Canadian Edition
Questions (Continued) 18.
(a) When calculating earnings per share, the amount of profit available to common shareholders is not always the same as 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 dividend 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.
19.
Company B would be a better choice. The price-earnings ratio indicates investors’ assessment of the company’s future earnings. A price-earnings ratio of 22 times means that investors are willing to pay 22 times earnings per share to purchase a share of Company B. If Company A and Company B are in the same industry, investors are more optimistic are Company B’s future earnings. There are potentially higher capital gains for a share of Company B. A very high price-earnings ratio may also mean that a company’s share price has reached its maximum.
20.
(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 risk that the price will increase even further. (d) Favourable from the perspective of a shareholder receiving the dividend.
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 14-1 (a) Mar. 1 Stock Dividends (400,000 × 5% × $5) ...100,000 Stock Dividends Distributable..........
100,000
31 Stock Dividends Distributable............... 100,000 Common Shares................................
100,000
(b) Wei Tse’s percentage ownership would not change as a result of a stock dividend. Prior to the stock dividend, Wei Tse’s ownership percentage was 0.5% (2,000 ÷ 400,000). After the stock dividend, Wei Tse’s ownership percentage remains 0.5% (2,100 ÷ 420,000).
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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BRIEF EXERCISE 14-3 Transaction (a) Declared a cash dividend (b) Paid the cash dividend declared in (a) (c) Declared a stock dividend (d) Distributed the stock dividend declared in (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) Dec. 31
(b) Dec. 31
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 share price = $250,000 ÷ 40,000 shares = $6.25
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BRIEF EXERCISE 14-5 (a) Average cost per share: $12.60 ($50,000 + $265,000) ÷ (10,000 + 15,000) (b) Feb.
8
Dec. 22
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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
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Accounting Principles, Sixth Canadian Edition
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
(c)
$(17,000) 12,000 $ (5,000)
Profit before income tax $320,000 Income tax expense 64,000 Profit from continuing operations 256,000 Discontinued operations: Loss from operations of discontinued operations, net of $17,000 income tax savings $68,000 Gain on disposal of assets of discontinued operations, net of $12,000 income tax expense 48,000 20,000 Profit $236,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 14-7 OLIVIER CORPORATION Statement of Income Year Ended August 31, 2014
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..........................................................
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$500,000 180,000 320,000 64,000 256,000
$68,000
48,000
20,000 $236,000
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 14-8 (a) JET SET AIRLINES Statement of Comprehensive Income Year Ended December 31, 2014
Profit ............................................................... Other comprehensive income Gain on equity investments, net of $19,8001 income tax expense ........ Comprehensive income ................................ 1 $66,000 × 30% = $19,800
$920,000
(b) Accumulated other comprehensive income [$(31,550) + $46,200]
$14,650
46,200 $966,200
BRIEF EXERCISE 14-9 Jan. 1 Inventory...................................................... 110,000 Income Tax Payable .............................. 27,500 Retained Earnings [$110,000 × (1 − 25%)] 82,500
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 14-10 BROADFOOT BAKERIES, INC. Statement of Retained Earnings Year Ended December 31, 2014
Balance, January 1, 2011 as previously reported ......... $394,000 Add: Correction for overstatement of cost of goods 82,500 sold in 2013, net of $27,500 income tax expense Balance, January 1, 2011 as restated ............................ 476,500 Add: Profit ..................................................................... 128,000 604,500 Less: Dividends.............................................................. 44,000 Balance, December 31 .................................................... $560,500
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, 2013 (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) $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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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 14-12 (a) PENINSULA SUPPLY CORPORATION Statement of Comprehensive Income Year Ended December 31, 2014 Profit .......................................................................... Other comprehensive income ................................. Comprehensive income ...........................................
$22,500 17,000 $39,500
(b) PENINSULA SUPPLY CORPORATION Partial Balance Sheet December 31, 2014
Shareholders' equity Share capital Common shares, unlimited shares authorized, 525,000 shares issued ................... Contributed surplus—reacquired common shares. Total contributed capital .............................................. Retained earnings ........................................................ Accumulated other comprehensive income............... Total shareholders' equity....................................
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$603,750 23,000 626,750 181,000 68,000 $875,750
Chapter 14
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 14-13 (a)
20,000 − 5,000 + 6,000 + 10,000 = 31,000 shares
(b)
Weighted average number of shares: Date Jan. 1 Mar. 1 June 1 Sep. 30
Actual Number 20,000 (5,000) 6,000 10,000 31,000
Fraction of Year × 12/12 = × 9/12 = × 7/12 = × 3/12 =
Weighted Average 20,000 (3,750) 3,500 2,500 22,250
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)
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Accounting Principles, Sixth Canadian Edition
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 per share ÷ Earnings per share = $0.80 ÷ $4.00 = .20 or 20%
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 14-1 Before Action Total assets
After Cash After Stock After Stock Dividend Dividend Split
$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 shareholders’ equity $1,875,000 $1,851,000
$ 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
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-2 1. Dec. 31 Cash Dividends—Preferred (20,000 × $4 ÷ 4) ..................... Dividend Expense.................. 2.
3.
4.
20,000 20,000
31 Stock Dividends—Common ...... Dividends Payable ..................... Common Stock Dividend Distributable ........ Retained Earnings .................
12,000 12,000
31 Preferred Shares ........................ Retained Earnings .................
1,400,000
12,000 12,000
31 Dividends Payable ..................... 20,000 Cash Dividends—Preferred .. (40,000 × $2 ÷ 4 = $20,000, not $40,000)
1,400,000 20,000
Before split: Annual dividend = 20,000 × $4 = $80,000 After split: Annual dividend = 40,000 × $2 = $80,000
Solutions Manual .
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Accounting Principles, Sixth 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) July 18
105,000
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) ........ *Average Cost per Common Share: Number of Transaction Common Shares Date Issued January 6 200,000 January 12 50,000 July 18 1,000,000 Total 1,250,000
390,000
16,500 270,000
Proceeds of Issue $ 300,000 87,500 2,000,000 $2,387,500
$2,387,500 1,250,000 = $1.91
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-3 (Continued) (b) There are 900,000 common shares remaining, at an average cost of $1.91**. **Average Cost per Common Share: 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
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-4 TOP BRANDS LIMITED Income Statement Year Ended March 31, 2014 Revenues Fees earned........................................... Rent revenue......................................... Operating expenses Advertising expense............................. Depreciation expense........................... Training programs 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, 2014
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
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-5 SHRINK LTD. Partial Statement of Comprehensive Income Year Ended December 31, 2014
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.......................................................... Other comprehensive income (loss) Gain on equity investments, net of $6,000*** in income tax savings. Comprehensive income ...........................
$320,000
42,000 362,000
14,000 $376,000
* $90,000 × 30% = $27,000 ** $30,000 × 30% = $9,000 *** $20,000 × 30% = $6,000
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Accounting Principles, Sixth 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, 2014
Balance, January 1 as previously reported ........ Add: Correction of error in recording purchase of land in 2013, net of $18,750 income tax expense ............................................................. Balance, January 1 as adjusted .......................... Add: Profit............................................................. Less: Cash dividends .......................................... Retained earnings, December 31 ........................
$ 573,500
56,250 629,750 193,000 822,750 216,000 $606,750
(c) If Silver Fox uses IFRS, instead of using a statement of retained earnings, it will use a statement of changes in shareholders’ equity.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-7 (a) FYRE LITE CORPORATION Statement of Retained Earnings Year Ended December 31, 2014
Balance, January 1, as previously reported..................... $650,000 Add: Correction for understatement of 2013 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
(b) Note X: During the year, the corporation completed a 3-for-1 stock split on its common shares. On the balance sheet, the number of common shares outstanding will have tripled in number.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-8
Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Contributed Capital Share Capital Additional NE NE NE NE I NE NE NE I NE NE NE NE NE NE NE D I NE NE
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Retained Earnings D NE NE NE D NE I NE NE I
Accumulated Other Comprehensive Income NE NE NE NE NE NE NE I NE I
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Total Shareholders’ Equity D NE I NE NE NE I I D I
Chapter 14
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 14-9 (a) Journal entries not required: July 1
Cash (60,000 × $15) ................................ 900,000 Common Shares .............................. 900,000
Sep. 30 Memo entry: 3 for 2 split, 90,000 shares issued (120,000 + 60,000) × 3/2 = 270,000 total shares less previously issued 180,000 = 90,000 Dec. 9 Stock Dividends (13,500* × $22) ............ 297,000 Stock Dividends Distributable ........ 297,000 * (120,000 + 60,000) × 3/2 × 5% = 13,500 HOPKINS CORPORATION Statement of Comprehensive Income Year ended December 31, 2014
Profit.......................................................... Other comprehensive income Loss on equity investments, net of $16,800* in income tax savings.. Comprehensive income ...........................
$390,000
31,200 $358,800
* ($48,000 × 35% = $16,800)
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EXERCISE 14-9 (Continued) (b) HOPKINS CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2014
Share capital, common shares Balance, January 1, 120,000 shares issued .......... $1,200,000 Issued for cash, 60,000 shares.......................... 900,000 Stock split, 90,000 shares.................................. 0 Balance, December 31, 270,000 shares issued .... 2,100,000 Stock dividends distributable Balance, January 1 ................................................. Common stock dividend declared ........................ Balance, December 31 ...............................................
0 297,000 297,000
Retained earnings Balance, January 1 ................................................. Profit ................................................................... Stock dividends.................................................. Balance, December 31............................................
750,000 390,000 (297,000) 843,000
Accumulated other comprehensive income Balance, January 1 ................................................. Other comprehensive income (loss)................. Balance, December 31............................................
17,000 (31,200) (14,200)
Total shareholders' equity .......................................... $3,225,800
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-10 RUBY RED RENTAL CORPORATION Statement of Changes in Shareholders’ Equity Year ended December 31, 2014
Share capital, common shares Balance, January 1, 32,000 shares issued ............ $800,000 Reacquired 1,000 shares (1) .............................. (25,000) Issued for cash, 2,000 shares ............................... 104,000 Balance, December 31, 33,000 shares issued .......... 879,000 Contributed surplus—reacquired shares Balance, January 1 ................................................. Reacquired common shares (1)............................ Balance, December 31 ...............................................
540,000 (19,500) 520,500
Retained earnings Balance, January 1 ................................................. Profit ($425,000 − $40,000)................................. Dividends ............................................................ Balance, December 31............................................
1,500,000 385,000 (70,000) 1,815,000
Accumulated other comprehensive income Balance, January 1 ................................................. Other comprehensive income ........................... Balance, December 31............................................
(25,000) 40,000 15,000
Total shareholders' equity ..........................................
$3,229,500
(1) ($800,000 ÷ 32,000) × 1,000 = $25,000 $44,500 – $25,000 = $19,500
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Accounting Principles, Sixth Canadian Edition
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, 2013 Feb. 28, 2014 May 31, 2014 Nov. 1, 2014
(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
(d)
Earnings per share — preferred shares are non-cumulative = Profit available to common shareholders ÷ Weighted average number of common shares = $465,325 ÷ 66,250 = $7.02
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-12 (a)
Weighted average number of shares Jan. 1, 2014 March 31, 2014 June 1, 2014 Dec. 1, 2014
100,000 × 12/12 12,000 × 9/12 (14,000) × 7/12 24,000 × 1/12
= = = =
100,000 9,000 (8,167) 2,000 102,833
(b) 1. (i) Earnings per share = $4.49 [($478,000 − $16,000*) 102,833] *(3,000 + 1,000) × $4 = $16,000 1. (ii) Same as in [(b) 1. (i)] above: $4.49. 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 $4.49 2. (ii) Earnings per share = $4.65 ($478,000 102,833)
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Accounting Principles, Sixth Canadian Edition
EXERCISE 14-13 (a) Earnings per share Price-earnings ratio Payout ratio
2014
2013
2012
$3.79 11.3 X .660
$4.18 11.9 X .538
$5.26 10.7 X .399
Calculations: Earnings per share (in thousands) 2014: ($1,978 − $73) ÷ 502 = $3.79 2013: ($2,131 − $43) ÷ 500 = $4.18 2012: ($2,663 − $30) ÷ 501 = $5.26 Price-earnings ratio 2014: $43.00 ÷ $3.79 = 11.3 times 2013: $49.75 ÷ $4.18 = 11.9 times 2012: $56.25 ÷ $5.26 = 10.7 times Payout ratio 2014: $2.50 ÷ $3.79 = .660 2013: $2.25 ÷ $4.18 = .538 2012: $2.10 ÷ $5.26 = .399
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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 2014 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 substantially in 2013, and then declined in 2014. There are many factors affecting priceearnings 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 price-earnings 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.
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 14-1A (a) Cash Dividend
Stock Dividend
3-for-2 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)
200,000 increase (400,000 × 3 ÷ 2 = 600,000)
a b
No effect = 400,000
400,000 × $1.50 = $600,000 400,000 × 5% × $30 = $600,000
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Accounting Principles, Sixth 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 ÷ 2 = 1,500 shares Fair value of shares = 1,500 × $203 = $30,000 3
Assumed that fair value of the shares would likely decrease by one-third because of the stock split ($30 × 2/3 = $20)
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 often brokerage fees associated with selling shares. Solutions Manual .
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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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 14-2A
(a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1 Debit
Credit
Jan. 15 Cash Dividends—Common................... 90,000 Dividends Payable (90,000 × $1) ......
90,000
Feb. 15 Dividends Payable ................................. Cash ...................................................
90,000
July
90,000
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 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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PROBLEM 14-2A (Continued) (b) Common Shares Date Jan.
Explanation 1 Balance
Ref.
Debit
Credit
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
Balance
J1 315,000 J1 225,000
540,000 855,000 630,000
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PROBLEM 14-2A (Continued)
(c) LEBLANC CORPORATION Partial Balance Sheet December 31, 2014
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: 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 2-for-1 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 rise above the split value, or the decreased value due to the stock dividend, as a result of investor interest.
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PROBLEM 14-3A (a) Shares authorized Shares issued
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.
Cont. surplus —reacq. of common shares
Retained earnings
$3.00
$15,000
$720,000
3.08
15,000 (1) 800 15,800
720,000
15,800 (2) (15,800) 0 (3) 6,750 $ 6,750
720,000 (580) 719,420
Common shares (a)
Average Number issue of shares price (b) (a) ÷ (b)
$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
3.08 3.09 3.09 3.09
720,000
$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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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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 14-4A (a) and (b)
Date Jan. 1, Feb. 11 Subtotal Mar. 2 May 3 Subtotal June 14 Subtotal Sept. 16 Subtotal Dec. 13 Bal.
Common Shares (1) (2) (3) No. of Shares Total Cost Average Cost 150,000 $2,400,000 $16.00 50,000 1,000,000 200,000 3,400,000 17.00 (20,000) (340,000) 17.00 4,000 75,000 184,000 17.04 3,135,000 184,000 368,000 3,135,000 8.52 (50,000) (426,000) 318,000 2,709,000 8.52 15,900 302,100 333,900 3,011,100 9.02
Date Jan. 1, May 3 July 25 Bal.
Preferred Shares (1) (2) (3) No. of Shares Total Cost Average Cost 5,000 $375,000 $75.00 (1,000) (75,000) 75.00 (500) (37,500) 75.00 3,500 262,500 75.00
(b) Feb. 11 Cash .................................................... 1,000,000 Common Shares ......................... 1,000,000 (50,000 shares × $20)
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PROBLEM 14-4A (Continued) (b) (Continued) Mar. 2 Common Shares (20,000 × $17.00) .................................... 340,000 Contributed Surplus— Reacquisition of Common Shares ....... 30,000 Retained Earnings ................................. 70,000 Cash (20,000 × $22)......................... 440,000 May
3
Preferred Shares.................................... 75,000 Common Shares .............................
July 25 Preferred Shares (500 × $75) ................ Contributed Surplus— Reacquisition of Preferred Shares Cash (500 × $70)..............................
75,000
37,500 2,500 35,000
Sept. 16 Common Shares (50,000 × $8.52) ..........426,000 Retained Earnings ..................................424,000 Cash (50,000 × $17)......................... 850,000 Oct. 27 Stock Dividends (15,900 × $19) ..............302,100 Stock Dividends Distributable ....... 302,100 Dec. 13 Stock Dividends Distributable................302,100 Common Shares ............................. 302,100 (c) Share capital Preferred shares $4 cumulative, convertible, 100,000 authorized, 3,500 shares issued Common shares, unlimited number of shares authorized, 333,900 shares issued
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$ 262,500 3,011,100
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PROBLEM 14-4A (Continued) Taking It Further: Branch Inc. may have split the common shares to make the price more affordable. As for the stock dividend, it might have been declared to give a return to shareholder but without having to reduce cash. Another reason for the stock dividend may be to permanently increase share capital and make the amount transferred from retained earnings unavailable for cash dividends.
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PROBLEM 14-5A (a) PORT HOPE CORPORATION Income Statement Year Ended November 30, 2014 Net sales ........................................................................ Cost of goods sold........................................................ Gross profit.................................................................... Operating expenses ............................. $1,120,000 Depreciation expense ........................... 355,000 Profit from operations................................................... Other revenues .............................................................. Profit before income taxes ........................................... Income tax expense* ..................................................... Profit from continuing operations................................ Discontinued operations Profit on discontinued operations of communication device division net of $5,000** income taxes ............. $15,000 Loss on disposal of discontinued communication device division net of $18,750*** income tax savings 56,250 Profit.......................................................... Earnings per share Profit ....................................................................
$9,124,000 7,280,000 1,844,000 1,475,000 369,000 48,000 417,000 104,250 312,750
41,250 $271,500
$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
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PROBLEM 14-5A (Continued) (b) PORT HOPE CORPORATION Statement of Comprehensive Income Year Ended November 30, 2014
Profit.......................................................... Other comprehensive loss Loss, 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.
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PROBLEM 14-6A (a) 2014 Mar. 17 Note Payable .................................... Income Taxes Payable................ Retained Earnings ...................... ($57,000 × 25% = $14,250)
57,000 14,250 42,750
(b) ZUG LIMITED Statement of Comprehensive Income Year Ended October 31, 2014 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 Other comprehensive income Gain net of $12,000** income taxes ..................... 36,000 Comprehensive income ................................................ $340,500 * ($406,000 × 25%) = $101,500 ** ($48,000 × 25%) = $12,000
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PROBLEM 14-6A (Continued) (c) The changes in retained earnings would include the following details: Balance, November 1, 2013 as previously reported Add: Correction of error in recording payment on notes payable in 2014, net of $18,750 income tax expense........................................ Balance, November 1 as adjusted....................... Add: Profit............................................................. Less: Reacquired common shares $ 22,500* Cash dividends ................... 120,000 Retained earnings, November 30 ........................ * $97,500 – $75,000
$ 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.
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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.
Jan.
1 Balance (320,000) 15 Reacquisition of shares (20,000) Oct. 1 Issue of shares (100,000)
Debit
Credit
J1
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 Balance Reacquisition of shares Prior period error Income Summary Dividends
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Ref.
Debit
J1 30,000 J1 J1 J1 25,000
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Credit
Balance
2,443,500 2,413,500 187,500 2,601,000 570,000 3,171,000 3,146,000
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PROBLEM 14-7A (Continued) (b) GENERAL JOURNAL Date
Account Titles and Explanation
J1 Debit
Credit
Jan. 15 Common Shares ($4(1) × 20,000) ........... 80,000 Contributed Surplus—Reacquisition of Shares ................................................ 30,000 Retained Earnings ................................. 30,000 Cash (20,000 × $7)............................. 140,000 (1)
$1,280,000 ÷ 320,000 = $4
Mar. 31
Jun. 30
Cash Dividends—Preferred .................. 12,500 Cash (10,000 × $5 × ¼)......................
12,500
Cash Dividends—Preferred .................. 12,500 Cash (10,000 × $5 × ¼)......................
12,500
Jul. 1 Long-Term Investments ......................... 250,000 62,500 Income Tax Payable ($250,000 × 25%) Retained Earnings 187,500 [$250,000 × (1 − 25%)] ....................... 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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PROBLEM 14-7A (Continued) (d) JAJOO CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2014
Share capital, preferred shares Balance, Jan. 1, 10,000 shares issued ..................... $1,100,000 Share capital, common shares Balance, Jan. 1, 10,000 shares issued................... Reacquired 20,000 shares................................. Issued for cash, 100,000 shares ....................... Balance, December 31, 400,000 shares issued.....
1,100,000 (80,000) 800,000 2,000,000
Contributed surplus – reacquired shares Balance, January 1 ................................................. Reacquired common shares............................. Balance, December 31, ...........................................
30,000 (30,000) 0
Retained earnings Balance, January 1, as previously reported .............. 2,443,500 Add: Correction for understatement of investment, net of $62,500 income tax expense .............................................. 187,500 Balance, January 1, as adjusted ............................ 2,631,000 Profit ..................................................................... 570,000 Cash dividends—preferred .................................. (25,000) Reacquisition of shares ....................................... (30,000) Balance, December 31 ................................................ 3,146,000 Shareholders’ equity December 31 ............................ $6,246,000 (e) The balances in the general ledger account, after the posting of closing entries, will match the balances reported on the statement of changes in shareholders’ equity.
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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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PROBLEM 14-8A (a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1 Debit
Credit
Jan. 20 Stock Dividend Distributable ................ 400,000 400,000 Common Shares ............................... Feb.
12 Cash (50,000 × $5) ................................. 250,000 Common Shares ............................... 250,000
Mar.
31 Inventory ................................................ 60,000 Income Tax Payable.......................... Retained Earnings ............................
Nov.
18,000 42,000
2 Common Shares (25,000 × $3.17*)........ 79,250 Contributed Surplus— 16,750 Reacquired Common Shares ........... Cash (25,000 × $2.50) ........................ 62,500 *($3,000,000 + $400,000 + $250,000) ÷ (1,000,000 + 100,000 + 50,000) = $3.17
Dec. 31 Cash Dividends—Common ....................562,500 Dividends Payable (1,125,000* × $0.50) 562,500 *(1,000,000 + 100,000 + 50,000 − 25,000) 31 Income Summary ....................................280,000 Retained Earnings ............................ 280,000 31 Retained Earnings ..................................562,500 Cash Dividends—Common .............. 562,500 31 Accumulated Other Comprehensive Income (Loss) ...........................................19,600 Other Comprehensive Income – Loss* *[$28,000 × (1 – 30%)]
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PROBLEM 14-8A (Continued) (b) Common Shares Date
Explanation
Ref.
Debit
Credit
Balance
3,000,000 J1 400,000 3,400,000 J1 250,000 3,650,000 J1 79,250 3,570,750
Jan.
1 Balance 20 Feb. 12 Nov. 2
Stock Dividends Distributable Date Jan.
Explanation 1 Balance 20
Ref.
Debit
Credit
Balance
400,000 J1 400,000
400,000 0
Contributed Surplus—Reacquired Common Shares Date
Explanation
Ref.
Debit
J1
Jan. 1 Balance Dec. 31
Credit
Balance
5,000 16,750
5,000 21,750
Credit
Balance
562,500
562,500 0
Cash Dividends—Common Date
Explanation
Dec. 31 Dec. 31 Closing entry
Ref.
Debit
J1 J1
562,500
Retained Earnings Date
Explanation
Jan. 1 Balance Mar. 31 Dec. 31 Closing entry Dec. 31 Closing entry
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Ref.
Debit
Credit
Balance
1,200,000 J1 42,000 1,242,000 J1 280,000 1,522,000 J1 562,500 959,500
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PROBLEM 14-8A (Continued) (b) (Continued) Accumulated Other Comprehensive Income (Loss) Date
Explanation
Dec. 31 Closing entry
Ref.
Debit
J1
19,600
Credit
Balance 19,600Dr
(c) CEDENO INC. Statement of Comprehensive Income Year ended December 31, 2014
Profit.......................................................... Other comprehensive loss Loss, net of $8,400* in income tax savings ...................................... Comprehensive income ...........................
$280,000
19,600 $260,400
*($28,000 × 30%) = $8,400
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PROBLEM 14-8A (Continued) (d) CEDENO INC. Statement of Changes in Shareholders’ Equity Year ended December 31, 2014
Share capital, common shares Balance, January 1, 1,000,000 shares issued ......... $3,000,000 Stock dividend, 100,000 shares ........................ 400,000 Issued for cash, 50,000 shares.......................... 250,000 Reacquired 25,000 shares...................................... (79,250) Balance, December 31, 1,125,000 shares issued . 3,570,750 Stock dividends distributable Balance, January 1 ................................................. 400,000 Common stock dividend distributed ..................... (400,000) Balance, December 31 ................................................ 0 Contributed surplus—reacquired shares Balance, January 1 ................................................. 5,000 Reacquired common shares .................................. 16,750 Balance, December 31 ................................................ 21,750 Retained earnings Balance, January 1, as previously reported .............. 1,200,000 Correction for overstatement of cost of goods sold in 2013, net of $18,000 income tax expense ......................................................... 42,000 Balance, January 1, as restated ................................. 1,242,000 Profit ................................................................... 280,000 Cash dividends ...................................................... (562,500) Balance, December 31 ............................................... 959,500 Accumulated other comprehensive income (loss) Balance, January 1 ................................................. 0 Other comprehensive income (loss) ................... (19,600) Balance, December 31 .............................................. (19,600) Total shareholders' equity ............................................ $4,532,400
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PROBLEM 14-8A (Continued) (e) CEDENO INC. Partial Balance Sheet December 31, 2014 Shareholders' equity Contributed capital Share capital Common shares, no par value, unlimited number of shares authorized, 1,125,000 shares issued ................................................ $3,570,750 Other contributed capital Contributed surplus—reacquired common shares......................................... 21,750 Total contributed capital ....................................... 3,592,500 Retained earnings.................................................. 959,500 Accumulated other comprehensive income (loss) (19,600) Total shareholders' equity .................................... $4,532,400 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 for 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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PROBLEM 14-9A TMAO INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2014
Share capital, preferred shares Balance, January 1, 4,000 shares issued .............. $400,000 Stock split, 4,000 shares ...................................... 0 Balance, December 31, 8,000 shares issued ............ 400,000 Share capital, common shares Balance, January 1, 160,000 shares issued ............. 800,000 Balance, December 31, 160,000 shares issued ........ 800,000 Stock dividends distributable Balance, January 1 ................................................. 0 Common stock dividend declared .................... 192,000 2 Balance, December 31 ............................................... 192,000 Retained earnings Balance, January 1, as previously reported ......... 450,000 Correction for understatement of cost of goods sold in 2013, net of $24,500 income tax savings.... (45,500) Cumulative effect of change in accounting policy, net of $10,500 income tax expense ........ (19,500) Balance, January 1, as restated............................. 385,000 Profit ................................................................... 227,500 1 Stock dividend—common ................................. (192,000) Cash dividends—preferred................................ (12,000) 3 Balance, December 31............................................ 408,500 Accumulated other comprehensive income (loss) Balance, January 1 ................................................. (50,000) Other comprehensive income (loss), net of $35,000 income tax expense ........................... 65,000 Balance, December 31............................................ 15,000 Total shareholders' equity .......................................... $1,815,500 1 $350,000 × (1 − 35%) = $227,500 2 160,000 × 10% × $12 = 16,000 × $12 = $192,000 3 4,000 × 2 from split × ($3 ÷ 2) = $12,000
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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 on the balance sheet. For companies following ASPE, there is no comprehensive income and consequently no accumulated other comprehensive income either.
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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 1. Preferred dividend cumulative but not declared = Income available to common shareholders ÷ Weighted average number of common shares = [$973,600 – (20,000 × $6)] ÷ 533,500 = $1.60 2. Preferred dividend cumulative and declared for 2 years = Income available to common shareholders ÷ Weighted average number of common shares = ($973,600 − $120,000) ÷ 533,500 = $1.60 Note: When the preferred dividend is cumulative it must be subtracted from profit whether or not it is declared. As well, profit is only reduced by the amount of the current year’s preferred dividend. Therefore, the earnings per share will be the same regardless of whether the preferred dividend declared is for one or more years.
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PROBLEM 14-10A (Continued) (c)
1. Preferred dividend not cumulative or declared = Income available to common shareholders ÷ Weighted average number of common shares = $973,600 ÷ 533,500 = $1.82 2. Preferred dividend noncumulative with partial ($80,000) dividend paid to preferred = Income available to common shareholders ÷ Weighted average number of common shares = ($973,600 − $80,000) ÷ 533,500 = $1.67
Taking It Further: Preferred shareholders usually have the return (or dividend rate) on their investment fixed by the terms of the share issue. They do not share in additional income. The concept of “earnings per share” for preferred shareholders therefore has no meaning. Common shareholders however, do not have a dividend rate and “own” all of the company’s profit after the preferred shareholders receive their dividend.
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PROBLEM 14-11A (a) ($ in millions except for market price per share) Canadian Pacific Railway Limited Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio
2011 $570 − $0 = $3.36 169.5 $67.67 = 20.14 times $3.36 $198 = .347 $570
2010 $651 − $0 = $3.86 168.8 $64.81 = 16.79 times $3.86 $179 = .275 $651
2009 $550 − $0 = $3.31 166.3 $54.00 = 16.31 times $3.31 $166 = .302 $550
2010 $2,104 − $0 = $4.51 466.3 $66.47 = 14.74 times $4.51 $503 = .239 $2,104
2009 $1,854 − $0 = $3.95 469.2 $54.36 = 13.76 times $3.95 $474 = .256 $1,854
Canadian National Railway Company Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio
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2011 $2,457 − $0 = $5.45 451.1 $78.56 = 14.41 times $5.45 $585 = .238 $2,457
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Problem 14-11A (Continued) (a) (Continued) In order to comment on whether a particular ratio has improved or deteriorated, one must take on a role of a user of that ratio. If the user is management, earnings per share improved in 2010 then deteriorated in 2011 for Canadian Pacific. On the other hand, for Canadian National, the improvement in earnings per share is constant from year to year. From a potential investor’s point of view, a lower the priceearnings ratio is an indicator of lower risk. From that perspective, Canadian Pacific’s price-earnings ratio keeps increasing and therefore is perceived as deteriorating. On the other hand, Canadian National’s price-earnings ratio deteriorated in 2010 then improved in 2011. Finally, for the dividend payout ratio, if one takes the perspective of a current shareholder who receives dividends, Canadian Pacific’s ratio deteriorated in 2010 then improved in 2011 while Canadian National’s ratio deteriorated in 2010 and again, but only slightly in 2011. (b) Canadian National’s earnings per share are consistently higher than Canadian Pacific’s earning per share but it is difficult to compare earnings per share without also considering the market price of each share. Therefore it is more useful to compare price earnings ratios. The price earnings ratio of Canadian National is better than Canadian Pacific, from the perspective of a potential shareholder. If a current shareholder is interested in receiving regular dividends, Canadian Pacific’s dividend payout ratio would be considered more favoured as it pays out a higher proportion of its profits compared to Canadian National. If a shareholder has purchased the shares for capital appreciation they would likely prefer Canadian National’s lower dividend payout ratio. Solutions Manual .
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Problem 14-11A (Continued) 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 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 14-12A (a)
Before Discontinued Operations Ratio 2014 $1,160 − $20 1. Return on equity = 33.53% $3,400 $1,160 − $20 2. Earnings per = $3.80 share 300 $45.50 3. Price-earnings = 11.97 ratio times $3.80
2013 $810 − $20 = 32.92% $2,400 $810 − $20 = $2.72 290 $33.65 = 12.37 times $2.72
2012 $570 − $15 = 30.83% $1,800 $570 − $15 = $1.98 280 $44.80 = 22.63 times $1.98
After Discontinued Operations Ratio 2014 $710 − $20 1. Return on equity = 20.29% $3,400 $710 − $20 2. Earnings per = $2.30 share 300 $45.50 3. Price-earnings = 19.78 ratio times $2.30
2013 $730 − $20 = 29.58% $2,400 $730 − $20 = $2.45 290 $33.65 = 13.73 times $2.45
2012 $500 − $15 = 26.94% $1,800 $500 − $15 = $1.73 280 $44.80 = 25.90 times $1.73
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PROBLEM 14-12A (Continued) (b)
Before Discontinued Operations: Highlander’s return on equity increased slightly from 2012 to 2014 due to a larger increase in profit from continuing operations 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 a substantial decrease in 2014 because the losses from discontinued operations offset most of the increase in profit from continuing operations. The slight increase in profit is offset by the substantial increase in shareholders’ equity. Earnings per share increased 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.
(c)
Performing the analysis for 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 2014. 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 2014 change this trend for all three ratios.
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PROBLEM 14-12A (Continued) Taking It Further: The purpose of reporting separately the discontinued operations of a component of an entity is to allow analysis of continuing operations. To be considered a component, operations must constitute a separate major line of business, or geographical area of operations, with its own cash flows separately identifiable from those of the continuing business.
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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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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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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 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.
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PROBLEM 14-2B (a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1 Debit
Credit
Feb. 1 Cash Dividends—Common (75,000 × $1) ........................................... 75,000 Dividends Payable—Common .........
75,000
Mar. 1 Dividends Payable—Common .............. Cash...................................................
75,000
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 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
Balance
J1 300,000 J1 195,000
600,000 900,000 705,000
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PROBLEM 14-2B (Continued) (c) ASAAD CORPORATION Partial Balance Sheet December 31, 2014
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 rise above the split value, or the decreased value due to the stock dividend, because of investor interest.
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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)
Average issue price (a) ÷ (b)
Cont.surplus —reacq. of common shares
$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
$35.00
$12,000 (1) (5,400) 6,600
$220,000
6,600 (2) (6,600) 0 (3) 4,560 $ 4,560
220,000 (16,152) 203,848
35.00
Retained earnings
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: 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.
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PROBLEM 14-4B (a) and (b)
Date Jan. 1, Jan. 17 Sub. Feb. 27 Mar. 31 Sub. Apr. 14 Sub. Aug. 16 Sub. Dec. 3 Bal.
Common Shares (1) (2) (3) No. of Shares Total Cost Average Cost 500,000 $4,000,000 $8.00 50,000 500,000 550,000 4,500,000 8.18 (20,000) (163,600) 8.18 20,000 300,000 550,000 8.43 4,636,400 550,000 1,100,000 4,636,400 4.215 (100,000) (421,500) 1,000,000 4,214,900 4.215 50,000 500,000 1,050,000 4,714,900 4.49
Date Jan. 1, Mar. 31 June 25 Bal.
Preferred Shares (1) (2) (3) No. of Shares Total Cost Average Cost 4,000 $600,000 $150.00 (2,000) (300,000) 150.00 (500) (75,000) 150.00 1,500 225,000 150.00
(b) Jan. 17 Cash ................................................. Common Shares ......................... (50,000 shares × $10)
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PROBLEM 14-4B (Continued) (b) (Continued) 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 Mar. 31 Preferred Shares ..................................... 300,000 Common Shares ............................. 300,000 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 × $4.125) ...... 421,500 Retained Earnings .................................. 678,500 Cash (100,000 × $11)....................... 1,100,000 Oct. 17 Stock Dividends (50,000 × $10) .............. 500,000 Stock Dividends Distributable ....... 500,000 Dec. 3
Stock Dividends Distributable ............... 500,000 Common Shares ............................. 500,000
(c) Share capital Preferred shares $9 cumulative, convertible, 100,000 authorized, 1,500 issued Common shares, unlimited number of shares authorized, 1,050,000 issued
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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 give a return to shareholder but without having to reduce cash. Another reason for the stock dividend may be to permanently increase share capital and make the amount distributed unavailable for cash dividends.
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PROBLEM 14-5B (a) PORT HOPE CORPORATION Income Statement Year Ended December 31, 2014 Net sales ........................................................................ Cost of goods sold........................................................ Gross profit.................................................................... Operating expenses ..................................................... Profit from operations................................................... Other expenses ............................................................. Profit before income taxes ........................................... Income tax expense*..................................................... Profit from continuing operations................................ 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 Profit.......................................................... Earnings per share Profit ....................................................................
$1,750,000 888,000 862,000 451,000 411,000 18,000 393,000 98,250 294,750
60,000 $234,750
$ 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) PORT HOPE CORPORATION Statement of Comprehensive Income Year Ended December 31, 2014
Profit.......................................................... Other comprehensive loss Gain, net of $11,750* in income tax savings ...................................... Comprehensive income ...........................
$234,750
35,250 $270,000
*($47,000 × 25%) = $11,750 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.
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PROBLEM 14-6B
(a)
2014 Jul. 9
Note Payable.................................... Income Taxes Payable................ Retained Earnings ...................... ($61,500 × 25% = $14,250)
61,500 15,375 46,125
(b)
WEATHER VANE LIMITED Statement of Comprehensive Income Year Ended September 30, 2014 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 Other comprehensive income Loss net of $9,500** income taxes ....................... 28,500 Comprehensive income ................................................ $471,750 * ($667,000 × 25%) = $166,750 ** ($38,000 × 25%) = $9,500
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PROBLEM 14-6B (Continued) (c) The changes in retained earnings would include the following
details: Balance, October 1, 2013 as previously reported Add: Correction of error in recording payment on notes payable in 2014, 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 .......................
$ 845,000
46,125 891,125 500,250 1,391,375 182,500 $1,208,875
Taking It Further: Financial statements are generally presented on a comparative basis to help the user of the financial statements to 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.
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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 J1
Debit
Credit
Balance
3,210,000 310,000 3,520,000 3,200,000
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
20,000 40,000
Credit
Balance
Retained Earnings Date Jan. 1 Sept. 1 Dec. 31 31
Explanation
Ref.
980,000 938,000 J1 42,000 J1 525,000 1,463,000 1,418,000 J1 45,000
Balance Correction of error Income Summary Dividends
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Debit
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PROBLEM 14-7B (Continued) (b)
GENERAL JOURNAL
Date
Account Titles and Explanation
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).................................... Cash...................................................
15,000
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%)] ............................. Income Tax Payable (Recoverable) ($60,000 × 30%)...................................... Accounts Receivable ........................
42,000 18,000 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 Retained Earnings ............................ 525,000 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, 2014
Share capital, preferred shares Balance, Jan. 1, 15,000 shares issued ....................... $ 850,000 Share capital, common shares Balance, Jan. 1, 255,000 shares issued................. Reacquired 25,000 shares................................. Issued for cash, 20,000 shares ......................... Balance, December 31, 250,000 shares issued.....
3,210,000 (320,000) 310,000 3,200,000
Contributed surplus—reacquired shares Balance, January 1 ................................................. Reacquired common shares............................. Balance, December 31, ...........................................
20,000 20,000 40,000
Retained earnings Balance, January 1, as previously reported ......... Add: Correction for overstatement of sales, net of $18,000 income tax saving ................................................. Balance, January 1, as adjusted ............................ Profit ..................................................................... Cash dividends—preferred .................................. Balance, December 31 ................................................
980,000 42,000 938,000 525,000 (45,000) 1,418,000
Shareholders’ equity December 31 ............................ $5,508,000
Note X: $15,000 of preferred dividends are in arrears. (e) The balances in the general ledger account, after the
posting of closing entries, will match the balances reported on the statement of changes in shareholders’ equity. Solutions Manual .
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PROBLEM 14-7B (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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PROBLEM 14-8B (a)
GENERAL JOURNAL
Date Aug.
Account Titles and Explanation
J1 Debit
1 Income Tax Payable (Recoverable) ...... 13,500 Retained Earnings ................................. 31,500 Inventory............................................
Credit
45,000
Oct. 15 Stock Dividends .................................... 450,000 Stock Dividends Distributable ......... 450,000 (250,000 × 10% × $18) Nov. 10 Stock Dividends Distributable .............. 450,000 450,000 Common Shares ............................... Dec. 15 Cash Dividends—Preferred .................. 48,000 Dividends Payable ............................ (12,000 × $4) 31 Other Comprehensive Income—Gain .. Income Taxes Payable......................
48,000
3,600 3,600
31 Income Summary .................................... 395,000 Retained Earnings ............................ 395,000 31 Retained Earnings .................................. 498,000 Cash Dividends—Preferred.............. 48,000 Stock Dividends ................................ 450,000 31 Other Comprehensive Income—Gain .. Accumulated Other Comprehensive Income (Loss) .................................
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PROBLEM 14-8B (Continued) (b) Preferred Shares Date Jan.
Explanation
Ref.
Debit
Credit
1 Balance
Balance 800,000
Common Shares Date
Explanation
Ref.
Debit
J1
Jan. 1 Balance Nov. 10
Credit
Balance
450,000
500,000 950,000
Contributed Surplus—Reacquired Common Shares Date Jan.
Explanation
Ref.
Debit
Credit
1 Balance
Balance 100,000
Stock Dividends Distributable Date
Explanation
Ref. J1 J1
Oct. 15 Nov. 10
Debit
Credit
Balance
450,000
450,000 0
450,000
Stock Dividends Date
Explanation
Oct. 15 Dec. 31 Closing entry
Ref.
Debit
Credit
J1 450,000 J1 450,000
Balance 450,000 0
Cash Dividends—Preferred Date
Explanation
Dec. 15 31 Closing entry
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Debit
J1 J1
48,000
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Balance 48,000 0
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PROBLEM 14-8B (Continued) (b) (Continued)
Retained Earnings Date
Explanation
Jan. 1 Balance Aug. 1 Dec. 31 Closing entry 31 Closing entry
Ref.
Debit
Credit
Balance
900,000 868,500 J1 31,500 J1 395,000 1,263,500 J1 498,000 765,500
Accumulated Other Comprehensive Income (Loss) Date
Explanation
Jan. 1 Balance Dec. 31 Closing entry
Ref.
Debit
J1
Credit
Balance
50,000Dr 8,400 41,600Dr
(c) FRYMAN LTD. Statement of Comprehensive Income Year ended December 31, 2014
Profit.......................................................... Other comprehensive loss Gain, net of $3,600* in income tax savings ...................................... Comprehensive income ...........................
$395,000
8,400 $403,400
*($12,000 × 30%) = $3,600
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PROBLEM 14-8B (Continued) (d) FRYMAN LTD. Statement of Changes in Shareholders’ Equity Year ended December 31, 2014
Share capital, preferred shares Balance, January 1, 12,000 shares issued .............. $800,000 Balance, December 31, 12,000 shares issued ......... 800,000 Share capital, common shares Balance, January 1, 250,000 shares issued .......... 500,000 Stock dividend, 25,000 shares ............................. 450,000 Balance, December 31, 275,000 shares issued ....... 950,000 Contributed surplus—reacquired shares Balance, January 1.................................................... 100,000 Balance, December 31 .............................................. 100,000 Retained earnings Balance, January 1, as previously reported ......... 900,000 Correction for understatement of cost of goods sold in 2010, net of $13,500 income tax expense ...................................................... (31,500) Balance, January 1, as restated............................. 868,500 Profit ................................................................... 395,000 Stock dividends—common ............................... (450,000) Cash dividends—preferred................................ (48,000) Balance, December 31............................................ 765,500 Accumulated other comprehensive income (loss) (50,000) Balance, January 1 ................................................. Other comprehensive income ........................... 8,400 Balance, December 31............................................ (41,600) Total shareholders' equity .......................................... $2,573,900
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PROBLEM 14-8B (Continued) (e)
FRYMAN LTD. Partial Balance Sheet December 31, 2014 Shareholders' equity Contributed capital Share capital Preferred shares, $4-noncumulative, no par value, unlimited number authorized, 12,000 shares issued......... $ 800,000 Common shares, no par value, unlimited number authorized, 275,000 shares issued........................... 950,000 Total share capital............................... 1,750,000 Additional contributed capital Contributed surplus—reacquired common shares..................................... 100,000 Total contributed capital..................... 1,850,000 Retained earnings ............................................ 765,500 Accumulated other comprehensive loss ........ (41,600) Total shareholders' equity.................. $2,573,900
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 format depends on the nature and amount of information that a company needs to present on its statement. 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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PROBLEM 14-9B KANADA INC. Statement of Changes in Shareholders’ Equity Year Ended September 30, 2014
Share capital, preferred shares Balance, October 1, 6,000 shares issued ................. $465,000 Balance, September 30, 6,000 shares issued ........... 465,000 Share capital, common shares Balance, October 1, 25,000 shares issued ............ 900,000 Stock dividend, 1,000 shares ............................ 10,000 1 Stock split, 26,000 shares .................................... 0 Balance, September 30, 52,000 shares issued ......... 910,000 Retained earnings Balance, October 1, as previously reported ......... 540,000 Correction for overstatement of bad debts expense, net of $9,900 income tax expense 23,100 Correction for overstatement of cost of goods sold in 2013, net of $16,200 income tax expense ........................................................ 37,800 Balance, October 1, as restated............................. 600,900 Profit ................................................................... 227,500 2 Stock dividend—common ................................. (10,000) Cash dividends—preferred ................................... (30,000) 3 Balance, September 30 .............................................. 788,400 Accumulated other comprehensive income (loss) Balance, October 1 ................................................. 95,000 Other comprehensive income, net of $8,100 income tax expense ......................................... 18,9004 Balance, September 30........................................... 113,900 Total shareholders' equity .......................................... $2,277,300 1
25,000 × 4% = 1,000 × $10 = $10,000 $325,000 × (1 − 30%) = $227,500 3 6,000 × $5 = $30,000 4 $27,000 × (1 − 30%) = $18,900 2
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PROBLEM 14-9B (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 on the balance sheet. For companies following ASPE, there is no 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
Beginning balance Issued 37,500 shares Reacquired shares Issued 30,000 shares Ending balance
Actual Fraction number of Year 350,000 12/12 37,500 8/12 (6,000) 6/12 30,000 5/12 411,500
Weighted Average 350,000 25,000 (3,000) 12,500 384,500
(b) Earnings per Share 1. Preferred dividend cumulative but not declared = Income available to common shareholders ÷ Weighted average number of common shares = [$1,022,800 − (25,000 × $4)] ÷ 384,500 = $2.40 2. Preferred dividend cumulative and declared for 2 years = Income available to common shareholders ÷ Weighted average number of common shares = ($1,022,800 − $100,000) ÷ 384,500 = $2.40 Note: When the preferred dividend is cumulative it must be subtracted from profit whether or not it is declared. As well, profit is only reduced by the amount of the current year’s preferred dividend. Therefore, the earnings per share will be the same regardless of whether the preferred dividend declared is for one or more years.
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PROBLEM 14-10B (Continued)
(c)
1. Preferred dividend not cumulative or declared = Income available to common shareholders ÷ Weighted average number of common shares = $1,022,800 ÷ 384,500 = $2.66 2. 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 = $2.50
Taking It Further: A weighted average number of shares is used in the earnings per share calculation because the issue of shares and other activity affecting the number of shares issued during the period changes the amount of net assets upon which income can be earned.
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PROBLEM 14-11B (a)
($in millions except for market price per share)
Husky Energy Inc. Ratio 1. Earnings per share 2. Price-earnings ratio 3. Payout ratio
2011 $2,224 − $10 = $2.40 923.8 $24.55 = 10.23 times $2.40 $1,109 = .50 $2,224
2010 $947 − $0 = $1.11 852.7 $26.55 = 23.92 times $1.11 $1,020 = 1.08 $947
2011 $4,304 −$0 = $2.74 1,571 $29.38 = 10.72 times $2.74 $664 = .154 $4,304
2010 $3,829 − $0 = $2.45 1,562 $38.28 = 15.62 times $2.45 $611 = .160 $3,829
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 a role of a user of that ratio. Husky’s more than doubling in the increase of its profit in 2011 has translated into a corresponding increase in earnings per share, while Suncor’s has had more of a modest increase in profitability. From the point of view of management, Husky has improved more than Suncor.
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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 which was very high in 2010 has now been brought in line, in comparison to Suncor’s and therefore has improved. The same can be said for Suncor, but on a much smaller scale. In terms of the dividend payout ratio, Husky’s ratio dropped by more than 50% from 2010 to 2011. This was caused by paying almost the same amount of dividends in both years even though profit was much higher in 2011. It is an indication that management felt the low 2010 profit would recover in future years, which it did. In this case maintaining the constant dividend would be considered a positive sign even though the ratio looks worse. Suncor’s dividend payout ratio was consistent between the two years indicating stability in its profit and dividends.
(b) Husky and Suncor have fairly similar earnings per share and price earnings ratios in 2011. Based on these ratios it would be difficult to say that one company is better than the other. Husky may be consider more favourable as it pays out a higher proportion of its profits compared to Suncor. On the other hand, Suncor is less volatile 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 2014 $1,250 − $80 1. Return on equity = 34.41% $3,400 $1,250 − $80 2. Earnings per = $2.60 share 450 $24.40 3. Price-earnings = 9.38 ratio times $2.60
2013 $1,130 − $80 = 43.75% $2,400 $1,130 − $80 = $2.23 470 $19.88 = 8.91 times $2.23
2012 $990 − $60 = 48.95% $1,900 $990 − $60 = $2.02 460 $21.60 = 10.69 times $2.02
After Discontinued Operations Ratio 2014 $430 − $80 1. Return on equity = 10.29% $3,400 $430 − $80 2. Earnings per = $0.78 share 450 $24.40 3. Price-earnings = 31.28 ratio times $0.78
2013 $980 − $80 = 37.50% $2,400 $980 − $80 = $1.91 470 $19.88 = 10.41 times $1.91
2012 $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 2012 to 2014 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 price-earnings 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 from in 2014 due to losses from discontinued operations. The same loss also causes a large decrease in earnings per share for 2014. 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 priceearnings ratio in 2014. This is also a different trend than the price-earnings ratio from continuing operations. (c)
Performing the analysis for 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 2014. The results before discontinued operations do not show the sharp decrease caused by the large losses in 2014 caused by the disposal of the discontinued operations.
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PROBLEM 14-12B (Continued) Taking It Further: The purpose of reporting separately the discontinued operations of a component of an entity is to allow analysis of continuing operations. To be considered a component, operations must constitute a separate major line of business, or geographical area of operations with its own cash flows, separately identifiable from those of the continuing business.
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CONTINUING COOKIE CHRONICLE
(a)
1.
Because Koebel’s Family Bakery 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.
The original 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 cost of the shares held and the price paid for the reacquisition of the shares will reduce retained earnings. In this case the average cost per share is $58.10 ($12,200 ÷ 210). Since 180 shares will be repurchased, $10,458 will be debited to the account for common shares and the remainder $205,542, will be debited to retained earnings. 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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CONTINUING COOKIE CHRONICLE (Continued) (a) 4. (Continued) Although there is a sufficient balance of retained earnings to allow the share repurchase, with such as substantial reduction in its balance, it is unlikely that dividends could be paid for several years 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 Koebel’s Family Bakery 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 and the interest on the loan. 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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CONTINUING COOKIE CHRONICLE (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 = $1,743
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BYP 14-1 FINANCIAL REPORTING PROBLEM
(a)
For the 2012 fiscal year Reitmans: (1) There were no stock dividends and stock splits. (2) Other comprehensive income changed due to the change in fair value of available-for-sale financial assets, net of taxes of $8,737,000. (3) There were no corrections of prior period errors.
(b) For the 2012 fiscal year, Reitmans repurchased Class A non-voting shares and spent $22,410,000 in cash on the repurchase. (c) The basic earnings per share ratio for 2011 was $1.33. The earnings per share weakened substantially in 2012. (d) Fully diluted earnings per share were reported in both years. In 2011, the fully diluted amount was one cent lower than the basic amounts, at $1.32 per share. For the 2012 fiscal year, the fully diluted was equal to the basic earnings per share ratio. (e) The price-earnings ratio increased from 13.8 times in 2011 to 20.3 times in 2012. From the perspective of potential investors, this is a weakening of the ratio, consistent with the declining earnings per share. Investors most likely believe that Reitmans is less likely to improve earnings in the future. (f)
Reitmans’ payout ratio for 2011 was 0.58 ($51,895 ÷ $88,985). The major cause for the difference between the 2011 of .58 and the 2012 of 1.11 payout ratio is the 46% decline in profit.
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BYP 14-2 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 most likely reason a 3-for-1 stock split was to decrease the market value of the shares that are split to a third of the pre-split price. This in turn will ensure that the share price remains at an optimal trading price, as a lower share price typically increases investor interest and makes it easier for the corporation to issue additional shares. The split market price is more in line with the market price of the shares of Potash’s competitors. (c)
The market reacted favourably to the stock split as evidenced by the fact that the stock’s market price post stock split was greater than one third of the market price pre stock split.
(d) If the dividend rate per share had remained the same after the stock split to what is was prior to the split, the amount of the dividend per share would be $0.133 ($0.40 ÷ 3). The actual cash dividend declared at $0.28 after the split is more than double the equivalent amount before the stock split.
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BYP 14-2 (Continued) (e) (in millions of US dollars, except per share data): 2011
Ratio Return on common shareholders' equity
Earnings per share
Payout ratio
2010
$3,081 = $7,847 + $6,685 2
42.4%
$1,775 = $6,685 + $6,305 2
27.3%
$3,081 855.7
= $3.60
$1,775 886.4
= $2.00
$240 $3,081
=
$118 $1,775
= 0.066
0.078
Potash’s profit increased 74% [($3,081 – $1,775) / $1,775] in 2011. This improvement in profit for the year 2011 led to a corresponding increase in the earning per share ratio and return on common shareholders’ equity.
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BYP 14-3 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 14-4 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 priceearnings 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 price earnings 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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BYP 14-4 (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 to refer to.
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BYP 14-5 ETHICS CASE
(a)
The stakeholders in this situation are: Vince Ramsey, president of Flambeau Corporation Janice Rahn, financial vice-president The shareholders of Flambeau Corporation
(b) There is nothing unethical in issuing a stock dividend. However, the president's order to write a press release convincing the shareholders that the stock dividend is just as good as a cash dividend is unethical. A stock dividend is not a cash dividend and does not necessarily place the shareholder in the same position. A stock dividend is not paid in cash, it is “paid” in shares. This does provide a future potential opportunity to receive cash if the additional shares can be profitably sold. (c)
As a shareholder, preference for a cash dividend versus stock dividend is dependent upon one's investment objective—income (cash flow) or growth (reinvestment). By not paying out the cash, the stock dividend leaves cash in the company, where it is reinvested and contributes to the growth of the company. As well, more shares provide an opportunity for future profitable resale of these shares, especially if the share price climbs.
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BYP 14-6 “ALL ABOUT YOU” ACTIVITY (a)
Canadian Tire’s four main business lines include: 1. Canadian Tire Retail 2. FGL Sports 3. Mark’s and 4. Financial Services Knowledge of the four main business lines will help investors interpret the financial statement information since the lines of business have different sources of revenue and operations.
(b)
The management discussion and analysis includes: 1. Company and industry overview, including key performance indicators and the competitive landscape. 2. Core capabilities. 3. Historical performance highlights. 4. Strategic objectives and initiatives and financial aspirations. 5. Economic environment. 6. Performance including details of business segments. 7. Tax matters. 8. Accounting policies and estimates. 9. Enterprise risk management. 10. Controls and procedures. 11. Social and environmental responsibility. 12. 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 you opinion concerning an investment decision.
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BYP 14-6 (Continued) (c)
Cash dividends per share in 2011 were $1.125 and $0.905 for 2010. 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 2011 was $5.73.
(e)
The web page for investors includes links to the following: 1. Company profile 2. Strategy 3. Corporate governance 4. Quarterly reports 5. Annual reports 6. Events and presentations 7. Shareholders 8. Debtholders 9. IFRS 10. FAQs 11. Investor contacts Canadian Tire’s close share price at December 30, 2011 was $65.90.
(f)
The price earnings ratio is $65.90 ÷ $5.73 = 11.5
(g)
Canadian Tire is listed on the TSX stock exchange under the symbol CTC.A and its auditors are Deloitte & Touche 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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BYP 14-6 (Continued) (i)
Solutions will vary depending on date retrieved: As of Oct. 5 2012 Price Earnings ratio is 10.46 and industry 13.27. 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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CHAPTER 15 Non-Current Liabilities ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
Brief Exercises
Exercises
1. Compare the impact of issuing debt instead of equity.
1, 2, 3
1
1, 16
2. Account for bonds payable.
4, 5, 6, 7, 8, 9, 10
2, 3, 4, 5, 6, 7, 8, 9
3. Account for instalment notes payable.
11, 12, 13, 14
4. Account for leases.
5. Explain and illustrate the methods for the presentation and analysis of non-current liabilities.
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Problems Set B
2, 3, 4, 5, 6, 7, 8
1, 2, 3, 4, 5
1, 2, 3, 4, 5
10, 11, 12, 13
9, 10, 11, 12, 13
6, 7, 8
6, 7, 8
15, 16, 17, 18, 19
14, 15, 16
14, 15
9, 10
9, 10
20, 21, 22, 23, 24
13, 17, 18, 19
15, 16, 17
4, 5, 6, 10, 11
4, 5, 6, 10, 11
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ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Record bond transactions.
Simple
20-30
2A
Record bond transactions; show balance sheet presentation.
Moderate
25-35
3A
Record bond transactions and answer questions
Moderate
25-30
4A
Fill in missing amounts in amortization schedule, record bond transactions, and show balance sheet presentation.
Moderate
20-30
5A
Record bond transactions; show balance sheet presentation.
Moderate
30-40
6A
Prepare instalment payment schedule and record note transactions and show balance sheet presentation.
Moderate
25-30
7A
Record note transactions.
Moderate
25-30
8A
Prepare instalment payment schedule and record note transactions. Show balance sheet presentation.
Moderate
25-30
9A
Analyze lease situations. Discuss financial statement presentation.
Moderate
20-25
10A
Calculate and analyze solvency ratios.
Simple
15-20
11A
Prepare liability section of balance sheet and analyze leverage.
Moderate
25-35
1B
Record bond transactions.
Simple
20-30
2B
Record bond transactions; show balance sheet presentation.
Moderate
25-35
3B
Record bond transactions and answer questions.
Moderate
25-30
4B
Fill in missing amounts in amortization schedule, record bond transactions, and show balance sheet presentation.
Moderate
20-30
5B
Record bond transactions; show balance sheet presentation.
Moderate
30-40
6B
Prepare instalment payment schedule and record note transactions and show balance sheet presentation.
Moderate
25-30
7B
Record note transactions.
Moderate
25-30
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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
8B
Prepare instalment payment schedule and record note transactions. Show balance sheet presentation.
Moderate
25-30
9B
Analyze lease situations. Discuss financial statement presentation.
Moderate
20-25
10B
Calculate and analyze solvency ratios.
Simple
15-20
11B
Prepare liability section of balance sheet and analyze leverage.
Moderate
25-35
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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material. Study Objectives
Knowledge
Comprehension Q15-1 Q15-2 Q15-3
Application BE15-1 E15-1 E15-16
Q15-9
Q15-4 Q15-5 Q15-6 Q15-7 Q15-8 Q15-10
BE15-2 BE15-3 BE15-4 BE15-5 BE15-6 BE15-7 BE15-8 BE15-9 E15-2 E15-3 E15-4 E15-5
E15-6 E15-7 E15-8 P15-1A P15-2A P15-3A P15-4A P15-5A P15-1B P15-2B P15-3B P15-4B P15-5B
3. Account for instalment notes payable.
Q15-11 Q15-12
Q15-13 Q15-14 BE15-10 BE15-11 BE15-12 BE15-13 E15-9 E15-10
E15-11 E15-12 E15-13 P15-6A P15-7A P15-8A P15-6B P15-7B P15-8B
4. Account for leases.
Q15-15 Q15-16 Q15-17 Q15-19
Q15-18 BE15-14 BE15-15 BE15-16 E15-14 E15-15
P15-9A P15-9B
P15-10A P15-10B
Q15-23 Q15-24
BE15-13 BE15-17 BE15-18 BE15-19 E15-15 E15-16 E15-17
P15-4A P15-5A P15-6A P15-11A P15-4B P15-5B P15-6B P15-11B
P15-10A P15-10B
BYP15-5
BYP15-1 BYP15-4 Continuing Cookie Chronicle
1. Compare the impact of issuing debt instead of equity. 2. Account for bonds payable.
5. Explain and illustrate the methods for the presentation and analysis of non-current liabilities. Broadening Your Perspective
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15-4
Analysis
Synthesis
Evaluation
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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 after one year from the balance sheet date. Examples include noncurrent mortgage payable and bonds payable.
2.
(a) The major advantages of debt over equity are: 1. Shareholder control is not affected—debt holders (lenders) do not have voting rights, so current shareholders retain full control over the company. 2. Income tax savings result—interest is deductible for tax purposes; dividends on shares are not. 3. 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. 4. Return on equity may be higher—although profit is lower, return on equity is often higher because shareholders’ equity is proportionately lower than profit. (b) The major disadvantage of using debt is that it is riskier. Interest must be paid on a periodic basis and the principal (face value) of the debt must be repaid. These are binding legal obligations.
3.
If a company increases its debt, its earnings per share will be higher under debt financing (even though interest expense will reduce profit), because no additional common shares are issued. Even though profit is reduced under debt financing because of the interest expense, as long as the company earns a higher rate of return on the borrowed money than they are paying in after-tax interest, return on equity will be higher.
4. (a) 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. (b) 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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QUESTIONS (Continued) 5.
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, months in advance, what the market interest rate will be on the date of issue.
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.
7.
(a) When a bond is sold at a discount, the total cost of borrowing is higher than the bond interest paid. The bond discount is considered to be an additional cost of borrowing. In accordance with the expense recognition criteria, the additional cost of borrowing should increase interest expense over the life of the bonds. (b) When bonds are sold at a premium, the sale of the bonds for proceeds higher than the face value of the bonds reduces the cost of borrowing. The bond premium is considered a reduction in the cost of borrowing. In accordance with the expense recognition criteria, these savings should reduce interest expense over the life of the bonds.
8.
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 an expense to the business over the term of the bonds, using the effective interest 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, in this case, reduces the amount of interest expense recognized over the life of the bond.
9.
Under the effective-interest method, the interest payment is determined by multiplying the face value of the bonds by the contractual interest rate. Interest expense is determined by multiplying the amortized cost of the bonds at the beginning of the period by the market (effective) rate of interest in effect when the bonds were issued. The difference between the interest payment and the interest expense is the amount of discount or premium amortized each period.
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 10.
When a bond reaches maturity, any premium or discount will have been fully amortized, so the amortized cost 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.
This type of loan is a floating rate loan because the prime rate changes over time. Since the loan repayment period is typically several years in length, this reduces the risk for the financial institution by providing a proper return on the loan to the student.
12.
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.
13.
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.
14.
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.
15.
(a) 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. (b) 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.
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 16.
A company might choose to lease equipment instead of purchasing the equipment because of financing considerations. The lease transaction provides essentially 100% the financing for acquisition. No down payment is required, as would be the case in a financed purchase, and the interest rate on long-term leases is fixed. Another consideration is the elimination of any obsolescence risk. Many leases offer the possibility of upgrades to newer, more efficient equipment within the term of the lease. The company can take advantage of these opportunities and doesn’t have to deal with the resale of an obsolete asset which would be the case if it had purchased instead of leased the equipment. Finally, there can be income tax advantages to leasing, because the full amount of the lease payments is a deductible expense.
17.
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.
18.
For operating leases, no asset or liability is recorded on the balance sheet. Lease payments are recorded as expenses on the income statement. For finance leases, the present value of the lease payments is recorded as an asset and as a liability on the balance sheet. The asset is depreciated during its life, the liability is paid down, and the interest portion of the lease payments is recorded as an expense on the income statement.
19.
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 financing lease and the asset must be included on the lessee’s balance sheet.
20.
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 .
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 21.
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.
22.
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.
23.
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 be still 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.
24.
An increase in debt will cause an increase in the debt to total asset ratio. An increase in debt leads to an increase in interest expense. In the calculation of the interest coverage ratio, the denominator, interest expense will become larger and when divided into the profit available to pay interest, the ratio will reduce.
Solutions Manual .
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 15-1 Profit before interest and income tax Interest expense ($4,000,000 × 6%) Profit before income tax Income tax expense (25%) Profit Number of shares Earnings per share (profit ÷ number of shares)
Solutions Manual .
15-10
Issue Equity $1,000,000 0 1,000,000 250,000 $ 750,000
Issue Debt $1,000,000 240,000 760,000 190,000 $ 570,000
700,000
500,000
$1.07
$1.14
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-2 (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 .
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-3 (a)
Jan.
1
(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
Solutions Manual .
Cash .......................................... 2,000,000 Bonds Payable .................... 2,000,000
15-12
30,000
30,000
Chapter 15
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-4 (a)
Jan.
July
(b)
(c)
1 Cash ($1,000,000 × 98%) .......... Bonds Payable ..................... 1 Interest Expense ($25,000 + $1,766) ................ Bonds Payable ..................... Cash ($1,000,000 × 5% × 1/2)
980,000 980,000
26,766 1,766 25,000
Jan.
1 Cash............................................1,000,000 Bonds Payable ..................... 1,000,000
July
1 Interest Expense....................... Cash ($1,000,000 × 5% × 1/2)
25,000 25,000
Jan.
1 Cash ($1,000,000 × 102%)..........1,020,000 1,020,000 Bonds Payable .....................
July
1 Interest Expense ($25,000 – $1,804) ................ Bonds Payable.......................... Cash ($1,000,000 × 5% × 1/2)
23,196 1,804 25,000
(d) Regardless of whether the bonds were sold at face value, at a discount, or at a premium, at maturity on January 1, 2019, the amortized cost of the bonds will be $1,000,000.
Solutions Manual .
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BRIEF EXERCISE 15-5 (a)
Principal $120,000 × 0.61027 = Interest $120,000 × 3% × 15.58916 (2.5%, 20 periods)
$ 73,232 56,121 $129,353
Using a financial calculator: Yields $129,353 PV $? I 2.5% N 20 PMT $ (3,600) FV $ (120,000) Type 0
(b) 2014 May 1
Cash ............................................... 129,353 Bonds Payable........................
(c) 2014 Nov. 1 Interest Expense ($129,353 × 5% × 6/12) ............. Bonds Payable ($3,600 – $3,234) ...................... Cash ($120,000 × 6% × 6/12)
Solutions Manual .
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129,353
3,234 366 3,600
Chapter 15
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-6 (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: $2,000,000 = 4%
($40,000 × 2) ÷ face value
Market interest rate = 5.0% [($47,812 ÷ $1,912,479) × 2] (d) Interest expense is greater than interest paid because the bonds sold at a discount. The bonds sold at a discount to satisfy the investors with a 5.0% market (or effective) interest rate, which was higher than the 4% contractual interest rate.
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-7 ELSWORTH LTD. Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 3% (c) Date
(A) (B) (C) Interest Interest Premium Payment Expense $1,000,000 × (D) × 3% × Amortization (A) – (B) 4% × 6/12 6/12
May 1, 2014 Nov. 1, 2014 May 1, 2015 Nov. 1, 2015
$20,000 20,000 20,000
$15,692 15,627 15,561
$4,308 4,373 4,439
(D) Bond Amortized Cost (D) – (C) $1,046,110 1,041,802 1,037,429 1,032,990
BRIEF EXERCISE 15-8 (a)
The bond was issued at a discount. The amortization for each period is added to the bond’s amortized cost.
(b) 2014 July 1 Interest Expense .............................. 7,172 Bond Payable .......................... Cash ......................................... (c) 2014 Dec. 31 Interest Expense .............................. 7,201 Bond Payable .......................... Interest Payable ...................... (d) 2015 Jan. 1 Interest Payable ............................... 6,000 Cash .........................................
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1,172 6,000
1,201 6,000
6,000
Chapter 15
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-9 (a)
2015 Jan. 1
(b) 2015 Jan. 1
(c)
2015 Jan. 1
Bonds Payable ............................. 289,245 Loss on Bond Redemption ($300,000 – $289,245) ................ 10,755 Cash ($300,000 × 100%) ..........
300,000
Bonds Payable ............................. 289,245 Loss on Bond Redemption ($303,000 – $289,245) ................ 13,755 Cash ($300,000 × 101%) ..........
303,000
Bonds Payable ............................. 289,245 Gain on Bond Redemption ($289,245 – $285,000).............. Cash ($300,000 × 95%)............
4,245 285,000
BRIEF EXERCISE 15-10
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 39.21 65.87 9,738.08
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-11 (a) Monthly Interest Period Nov. 30, 2013 Dec. 31, 2013 Jan. 31, 2014
(C) Cash Payment (A) – (B)
(B) Interest Expense (D) × 6% × 1/12
$4,800 4,785
$1,800 1,785
(D) (A) Principal Reduction Balance of Principal (D) – (A) $360,000 $3,000 357,000 3,000 354,000
2013 Nov. 30 Cash..................................................... 360,000 Mortgage Note Payable .................
360,000
Dec. 31 Interest Expense ..................................... 1,800 Mortgage Note Payable .......................... 3,000 Cash................................................
4,800
2014 Jan. 31 Interest Expense ..................................... 1,785 Mortgage Note Payable .......................... 3,000 Cash................................................
4,785
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-11 (Continued) (b) Monthly (A) Interest Cash Period Payment Nov. 30, 2013 Dec. 31, 2013 $3,997 Jan. 31, 2014 3,997
(B) Interest (C) Expense Reduction (D) × 6% × of Principal 1/12 (A) – (B) $1,800 1,789
2013 Nov. 30 Cash .......................................... Mortgage Note Payable ....... Dec. 31 Interest Expense....................... Mortgage Note Payable ............ Cash...................................... 2014 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 15-12 (a) December 31, 2013 Current liabilities Interest payable .......................................................... Current portion of note payable ................................
$2,000 10,000
Non-current liabilities Note payable, 5%, due 2017, net of current portion .
$30,000
(b) December 31, 2016 Current liabilities Interest payable .......................................................... Current portion of note payable ................................
$500 10,000
There is no non-current portion on December 31, 2016 Solutions Manual .
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-13 (a) 2013 Mar. 31 Cash .......................................... Note Payable ........................ 2014 Mar. 31 Note Payable............................. Interest Expense ($600,000 × 4%)......................... Cash......................................
600,000 600,000
150,000 24,000 174,000
(b) ELBOW LAKE CORP. Balance Sheet (Partial) March 31, 2014 Current liabilities Current portion of note payable ................................... $150,000 Non-current liabilities Note payable, net of current portion .............................. 300,000
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-14 Because the asset being leased is of such a specialized nature that only the lessee can use the asset, the leased asset should be recorded as an asset on Paget’s books. The lease should be accounted as a finance lease.
BRIEF EXERCISE 15-15 Rent Expense .................................................. 2,500 Cash........................................................
2,500
BRIEF EXERCISE 15-16 (a)
Lessor: Lessee:
Bracer Construction, Inc. Chang Corp.
(b) Leased Asset—Equipment......................... 300,000 Lease Liability ........................................
300,000
BRIEF EXERCISE 15-17 COOKE INC. Balance Sheet (Partial) December 31, 2013 Current liabilities Interest payable .......................................................... Current portion of note payable ................................
$ 4,800 16,375*
Non-current liabilities Note payable, due 2023, net of current portion ............. 223,625 *$3,973 + $4,052 + $4,134 + $4,216 = $16,375 Alternately: $240,000 – $223,625
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 15-18 WAUGH CORPORATION Balance Sheet (Partial) December 31, 2014 Current liabilities Accounts payable ....................................................... $ 48,000 Income tax payable..................................................... 8,000 Interest payable .......................................................... 26,000 Current portion of lease liability ................................ 25,000 Current portion of notes payable .............................. 25,000 Total current liabilities ........................................... 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
BRIEF EXERCISE 15-19 ($ in U.S. millions) (a)
Debt to total assets = Total debt ÷ Total assets $4,733.6 $12,423.8
=
38.1%
(b) Interest coverage = EBIT ÷ Interest expense ($677.1 + $118.7 + $99.4) $118.7
Solutions Manual .
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=
7.54 times
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SOLUTIONS TO EXERCISES EXERCISE 15-1 (a) Profit before interest and income tax Interest expense ($5,400,000 × 5%) Profit before income tax Income tax expense (30%) Profit Number of shares Shareholders’ equity ($12,000,000 + $5,400,000 + $840,000) ($12,000,000 + $651,000)
Issue Equity $1,200,000 0 1,200,000 360,000 $ 840,000
Issue Bonds $1,200,000 270,000 930,000 279,000 $ 651,000
320,000
200,000
$18,240,000 $12,651,000
(b) Earnings per share (profit ÷ number of shares)
$2.63
$3.26
Return on equity (profit ÷ shareholders’ equity)
4.61%
5.15%
(c)
Even though profit is lower, the debt alternative is better as earnings per share and return on equity are higher. However, the existing amount of debt should be considered as part of the decision.
Solutions Manual .
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-2 (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
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EXERCISE 15-2 (Continued) (b) (1)
Market interest rate 5% $1,077,945 × 5% × 6/12 = $26,949
(2)
Market interest rate 6% $1,000,000 × 6% × 6/12 = $30,000
(3)
Market interest rate 7% $928,938 × 7% × 6/12 = $32,513
(c)
The amount of interest payment will be the same for all three market rates as the amount of the payment is based on the contractual interest rate of 6% per year or 3% semiannual. The amount will be $1,000,000 × 3% = $30,000.
Solutions Manual .
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-3 (a)
The market rate of interest is higher than the contract rate of 3% interest, which explains why the bond can be sold at a discount.
(b) 2013 Sept. 1 Cash ($600,000 × 96%)................. 576,000 Bonds Payable ........................ (c)
2014 Feb. 28 Interest Expense ............................ 10,014 Bonds Payable ........................ Interest Payable ($600,000 × 3% × 6/12) ...........
576,000
1,014 9,000
(d) PRIORA CORPORATOIN Balance Sheet (Partial) February 28, 2014 Current liabilities Interest payable ..........................................................
$9,000
Non-current liabilities Bonds payable, due 2023 ............................................. $577,014 ($576,000 + $1,014) = $577,014
(e) 2014 Mar. 1
Solutions Manual .
Interest Payable ............................... 9,000 Cash .........................................
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9,000
Chapter 15
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-4 (a)
The market rate of interest is lower than the contract rate of 4% interest, which explains why the bond can be sold at a premium.
(b) 2013 July 31 Cash ($500,000 × 102%) ............... 510,000 Bonds Payable ........................ (c)
2014 Jan. 31 Interest Expense .............................. 9,077 Bond Payable............................... 923 Cash ($500,000 × 4% × 6/12)...
510,000
10,000
(d) MOONEY INC. Balance Sheet (Partial) January 31, 2014 Non-current liabilities Bonds payable, due 2018 ............................................. $509,077 ($510,000 – $923) = $509,077
Solutions Manual .
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-5 (a)
The bonds were issued at a premium. Note that the amortized cost is decreasing from periods 1 through 6, 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.
(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) Contractual interest rate = 4% $8,000 ÷ $400,000 = 2% semi-annually, × 2 = 4% annually Market interest rate = 3% $6,277 ÷ $418,444 = 1.5% semi-annually, × 2 = 3% annually (e) BRIGHT CORPORATOIN Balance Sheet (Partial) March 31, 2013 Current liabilities Interest payable ..........................................................
$8,000
Non-current liabilities Bonds payable, due 2016 ............................................. $411,395 (f)
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
Solutions Manual .
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-5 (Continued) (g)
The total interest payment of $80,000, would be unchanged if the bonds had been issued at a discount instead of a premium. However, the interest expense would be greater. It would be the total of the interest payment of $80,000 plus the amount of the discount. For a premium, as shown in (f), the interest expense is calculated as the total of the interest payments less the amount of the premium.
Solutions Manual .
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-6 (a)
2013 July 1
(b) 2013 Dec. 31
(c)
2014 Jan. 1
(d) 2014 Jan. 1
(e)
2014 Jan. 1
Solutions Manual .
Interest Expense.......................... 14,474 Bond Payable .......................... Cash .........................................
1,974 12,500
Interest Expense.......................... 14,533 Bond Payable .......................... Interest Payable ......................
2,033 12,500
Interest Payable ........................... 12,500 Cash .........................................
12,500
Bonds Payable............................. 486,457 Loss on Bond Redemption ($500,000 – $486,457).............. 13,543 Cash ($500,000 × 100%) ..........
500,000
Bonds Payable............................. 486,457 Gain on Bond Redemption ($486,457 – $480,000).............. Cash ($500,000 × 96%)............
6,457 480,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-7 (a) ($800,000 × 0.61027) + ($800,000 × 2% × 15.58916) = $737,643 (2.5%, 20 periods) Discount = $800,000 – $737,643 = $62,357 Using a financial calculator: Yields $737,643 PV $? I 2.5% N 20 PMT $ (16,000) FV $ (800,000) Type 0 (b) 2013 Jan. 1 Cash.............................................. 737,643 Bonds Payable ........................ 737,643 (c) ONTARIO INC. Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 4% Bonds Issued at market rate of 5%
Date
Jan. 1, 2013 July 1, 2013 Jan. 1, 2014 July 1, 2014 Jan. 1, 2015
Solutions Manual .
(A) Interest Payment $800,000 × 4% × 6/12 $16,000 16,000 16,000 16,000
(B) (C) Interest Discount Expense (D) × 5% × Amortization (B) – (A) 6/12 $18,441 18,502 18,565 18,629
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$2,441 2,502 2,565 2,629
(D) Bond Amortized Cost (D) + (C) $737,643 740,084 742,586 745,151 747,780
Chapter 15
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-7 (Continued) 2014 (d) Dec. 31 Interest Expense ............................ 18,629 Bond Payable .......................... Interest Payable ...................... (e)
ONTARIO INC. Balance Sheet (Partial) December 31, 2014 Current liabilities Interest payable ................................... Non-current liabilities Bonds payable, due 2023 ....................
(f)
2,629 16,000
2015 Jan. 1 Interest Payable ............................. 16,000 Cash .........................................
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$16,000 $747,780
16,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 15-8 (a)
2014 Jan. 1
Cash.............................................. 642,637 Bonds Payable ........................
642,637
(b) TAGAWA CORPORATION Bond Premium Amortization Table Effective Interest Method—Semi-annual Interest Payments 8% Bonds Issued at market rate of 7% (c) Date
(A) Interest Payment $600,000 × 8% × 6/12
Jan. 1, 2014 July 1, 2014 Jan. 1, 2015 July 1, 2015 Jan. 1, 2016
(c)
2014 July 1
$24,000 24,000 24,000 24,000
(B) (C) Interest Premium Expense (D) × 7% × Amortization (A) – (B) 6/12 $22,492 22,440 22,385 22,328
$1,508 1,560 1,615 1,672
(D) Bond Amortized Cost (D) – (C) $642,637 641,129 639,569 637,954 636,282
Interest Expense ............................ 22,492 Bonds Payable........................... 1,508 Cash .........................................
24,000
(d) Dec. 31 Interest Expense ............................ 22,440 Bonds Payable ................................. 1,560 Interest Payable ......................
24,000
(e)
2015 Jan. 1
Solutions Manual .
Bonds Payable ............................. 639,569 Gain on Bond Redemption ($639,569 – $624,000).............. Cash ($600,000 × 104%) ..........
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15,569 624,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 15-9 (a)
Semi-annual (A) Interest Cash Period Payment Dec. 31, 2014 June 30, 2015 $15,000 Dec. 31, 2015 14,813
(B) Interest (C) (D) Expense Reduction Principal (D) × 5% × of Principal Balance 1/2 (A) – (B) (D) – (C) $300,000 $7,500 $7,500 292,500 7,313 7,500 285,000 Issue of Note
2014 Dec. 31
Cash ................................................... 300,000 Mortgage Note Payable .................
300,000
First Instalment Payment 2015 June 30
Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
7,500 7,500 15,000
Second Instalment Payment Dec. 31
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Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
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7,313 7,500 14,813
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 15-9 (Continued) (b)
Semi-annual (A) Interest Cash Period Payment Dec. 31, 2014 June 30, 2015 $11,951 Dec. 31, 2015 11,951
(B) Interest (C) (D) Expense Reduction Principal (D) × 5% × of Principal Balance 1/2 (A) – (B) (D) – (C) $300,000 $7,500 $4,451 295,549 7,389 4,562 290,987 Issue of Note
2014 Dec. 31
Cash ................................................... 300,000 Mortgage Note Payable .................
300,000
First Instalment Payment 2015 June 30
Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
7,500 4,451 11,951
Second Instalment Payment Dec. 31
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Interest Expense................................ Mortgage Note Payable ..................... Cash ..........................................
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7,389 4,562 11,951
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 15-10 (a)
This is a blended payment loan as the payments are constant at $23,097 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
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-11 (a)
This is a fixed principal loan as principal is being reduced by $18,750 each year.
(b) The interest rate is 4% ($6,000 ÷ $150,000). (c)
The number of semi-annual payments for the instalment note will be ($150,000 ÷ $18,750 = 8) and so the maturity date of the note will be January 1, 2017.
(d) Interest Expense ............................................. 6,000 Notes Payable ............................................... 18,750 Cash........................................................
24,750
(e) Current portion = $37,500 Non-current portion = $112,500 – $37,500 = $75,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-12 (a) Cash Payment
Period Jan. 1, 2014 Dec. 31, 2014 $5,612 Dec. 31, 2015 5,612 Dec. 31, 2016 5,612 * adjusted for rounding error
Interest Expense 6%
Reduction of Principal
$ 900 617 *319
$4,712 4,995 5,293
Principal Balance $15,000 10,288 5,293 0
(b) 2014 Jan. 1 Cash .......................................... Notes Payable ......................
(c)
15,000 15,000
Dec. 31 Interest Expense....................... Notes Payable ........................... Cash ......................................
900 4,712
Current liability........................................ Non-current liability ................................
$4,995 5,293
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 15-13 (a)
The amount of the annual principal payments will be $5,000 ($15,000 ÷ 3 years).
(b)
Period Jan. 1, 2014 Dec. 31, 2014 Dec. 31, 2015 Dec. 31, 2016
Cash Payment
Interest Expense 6%
Reduction of Principal
$5,900 5,600 5,300
$ 900 600 300
$5,000 5,000 5,000
Principal Balance $15,000 10,000 5,000 0
(c) 2014 Jan. 1 Cash .......................................... Notes Payable ......................
(d)
15,000 15,000
Dec. 31 Interest Expense....................... Notes Payable ........................... Cash ......................................
900 5,000
Current liability........................................ Non-current liability ................................
$5,000 5,000
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 15-14 (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 ........................................... 2. Jan.
Solutions Manual .
750 750
1 Leased Asset—Equipment ............ 118,000 Lease Liability ........................... 118,000
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Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 15-15 (a)
[dollar figures in millions] 2011 Debt to total assets =
Interest coverage = 2010 Debt to total assets =
Interest coverage =
$3,032.5 $7,300.3
=
41.5%
($613.9 + $64.0 + $232.9) = $64.0 $2,941.6 $7,044.2
=
14.23 times
41.8%
($591.9 + $60.6 + $244.8) = $60.6
14.81 times
The debt to total asset ratio has decreased slightly indicating a modest solvency improvement and the interest coverage has decreased indicating that Shoppers’ solvency deteriorated. Overall Shoppers’ solvency is very similar in 2011 to 2010. (b) The use of the operating leases improves the company’s solvency. If the operating leases were treated as finance leases, the debt to total assets ratio would be much worse as would the company solvency. Since operating leases are accounted for as rent expense, Shoppers Drug Mart 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.
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-16 (a) Issue Debt $17,000,000 13,000,000 4,000,000
Assets Liabilities Shareholders’ Equity Profit ($2,000,000 + $315,000) ($2,000,000 + $525,000)
Issue Equity $17,000,000 8,000,000 9,000,000
$2,315,000 $2,525,000
Average Shareholder’s Equity ($4,000,000 + ($4,000,000 + $2,315,000))/2
$5,157,500 $10,262,500
(($4,000,000 + $5,000,000) + ($4,000,0000 + $5,000,000 + $2,525,000))/2
Debt to Assets ($13,000,000 ÷ $17,000,000) ($8,000,000 ÷ $17,000,000)
76.5%
Return on Equity ($2,315,000 ÷ $5,157,500) ($2,525,000 ÷ $10,262,500)
44.9%
47.1%
24.6%
(b) Utopia should issue debt. The existing shareholders maintain control, and they achieve a higher return on equity. There is more risk, however. Interest must be paid regularly, and the principal must eventually be repaid or refinanced. 76.5% debt is quite high. Perhaps a combination of debt and equity issue would be a better alternative.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 15-17 (a) RAY CORPORATION Balance Sheet (Partial) July 31, 2014 Non-current liabilities Bonds payable, due 2018....................................... $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 a current liability. 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.
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 15-1A
(a) The contractual rate of interest on the bonds is 4% [($50,000 × 2) ÷ $2,500,000] (b) Jan. 1 Interest Payable ......................... Cash ......................................
50,000
(c) Jan. 1 Bonds Payable ........................... Loss on Bond Redemption ....... Cash ($625,000 × 102%) ........
625,000 12,500
50,000
637,500
(d) July 1 Interest Expense ........................ 37,500 Cash ....................................... [($2,500,000 – $625,000) × 4% × 6/12]
37,500
(e) Dec. 31 Interest Expense ........................ 37,500 Interest Payable..................... [($2,500,000 – $625,000) × 4% × 6/12]
37,500
(f)
Jan. 1 Bonds Payable ........................... 1,875,000 Cash ....................................... 1,875,000 ($2,500,000 – $625,000)
Taking It Further: The bonds were initially issued at par. The market rate of interest at the time of the redemption was lower than when the bonds were issued because the bonds were trading at a premium ($625,000 × 102%) at the time of redemption.
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-2A 2013 (a) May 1 Cash ($900,000 × 103%) ............ Bonds Payable ...................... 2014 (b) Apr. 30 Interest Expense ........................ Bonds Payable ........................... Interest Payable..................... ($900,000 × 7%) (c) MEM Corp. Balance Sheet (Partial) April 30, 2014
927,000 927,000 58,237 4,763 63,000
Current liabilities Interest payable .......................................
$63,000
Non-current debt Bonds payable......................................... *($927,000 – $4,763) = $922,237
*922,237
(d) May 1 Interest Payable ......................... Cash .......................................
63,000
(e)
922,237
May 1 Bonds Payable ........................... Loss on Bond Redemption ($922,237 – $891,000) ............ Cash ($900,000 × 104%) ........
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63,000
13,763 936,000
Chapter 15
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 15-2A (Continued)
Taking It Further: The market rate of interest on May 1, 2013 was 6.28%. Using a financial calculator: PV $ 927,000 I ? Yields 6.2823% N 5 PMT $(63,000) FV $(900,000) Type 0
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-3A (a) 2013 1. July
2.
Dec.
3.
2014 Jan.
4.
July
1 Cash ....................................... Bonds Payable .................. 31 Interest Expense ($4,327,029 × 4% × 6/12)............. Bonds Payable............................ Interest Payable ($4,000,000 × 5% × 6/12) .......
4,327,029 4,327,029
86,541 13,459 100,000
1 Interest Payable .............................. 100,000 Cash....................................... 100,000 1 Interest Expense [($4,327,029 – $13,459) × 4% × 6/12] . 86,271 Bonds Payable .................................. 13,729 Cash............................................. 100,000
(b) 1.
Interest expense for 2013 is $86,541.
2.
Interest expense for bonds issued at a premium as in this problem, is less than interest expense for bonds issued at a discount. When bonds are issued at a discount, the interest expense is more than the interest payment by the amount of the amortization. When bonds are issued at a premium, the interest expense is less than the interest payment by the amount of the amortization.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-3A (Continued) (b) (Continued) 3.
The total cost of borrowing will be the total interest payments less the premium. Total interest payments = $4,000,000 × 2.5% × 20 = Premium Total cost of borrowing
4.
$2,000,000 327,029 $1,672,971
Interest expense for bonds issued at a premium is less than interest expense for bonds issued at a discount whether calculated annually (as explained in part (b) (2)), or in total. When bonds are issued at a discount, the interest expense is more than the interest payment by the amount of the discount. When bonds are issued at a premium, the interest expense is less than the interest payment by the amount of the premium.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-3A (Continued) 5.
$4,000,000 × 0.55368 = $ 2,214,720 $4,000,000 × 2.5% × 14.87747 = 1,487,747 (3%, 20 periods) $3,702,467 Using a financial calculator: PV $ ? Yields $3,702,451 I 3% N 20 PMT $ (100,000) FV $ (4,000,000) Type 0
The total cost of borrowing will be the total interest payments plus the discount. Total interest payments = $4,000,000 × 2.5% × 20 = Discount ($4,000,000 – $3,702,467) Total cost of borrowing
$2,000,000 297,533 $2,297,533
Taking It Further: Had the market rate of interest gone to 4.5% in December 2013, there would be no change in how the debt would be accounted for on the records of Webhancer Corp. The company would likely be happy that it managed to sell the bond before the market rate of interest increased.
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Chapter 15
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-4A
(a)
The bonds were issued at a discount. Note that the 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) [1] [2] [3] [4] [5] (c)
$42,000. $42,000 + $3,518 = $45,518 or $1,300,514 × 3.5% (market rate (e) below = $45,518) $45,769 – $42,000 = $3,769 $45,900 – $42,000 = $3,900 $1,311,442 + $3,900 = $1,315,342
The face value of the bond is $1,400,000.
(d) Contractual interest rate = 6% $42,000 ÷ $1,400,000 = 3% semi-annually, × 2 = 6 annually (e)
(f)
%
Market interest rate = 7% [2] $45,518 ÷ $1,300,514 = 3.5% semi-annually, × 2 = 7% annually 2013 Jan 1 Cash ............................................ 1,300,514 Bonds Payable ...................... 1,300,514
2014 (g) July 1 Interest Expense ........................ Bonds Payable ...................... Cash ....................................... 2014 (h) Dec. 31 Interest Expense ........................ Bonds Payable ...................... Interest Payable.....................
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45,769 3,769 42,000 45,900 3,900 42,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-4A (Continued) (i) GLOBAL SATELLITES Balance Sheet (Partial) December 31, 2014 Current liabilities Interest payable .......................................................
$42,000
Non-current liabilities Bonds payable, due 2023 ...........................................$1,315,342 (j) (k)
2015 Jan. 1 Interest Payable ......................... Cash .......................................
42,000 42,000
Calculate the present value of the future payments of interest and maturity amount of $1,400,000 at the market rate of 5%, when there are 16 interest payments (initial 20 less 4 already paid) remaining as follows: ($1,400,000 × 0.67362) + ($42,000 × 13.05500) = $1,491,378 (2.5%, 16 periods) Using a financial calculator: PV $ ? Yields $1,491,385 I 2.5% N 16 PMT $ (42,000) FV $ (1,400,000) Type 0
(l)
2015 Jan. 1
Solutions Manual .
Bonds Payable .............................1,315,342 Loss on Bond Redemption ($1,491,378 – $1,315,342) ...........176,036 Cash ......................................... 1,491,378 15-51
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-4A (Continued) 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, 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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-5A
(a) ($8,000,000 × 0.67297) + ($8,000,000 × 2.5% × 16.35143) = $8,654,046 (2%, 20 periods) 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, 2013 July 1, 2013 Jan. 1, 2014 July 1, 2014 Jan. 1, 2015
Solutions Manual .
(A) (B) (C) Interest Interest Premium Payment Expense $8,000,000 × (D) × 4% × Amortization (A) – (B) 5% × 6/12 6/12 $200,000 200,000 200,000 200,000
$173,081 172,543 171,993 171,433
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$26,919 27,457 28,007 28,567
(D) Bond Amortized Cost (D) – (C) $8,654,046 8,627,127 8,599,670 8,571,663 8,543,096
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PROBLEM 15-5A (Continued) 2013 (c) Jan. 1 Cash ............................................ 8,654,046 Bonds Payable ................... 8,654,046 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, 2013 Current liabilities Interest Payable ................................... Non-current liabilities Bonds payable, due 2023 ....................
2014 (e) Jan. 1 Interest Payable ............................ 200,000 Cash .......................................
(f)
2015 Jan. 1
2023 (g) Jan. 1
Solutions Manual .
$200,000 8,599,670
200,000
Bonds Payable .............................8,599,670 Gain on Bond Redemption ($8,599,670 – $8,160,000) ........ 439,670 Cash ($8,000,000 × 102%) ....... 8,160,000 Bonds Payable .............................8,000,000 Cash ......................................... 8,000,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-5A (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 ($8,654,046 – $8,000,000) Total interest expense ............................
$4,000,000 654,046 $3,345,954
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. On the other hand, 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, Sixth Canadian Edition
PROBLEM 15-6A (a) 2013 April 1 Cash........................................... 1,000,000 Note Payable ...................... 1,000,000 (b) Annual fixed principal $1,000,000 ÷ 4 = $250,000 (c) (A) Cash Payment (B) + (C)
Period Apr. 1, 2013 Mar. 31, 2014 $300,000 Mar. 31, 2015 287,500 Mar. 31, 2016 275,000 Mar. 31, 2017 262,500 Total $1,125,500
(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) 2013
Dec. 31 Interest Expense..................... Interest Payable ................. ($1,000,000 × 5% × 9/12) 2014 Mar. 31 Note 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 15-6A (Continued) (f)
2014 Dec. 31 Interest Expense..................... Interest Payable ................. ($750,000 × 5% × 9/12) 2015 Mar. 31 Note Payable ........................... Interest Expense..................... Interest Payable ...................... Cash ....................................
28,125 28,125 250,000 9,375 28,125 287,500
Taking It Further: (A)
Date Apr. 1, 2013 Mar. 31, 2014 Mar. 31, 2015 Mar. 31, 2016 Mar. 31, 2017
Payment
(B) Interest Portion (D) × 5%
$ 282,012 282,012 282,012 282,012 $1,128,048
$50,000 38,399 26,219 * 13,430 *$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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PROBLEM 15-7A (a) 2013 Sept. 30 Equipment ................................. Mortgage Note Payable ....... Cash ......................................
900,000 750,000 150,000
(b) (A) Monthly Interest Period
Cash Payment
Oct. 31 Nov. 30
$13,677 13,677
(B) (C) (D) Interest Reduction Principal Expense (D) × 3.6% × of Principal Balance 1/12 (A) – (B) (D) – (C) $750,000 $2,250 $11,427 738,573 2,216 11,461 727,112
2013 Oct. 31 Interest Expense........................ Mortgage Note Payable ............. Cash ....................................... Nov. 30 Interest Expense........................ Mortgage Note Payable ............. Cash .......................................
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2,250 11,427 13,677 2,216 11,461 13,677
Chapter 15
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-7A (Continued) (c) (A) Monthly Interest Period
Cash Payment (B) + (C)
Oct. 31 Nov. 30
$14,750 14,713
(B) (C) (D) Interest Expense Principal (D) × 3.6% × Reduction Balance 1/12 of Principal (D) – (C) $750,000 $2,250 $12,500 737,500 2,213 12,500 725,000
Oct. 31 Interest Expense........................ Mortgage Note Payable ............. Cash .......................................
2,250 12,500
Nov. 30 Interest Expense........................ Mortgage Note Payable ............. Cash .......................................
2,213 12,500
14,750
14,713
Taking It Further: 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. As a result, the interest paid will be less if the instalments are fixed principal payments of $12,500.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-8A (a)
(A) Semi-annual Interest Period Dec. 31, 2013 June 30, 2014 Dec. 31, 2014 June 30, 2015 Dec. 31, 2015
(b)
Cash Payment
(B) Interest Expense (D) × 3.5%
(C) Reduction of Principal (A) – (B)
$49,253 49,253 49,253 49,253
$24,500 23,634 22,737 21,809
$24,753 25,619 26,516 27,444
(D) Principal Balance (D) – (C) $700,000 675,247 649,628 623,112 595,668
2013 Dec. 31 Cash .............................................. 700,000 Mortgage Note Payable .......
700,000
(c)
KINYAE ELECTRONICS Balance Sheet (Partial) December 31, 2013
Current liabilities Current portion of mortgage note payable* ............... $ 50,372 Non-current liabilities Mortgage note payable, net of current portion** ........... 649,628 * $24,753 + $25,619 = $50,372 ** $700,000 – $24,753 – $25,619 = $649,628 or see Dec. 31, 2014 balance.
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PROBLEM 15-8A (Continued) (d)
2014 June 30 Interest Expense ............................ 24,500 Mortgage Note Payable ................. 24,753 Cash .....................................
49,253
Dec. 31 Interest Expense ............................ 23,634 Mortgage Note Payable ................. 25,619 Cash .....................................
49,253
(e)
If Kinyae Electronics made instalments of fixed principal payments on a semi-annual basis, the fixed principal payment would be: $700,000 ÷ the total number of payments 20 = $35,000.
(f)
2014 June 30 Interest Expense ............................ 24,500 Mortgage Note Payable ................. 35,000 Cash ..................................... Dec. 31 Interest Expense* ........................... 23,275 Mortgage Note Payable................. 35,000 Cash ..................................... * ($700,000 – $35,000) × 3.5% = $23,275
59,500
58,275
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, Sixth Canadian Edition
PROBLEM 15-9A (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 need be met to require capitalization.
(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, 2014 is as follows: Leased Asset—Vehicles ............................... 74,800 Lease Liability ..................................... Solutions Manual .
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PROBLEM 15-9A (Continued) 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). 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 2014. 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 December 31, 2014 by the principal portion of the annual lease payment. Interest expense included in the annual lease payment would also appear on the income statement.
Taking It Further: The adjusting journal entry on December 31, 2014 for the accrual of interest on the lease liability would be as follows: Interest Expense on Finance Leases ............. 4,786 Interest Payable................................... (($74,800 – $14,981) × 8% = $4,786)
4,786
Since the rental cost of the manufacturing and office equipment have been paid and expensed during the year, no accruals need be recorded for the two remaining leases.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-10A (a)
($ in millions) Debt to total assets = Total debt ÷ Total assets 2011 2010
$11,421 ÷ $17,428 = 65.5% $11,238 ÷ $16,841 = 66.7%
Interest coverage = EBIT ÷ Interest expense 2011 2010
($769 + $327 + $288) ÷ $327 = 4.2 times ($675 + $353 + $319) ÷ $353 = 3.8 times
(b) Although Loblaw has a significant amount of debt, the company is generating sufficient profit to continue to operate without any concerns as to solvency. The debt to total asset ratio improved in 2011 and the times interest earned ratio improved dramatically, mainly due to improved profitability. Loblaw’s solvency improved. Taking It Further: The use of the 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, Sixth Canadian Edition
PROBLEM 15-11A (a)
SYKES LTD. Balance Sheet (Partial) October 31, 2014 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income taxes 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
Shareholders’ equity Common shares.................................................. Retained earnings............................................... Total shareholders’ equity...................................... Total liabilities and shareholders’ equity ..............
350,000 835,7934 1,185,793 $2,044,147
1
$20,800 – $11,125 = $9,675 $230,211 – $9,675 = $220,536 3 $40,243 – $26,430 = $13,813 4 $824,793 + $36,000 – $25,000 = $835,793 2
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PROBLEM 15-11A (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 alarmingly 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) The contractual rate of interest on the bonds is 3% [($18,000 × 2) ÷ $1,200,000]. (b) Jan.
1 Interest Payable .................................18,000 Cash ...........................................
18,000
(c) Jan.
1 Bonds Payable ................................. 400,000 Gain on Bond Redemption ........ 8,000 Cash ($400,000 × 98%) ............... 392,000
(d) July
1 Interest Expense ................................ 12,000 Cash ............................................ [($1,200,000 – $400,000) × 3% × 6/12]
12,000
(e) Dec. 31 Interest Expense ................................ 12,000 Interest Payable.......................... [($1,200,000 – $400,000) × 3% × 6/12]
12,000
(f)
Jan. 1 Bonds Payable .............................. 800,000 Cash ....................................... ($1,200,000 – $400,000)
800,000
Taking It Further: The bonds were initially issued at par. The market rate of interest at the time of the redemption was greater than the rate the bonds were issued at because the bonds were trading at a discount ($400,000 × 98%) when they were redeemed.
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PROBLEM 15-2B (a)
(b)
2013 Oct. 1 Cash ($800,000 × 98%)................. 784,000 Bonds Payable ..................... 2014 Sep. 30 Interest Expense....................... Bonds Payable ..................... Interest Payable ($800,000 × 5%) ....................
784,000
41,257 1,257 40,000
(c) PFQ Corp. Balance Sheet (Partial) September 30, 2014 Current liabilities Interest payable .......................................
$40,000
Non-current debt Bond payable........................................... *($784,000 + $1,257) = $785,257 (d) 2014 Oct. 1 Interest Payable ........................ Cash ...................................... (e)
2014 Oct. 1 Bonds Payable.......................... Gain on Bond Redemption ($785,257 – $776,000)........... Cash ($800,000 × 97%).........
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*785,257
40,000 40,000
785,257 9,257 776,000
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PROBLEM 15-2B (Continued) Taking It Further: The market rate of interest on Oct 1, 2013 was 5.26%. Using a financial calculator: PV $ 784,000 I ? Yields 5.2623% N 10 PMT $(40,000) FV $(800,000) Type 0
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PROBLEM 15-3B (a)
2013
1.
July
2.
Dec. 31 Interest Expense ($3,449,423 × 5% × 6/12) ..................... 86,236 Bonds Payable ...................................... 9,764 Interest Payable ($3,200,000 × 6% × 6/12) ............... 96,000
1 Cash............................................... 3,449,423 Bonds Payable ..................... 3,449,423
3.
2014 Jan 1 Interest Payable .................................. 96,000 Cash ............................................... 96,000
4.
Jul.
1 Interest Expense [($3,449,423 – $9,764) × 5% × 6/12] .... 85,991 Bonds Payable .................................... 10,009 Cash ............................................... 96,000
(b) 1.
Interest expense for 2013 is $86,236.
2.
Interest expense for bonds issued at a discount is greater than interest expense for bonds issued at a premium. When bonds are issued at a premium, as they are in this problem, the interest expense is less than the interest payment by the amount of the amortization. When bonds are issued at a discount, the interest expense is more than the interest payment by the amount of the amortization.
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PROBLEM 15-3B (Continued) (b) (Continued) 3.
The total cost of borrowing will payments less the premium. Total interest payments ($3,200,000 × 3% × 20) Premium ($3,449,423 – $3,200,000) Total cost of borrowing
4.
be the total interest
$1,920,000 249,423 $1,670,577
Interest expense for bonds issued at a discount is greater than interest expense for bonds issued at a premium, whether calculated annually (as explained in part (b) (2)), or in total. When bonds are issued at a premium, as they are in this problem, the interest expense is less than the interest payment by the amount of the premium as shown above in part (b) (3). When bonds are issued at a discount, the interest expense is more than the interest payment by the amount of the discount.
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PROBLEM 15-3B (Continued) 5.
$3,200,000 × 0.50257 = $3,200,000 × 3% × 14.2124 = (3.5%, 20 periods)
$1,608,224 1,364,390 $2,972,614
Using a financial calculator: PV $ ? Yields $2,972,602 I 3.5% N 20 PMT $ (96,000) FV $ (3,200,000) Type 0 The total cost of borrowing will be the total interest payments plus the discount. Total interest payments = $3,200,000 × 3% × 20 = Discount ($3,200,000 – $2,972,614) Total cost of borrowing
$1,920,000 227,386 $2,147,386
Taking It Further: Had the market rate of interest gone to 5.5% in December 2013, there would be no change in how the debt was accounted for on the records of Waubonsee Ltd. The company would likely be happy that it managed to sell the bond before the market interest rate went up.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 15-4B (a)
The bonds were issued at a premium. Note that the 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) [1] [2] [3] [4] [5] (c)
$2,695,981 + $8,412 = $2,704,393. $62,500 – $8,412 = $54,088 or $2,704,393 × 2% (market rate (e) below = $54,088) $62,500 $62,500 – $53,573 = $8,927 $2,678,649 – $8,927 = $2,669,722
The face value of the bond is $2,500,000.
(d) Contractual interest rate = 5% $62,500 ÷ $2,500,000 = 2.5% semi-annually, × 2 = 5% annually (e)
(f)
Market interest rate = 4% [2] $54,088 ÷ $2,704,393 = 2% semi-annually, × 2 = 4% annually 2013 Jan 1 Cash ............................................ 2,704,393 Bonds Payable ...................... 2,704,393
2014 (g) July 1 Interest Expense ........................ Bonds Payable ........................... Cash ....................................... 2014 (h) Dec. 31 Interest Expense ........................ Bonds Payable ........................... Interest Payable..................... Solutions Manual .
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PROBLEM 15-4B (Continued) (i) PONASIS CORPORATION Balance Sheet (Partial) December 31, 2014 Current liabilities Interest payable .......................................................
$62,500
Non-current liabilities Bonds payable, due 2023 ...........................................$2,669,722
(j) (k)
(l)
2015 Jan. 1 Interest Payable ......................... Cash .......................................
62,500 62,500
Since the contractual interest rate of 5% is equal to the market rate of interest of 5% at the date of the redemption, the amount paid to redeem the bonds is the face value of $2,500,000.
2015 Jan. 1
Bonds Payable .............................2,669,722 Gain on Bond Redemption ($2,699,722 – $2,500,000) ........ 169,722 Cash ......................................... 2,500,000
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, 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. Solutions Manual .
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PROBLEM 15-5B (a) ($5,000,000 × 0.78120) + ($5,000,000 × 2% × 8.75206) = $4,781,206 (2.5%, 10 periods) 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, 2013 July 1, 2013 Jan. 1, 2014 July 1, 2014 Jan. 1, 2015
Solutions Manual .
(A) (B) (C) Interest Interest Discount Payment Expense $5,000,000 × (D) × 5% × Amortization (B) – (A) 4% × 6/12 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) $4,781,206 4,800,736 4,820,754 4,841,273 4,862,305
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PROBLEM 15-5B (Continued) 2013 (c) Jan. 1 Cash ............................................ 4,781,206 Bonds Payable ................... 4,781,206 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, 2013 Current liabilities Interest Payable ................................... Non-current liabilities Bonds payable, due 2018 ....................
2014 (e) Jan. 1 Interest Payable ............................ 100,000 Cash ......................................
$100,000 4,820,754
100,000
2015 (f) Jan. 1 Bonds Payable ........................... 4,862,305 Loss on Bond Redemption ($4,900,000 – $4,862,305) .... 37,695 Cash ($5,000,000 × 98%) ...... 4,900,000 2018 (g) Jan. 1 Bonds Payable ........................... 5,000,000 Cash ...................................... 5,000,000
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PROBLEM 15-5B (Continued)
(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 – $4,781,206) Total interest expense ............................
$1,000,000 218,794 $1,218,794
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. On the other hand, 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, Sixth Canadian Edition
PROBLEM 15-6B (a)
2014 May
1 Cash ........................................... 120,000 Note Payable .......................
120,000
(b) (A) Cash Payment
Period May 1, 2014 Oct. 31, 2014 $22,520 Apr. 30, 2015 22,520 Oct. 31, 2015 22,520 Apr. 30, 2016 22,520 Oct. 31, 2016 22,520 Apr. 30, 2017 22,520 Total $135,120 *rounded
(c)
2014 Oct. 31
2015 Apr. 30
(d)
(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
Note Payable............................ Interest Expense ..................... Cash.....................................
18,320 4,200
Note Payable............................ Interest Expense ..................... Cash.....................................
18,961 3,559
22,520
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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PROBLEM 15-6B (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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PROBLEM 15-7B (a) 2013 Sep. 30 Equipment .................................... 800,000 Cash ...................................... Mortgage Note Payable .......
(A) Quarterly Interest Period Sep. 30, 2013 Dec. 31, 2013 Mar. 31, 2014
Cash Payment
(B) Interest Expense (D) × 4% × 3/12
$66,637 66,637
$7,500 6,909
(C)
2014 Mar. 31 Interest Expense....................... Mortgage Note Payable ............ Cash ......................................
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(D)
Reduction Principal of Principal Balance (A) – (B) (D) – (C) $750,000 $59,137 690,863 59,728 631,135
(b) Dec. 31 Interest Expense....................... Mortgage Note Payable ............ Cash ......................................
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50,000 750,000
7,500 59,137 66,637 6,909 59,728 66,637
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PROBLEM 15-7B (Continued) (c) (A)
(B)
Monthly Interest Period
Cash Payment (B) + (C)
Dec. 31 Mar. 31
$70,000 69,375
(C) (D) Interest Principal Expense (D) × 4% × Reduction Balance 3/12 of Principal (D) – (C) $750,000 $7,500 $62,500 687,500 6,875 62,500 625,000
(c) 2013 Dec. 31 Interest Expense....................... Mortgage Note Payable ............ Cash ......................................
7,500 62,500
2014 Mar. 31 Interest Expense....................... Mortgage Note Payable ............ Cash ......................................
6,875 62,500
70,000
69,375
Taking It Further: Total payments ($66,637 × 4 × 3) Less: Principal repayment Total interest expense of note
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PROBLEM 15-8B (a)
(A) Semi-annual Interest Period Dec. 31, 2013 June 30, 2014 Dec. 31, 2014 June 30, 2015 Dec. 31, 2015 (b)
Cash Payment (B) + (C)
(B) Interest Expense (D) × 7.5% × 6/12
$39,375 38,531 37,688 36,844
$16,875 16,031 15,188 14,344
(C)
(D)
Principal Reduction Balance of Principal (D) – (C) $450,000 $22,500 427,500 22,500 405,000 22,500 382,500 22,500 360,000
2013 Dec. 31 Cash.............................................. 450,000 Mortgage Note Payable ..........
450,000
(c) ELITE ELECTRONICS Balance Sheet (Partial) December 31, 2013
Current liabilities Current portion of mortgage note payable ................ $ 45,000 Non-current liabilities Mortgage notes payable, 7.5% ...................................... *405,000 * $450,000 – $45,000 = $405,000 or see Dec. 31, 2014 balance (d)
2014 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 15-8B (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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PROBLEM 15-9B (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 manufacturing equipment lease and so it should be treated as a finance lease. Both the equipment and vehicle 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 need be met to require capitalization.
(b) Equipment Rental Expense........................ Cash .....................................................
4,800
Equipment Rental Expense........................ Cash .....................................................
7,000
4,800
7,000
The manufacturing equipment lease is a finance lease. The entry to record the finance lease on January 1, 2014 is as follows: Solutions Manual .
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PROBLEM 15-9B (Continued) Leased Asset—Manufacturing Equipment Lease Liability .....................................
45,000
Lease Liability............................................. Cash .....................................................
8,823
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PROBLEM 15-9B (Continued) (c)
Since the equipment and vehicle leases do not qualify as finance leases, nothing would appear on Klippert Inc. 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 $11,800 ($7,000 + $4,800). The manufacturing equipment lease is a finance lease. Therefore, the manufacturing equipment 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 $45,000, reduced by any accumulated depreciation recorded in 2014. The amount of the depreciation would be reported on the income statement. A corresponding liability for leased assets of $45,000 would be recorded on January 1, 2014. This amount would be reduced by the first lease payment which was made on January 1, 2014. Interest expense accrued for 2014 would also appear on the income statement.
Taking It Further: The adjusting journal entry on December 31, 2014 for the accrual of interest on the lease liability would be as follows: Interest Expense on Finance Leases ............. 2,532 Interest Payable................................... (($45,000 – $8,823) × 7% = $2,532)
2,532
Since the rental cost of the equipment and vehicles have been paid and expensed during the year, no accruals need be recorded for the two remaining leases.
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PROBLEM 15-10B a)
($ in thousands) Debt to total assets = Total debt ÷ Total assets 2011 2010
$2,010,346 ÷ $2,940,459 = 68.4% $1,848,138 ÷ $2,834,910 = 65.2%
Interest coverage = EBIT ÷ Interest expense 2011 2010 (b)
($87,331 + $70,747 + $24,469) ÷ $70,747 = 2.6 times ($35,613 + $64,874 + $19,077) ÷ $64,874 = 1.8 times
In 2011, Maple Leaf Foods’ solvency has deteriorated. The company’s debt to total assets ratio has climbed from 65.2% in 2010 to 68.4% in 2011. On the other hand, the times interest earned ratio improved dramatically, mainly due to improved profitability in 2011.
Taking It Further: The use of the operating leases improves the company’s solvency ratios. Since operating leases are accounted for as rent expense, Maple Leaf Foods 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 liquidity problem in 2011, as revealed by the ratios, could be even worse. Solutions Manual .
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PROBLEM 15-11B (a)
CAREY CORPORATION Balance Sheet (Partial) December 31, 2014 Liabilities and shareholders’ equity Current liabilities Accounts payable ............................................... Interest payable .................................................. Income taxes 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 2019 ................................... 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
Shareholders’ equity Common shares.................................................. Retained earnings............................................... Total shareholders’ equity...................................... Total liabilities and shareholders’ equity ..............
425,000 742,3204 1,167,320 $2,594,031
1
$24,400 – $7,480 = $16,920 $158,666 – $16,920 = $141,746 3 $99,869 – $22,800 = $77,069 4 $608,820 + $173,500 – $40,000 = $742,320 2
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PROBLEM 15-11B (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)
Sykes’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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CONTINUING COOKIE CHRONICLE (a)
Alternative 1
Interest Period
Sept. 1, 2014 Mar. 1, 2015 Sept. 1, 2015 Mar. 1, 2016 Sept. 1, 2016 Mar. 1, 2016 Sept. 1, 2016 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
Sept. 1, 2014 Mar. 1, 2015 Sept. 1, 2015 Mar. 1, 2016 Sept. 1, 2016 Mar. 1, 2017 Sept. 1, 2017 Totals *$1 Solutions Manual .
(A) Cash Payment
(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
$3,749 $420 3,749 353 3,749 286 3,749 216 3,749 146 3,749 73* $22,494 $1,494 rounding 15-90
$3,329 3,396 3,463 3,533 3,603 3,676 $21,000
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (b)
(c)
Sept. 1 Equipment ................................. Cash ...................................... Note Payable ........................
25,000 4,000 21,000
Alternative 1 2015 Mar. 1 Note Payable ............................. Interest Expense....................... Cash ...................................... Sept. 1 Note Payable ............................. Interest Expense....................... Cash ......................................
3,500 420 3,940 3,500 350 3,850
Alternative 2 2015 Mar. 1 Note Payable ............................. Interest Expense....................... Cash ...................................... Sept. 1 Note Payable ............................. Interest Expense....................... Cash ......................................
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Accounting Principles, Sixth Canadian Edition
CONTINUING COOKIE CHRONICLE (Continued) (d) 1
Current Portion Non-current Portion 1
(e)
Alternative 1 $7,000 10,500 $17,500
Alternative 2 $6,859 10,812 $17,671
$3,500 + $3,500 = $7,000 $3,396 + $3,463 = $6,859
Alternative 1 2015 July 31 Interest Expense....................... Interest Payable ................... ($17,500 × 4% × 5/12) = $292 Alternative 2 July 31 Interest Expense....................... Interest Payable ................... ($17,671 × 4% × 5/12) = $295
292 292
295 295
(f) 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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BYP 15-1 FINANCIAL REPORTING PROBLEM * dollar amounts are in thousands (a)
Reitmans’ total debt
Jan. 28, 2012 $8,573
Jan. 29, 2011 $10,047
Total debt decrease by $1,474 or 14.7 %. (b) Yes, Reitmans reported a current portion of non-current debt in the current liability section of its balance sheet. At January 28, 2012, Reitmans had $1,474 of its non-current debt as currently due. (c)
Reitman’s non-current debt consists of a mortgage payable secured by the company’s distribution centre.
(d) The interest rate paid on the mortgage payable is 6.4% and the mortgage will be fully paid by November 2017. (e)
By January 31, 2013, the current liability portion of the mortgage payable will be $1,570.
(f)
In Note 18 to the financial statements, it is disclosed that Reitmans has significant leases for retail stores, offices, automobiles and equipment that are being treated as operating leases for accounting purposes. The use of operating leases is a form of off-balance sheet financing.
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BYP 15-1 (Continued) (g)
2011 Debt to total assets = Total debt ÷ Total assets Debt to total assets
=
($91,309 + $55,248) $633,861
=
23.1%
Interest coverage = EBIT ÷ Interest expense =
($88,985 + $845 + $38,817) $845
= 152.2
times
Reitmans’ solvency worsened in 2012. Debt to total assets was virtually unchanged. However, the profit available for the payment of interest decreased in 2012 while interest expense increased. This is apparent from the decrease in the interest coverage ratio from 152.2 times in 2011 to 45 times in 2012. However, the interest coverage ratio remains extremely high.
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BYP 15-2 INTERPRETING FINANCIAL STATEMENTS (a) In spite of the fact that the financial statements of Gap Inc. and Le Château are prepared using different currencies and are rounded, in the case of the GAP Inc. in millions, and Le Château in thousands, the comparisons using ratios will remain unaffected by these differences. This is one of the main advantages of the use of ratios to make comparisons in the performance and condition of different companies. When dollars are divided by dollars, the result is not dollars – it is just a number. (b) Gap Inc.
($ in millions) U.S. Debt to total assets Times interest earned
$4,667 $7,422
= 62.9%
($833 + $74 +$536) $74
Le Château
($ in thousands) Debt to total assets Times interest earned
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= 19.5 times
$90,689 $233,794 = 38.8% (($2,386) + $1,974 + ($596)) = – 0.51 times $1,974
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BYP 15-2 (Continued) (c)
Gap Inc. relied more heavily on debt financing; 62.9% of every dollar of assets was financed with debt versus only 38.8% by Le Château. In spite of having a higher debt to total asset ratio, Gap Inc. has a positive times interest earned ratio compared to Le Château that experienced a large loss for the year and had a negative times interest earned ratio.
(d) 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. (e)
The $10 million loan obtained by Le Château during the last month of the fiscal year had the effect of increasing the assets (cash) and the total liabilities by the same amount. The cash was likely used to pay off current liabilities immediately. Although the net result was to obtain long term financing, which improved liquidity, the debt to total asset position of Le Château remained unchanged. Due to the timing of the loan, by the end of the 2012 fiscal year, Le Château would not have incurred significant interest costs, and so the times interest earned ratio would not have been significantly affected by the loan’s interest costs.
(f)
Although the banks’ prime lending rate was 3% at the end of 2012, this rate is seldom used by bank in their loans to businesses. The banks generally lend money to their customers at the prime rate of interest in very rare cases where the loans have very short repayment terms and are very low risk secured loans. Due to the extremely poor profit performance of Le Château, it is likely that the interest rate obtained from the company owned by of the directors as least as low as the rate the banks would have charged Le Château.
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BYP 15-3 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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Accounting Principles, Sixth Canadian Edition
BYP 15-4 COMMUNICATION ACTIVITY To: Friend From: Accounting student Re: Liabilities Liabilities represent obligations of the business that have to be settled in the future, based on events that have happened in the past. While many liabilities have to be settled in cash, not all the obligations of a business require that a cheque be written. For example, a company may have a liability referred to as “Unearned Revenue.” Unearned revenue is recognized when the business is paid cash by a customer before any services are provided. In this situation, the company has an obligation (liability) to provide goods or services to the customer rather than cash. Occasionally, a company may have other obligations that are not reported as liabilities on the balance sheet. For example, if the amount that has to be paid is undeterminable or the likelihood of having to pay the obligation is not known, the potential obligation is disclosed in the notes to the financial statements. These types of liabilities are referred to as contingencies. Examples of contingencies include unsettled lawsuits and guarantees. Operating leases represent a second type of liability that often goes unreported on the balance sheet. Commitments to make payments under the terms of an operating lease are only recognized in the financial statements when payments are actually made. However, companies are required to disclose their commitments under such leases in the notes to the financial statements. Accounting standards state that the disclosures related to operating lease commitments include the amount of payments required for the next five years. Solutions Manual .
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BYP 15-4 (Continued) As you can see, in order to get a clear picture of the obligations of a company, it is necessary to look not only on the balance sheet but to also carefully examine the notes to the financial statements.
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BYP 15-5 ETHICS CASE (a)
The stakeholders in the Lehman Brothers case are: Senior Management (e.g., CEO) Board of Directors Shareholders Existing creditors (debt holders) Employees, suppliers, and customers General stock market investors
(b) Paying debt off reduces cash and reduces liabilities. A debt to total assets ratio will be improved by this transaction. (c)
Paying debt off and then immediately borrowing again, immediately after the financial statements are published has the sole purpose of manipulating the financial position of the company as of the balance sheet date. Paying the debt off immediately before issuing financial statements gave investors an incorrect representation of the true liquidity and solvency position of Lehman Brothers. In turn, the investors may have made inappropriate investment decisions. The manipulated balance sheet does not faithfully represent the economic events of Lehman Brothers. Management should be ethically obligated to ensure that the company’s financial statements accurately reflect the true financial position of the company so that investors (shareholders) can make informed decisions.
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BYP 15-6 “ALL ABOUT YOU” ACTIVITY
(a)
A fixed interest rate is set for the term of the loan. For example, a loan with a fixed interest rate of 5% means that annual interest of 5% will be paid for the duration of the loan period. A floating interest rate changes over the duration of the loan period, with a base (such as the prime interest rate). For example, a loan with a floating interest rate of prime + 2.5% will increase and decrease along with the prime rate. For example, if the prime rate is 3%, the floating interest rate on your loan will be 5.5% (3% + 2.5%). If the prime rate is 4.5%, the floating interest rate on your loan will be 7% (4.5% + 2.5%). Fixed rates usually carry higher rates of interest to cover for the risk of changing interest rates. If it is expected that interest rates will rise during the payment period, a fixed rate will likely be less costly.
(b)
Answers will vary depending of the date retrieved. Prime rate is not set by the calculator but by the rate declared by the five largest Canadian financial institutions. The fixed rate of interest is calculated by adding 5% to the prime rate. For example, if the prime rate is 3%, fixed rate on the Loan Repayment Calculator will be 8% (3% + 5% = 8%).
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BYP 15-6 (Continued) (c)
Answers will vary by student, depending on the interest rate assumed. The following answers assume a prime interest rate of 3%: 1. 2.
(d)
Answers will vary by student, depending on the interest rate assumed. The following answers assume a prime interest rate of 3%: 3. 4.
(e)
Monthly payment = $261.07 Interest payable = $8,961.69 (rounded) (114 × $261.07 – $20,800 including grace period interest)
Monthly payment = $391.60 Interest payable = $13,442.54 (rounded) (114 × $391.60 – $31,200 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 = $303.51 Interest payable = $21,611.54
(f) Take home pay per month Rent Car loan Expenses Available
$2,800 $750 300 1,100
2,150 $ 650
Based on the above calculation, loan repayments on either the $20,000 or $30,000 amounts could be made comfortably.
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CHAPTER 16 Investments ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
Brief Problems Exercises Exercises Set A
1. Identify reasons to invest, and classify investments.
1, 3
1, 2
1, 2
2. Account for debt investments that are reported at amortized cost.
2, 4, 5, 6, 7
3, 4, 5
3, 4, 6
1, 2, 3, 6
1, 2, 3, 6
3. Account for trading investments.
4, 5, 6, 7, 8
6, 7, 8, 9, 10
5, 7, 8, 9, 10
1, 3, 4, 5, 6
1, 3, 4, 5, 6
4. Account for strategic investments.
8, 9, 10, 11, 12, 13, 14
11, 12, 13
11, 12
6, 7, 8
6, 7, 8
5. Indicate how investments are reported in the financial statements.
15, 16, 17
14, 15, 16
12, 13, 14
1, 2, 3, 4, 5, 6, 7, 9, 10
1, 2, 3, 4, 5, 6, 7, 9, 10
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Chapter 16
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A
Description Record debt investments; 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 and fair value, prepare bond amortization schedule, and record liability; show statement presentation.
Moderate
50-60
4A
Record equity and debt trading investments; show statement presentation.
Moderate
30-40
5A
Record equity trading investments; show statement presentation.
Moderate
35-45
6A
Identify impact of investments on financial statements.
Simple
20-25
7A
Record strategic equity investment, using fair value and equity methods. Show statement presentation.
Moderate
25-35
8A
Analyze strategic investment and compare fair value, equity method, and cost method.
Complex
35-45
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 and fair value, prepare bond amortization schedule, and record liability; show statement presentation.
Moderate
40-50
4B
Record debt and equity trading investments; 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.
Simple
20-25
7B
Record strategic equity investment, using fair value and equity methods. Show statement presentation.
Moderate
25-35
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number 8B
Description Analyze strategic investment and compare fair value, equity method, and cost method.
Difficulty Level Complex
Time Allotted (min.) 35-45
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, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-ofChapter Material Study Objective Knowledge Comprehension 1. Identify reasons to BE16-1 Q16-1 invest, and classify Q16-3 investments. BE16-2 E16-1 E16-2 2. Account for debt Q16-2 investments that are reported at Q16-4 amortized cost. Q16-5 Q16-6 Q16-7
Application
Analysis
BE16-3 P16-2A BE16-4 P16-3A BE16-5 P16-6A P16-1B E16-3 E16-4 P16-2B P16-3B E16-6 P16-1A P16-6B BE16-6 P16-1A BE16-7 P16-3A BE16-8 P16-4A BE16-9 P16-5A BE16-10 P16-6A E16-5 P16-1B E16-7 P16-3B P16-4B E16-8 P16-5B E16-9 E16-10 P16-6B
3. Account for trading Q16-8 investments.
Q16-4 Q16-5 Q16-6 Q16-7
4. Account for strategic investments.
Q16-8 Q16-9 Q16-10 Q16-13
Q16-11 Q16-12 Q16-14
BE16-11 P16-6A BE16-12 P16-7A BE16-13 P16-6B E16-11 P16-7B E16-12
5. Indicate how investments are reported in the financial statements.
Q16-15 Q16-16
Q16-17
BE16-14 P16-7A BE16-15 P16-9A BE16-16 P16-10A E16-12 P16-1B E16-13 P16-2B E16-14 P16-3B P16-1A P16-4B P16-2A P16-5B P16-3A P16-6B P16-4A P16-7B P16-5A P16-9B P16-6A P16-10B BYP 16-4 BYP 16-2 BYP 16-6 BYP 16-3 Continuing Cookie BYP 16-5 Chronicle
Broadening Your Perspective
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16-4
Synthesis Evaluation
P16-8A P16-8B
Chapter 16
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Accounting Principles, Sixth Canadian Edition
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 which 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.
Bell Canada and Rogers Communications purchased 79.53% of MLSE as a strategic, long-term investment. This acquisition helped the investors solidify their control over the broadcast of sporting events to generate advertising revenue.
4.
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. In the case of trading investments, the debt or equity securities are purchased and held for resale in the short term. Reporting these investments at fair value is more relevant to the financial statement users as their fair value is closer to their intended realizable value.
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. On the other hand, if the bonds are purchased to earn interest revenue, they are reported at amortized cost.
6.
For a public company, bonds purchased for trading are reported at fair value. Bonds held to earn interest revenue are reported at amortized cost.
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QUESTIONS (Continued) 7.
Because the bonds were purchased and are held to earn interest income, the amortization of the discount increases the interest revenue beyond the amount of the interest collected. The amortization of the discount will affect the interest revenue recognized in each accounting period and in total over the term of the bond. If the bonds had instead been purchased for trading, the discount would not be amortized and therefore there would be no impact on interest revenue beyond the amount of the interest collected. This is because the bonds are held for such as short period of time any misstatement of revenue from not amortizing the discount is not considered significant.
8.
Gains and losses on fair value adjustments can be reported as other comprehensive income if the investments are strategic investments purchased by a public company following IFRS.
9.
Private companies following ASPE should use the cost method to report strategic investments when there is no quoted market price for investments if (1) there is not significant influence, or (2) the company chooses to use the cost method for significant influence investments.
10.
(a) Whenever the investor's influence on the operating and financial affairs of its associate (the investee) is not significant, the fair value method should be used. 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 fair value method is less 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. (b) If the investor does exert significant influence, which is generally the case with 20% or more ownership, the investment should be accounted for using the equity method.
11. The equity method is used when an investor has significant influence over the affairs of an associate, its investee. This occurs when an investment is purchased for strategic purposes and not for passive (to generate a return) purposes. Trading and long-term equity securities without significant influence are passive investments available to be sold in the future. Since the purpose is to generate a return on the investment, using the fair value model provides the best method of measuring the profit or loss from the investment.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 12.
(a) Under the fair value method, the company’s initial investment is recorded at cost. The investment account is not directly affected by the income of the company in which the investment is made. The investing company records any dividends received as investment revenue, leaving the carrying value of the investment intact. The carrying value of the investment is revalued to fair value at the balance sheet dates. (b) 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. (c) 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 sheets dates.
13. 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 stock. 14. Opal Limited is the parent and Fashion Runway Inc. is the subsidiary. In order for a parent relationship to exist, investor must control the investee by owning at least 50% plus one share of voting stock. When control exists over an investee, the financial statements of the two entities must be consolidated. 15. Trading investments are reported as current assets because management purchased the investments for the purpose of selling them in the near future at a gain. On the other hand, when debt investments are purchased to earn interest, management’s intention is to hold on to the investments and not sell the investments quickly at a gain. Depending on the maturity date of the debt investments, the classification can be current or non-current.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 16. (a)
Trading investments are classified as a 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 reported at fair value are classified as long-term investments.
(e)
Strategic investments accounted for using the equity method are classified as long-term investments.
17. 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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Chapter 16
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 (a) (b) (c) (d)
4. Debt investments reported at amortized cost 1. Strategic investments 3. Trading investments 2. Non-strategic investments
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Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
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 purchased to hold with the intent of acquiring control of the company 5-year bonds purchased by a company reporting under ASPE, to hold and earn interest 10-year bonds purchased by a public company to sell in the near future at a gain 5-year bonds purchased by a public company, to hold and earn interest
3.
4.
5.
6.
(a) Reason Nonstrategic Nonstrategic
(b) Classification Current asset
Strategic
Non-current asset
Fair value*
Nonstrategic
Non-current asset
Amortized cost
Nonstrategic
Current asset
Fair value
Nonstrategic
Current Asset
Amortized cost
Current asset
(c) Valuation Amortized cost Fair value
* It is assumed that 15% ownership does not constitute significant influence.
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Chapter 16
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-3 (a) Dec. 2 Short-Term Investments—Treasury Bill ................................................ 148,900 Cash............................................. (b) Dec. 31 Short-Term Investments—Treasury Bill ............................................ 275 Interest Revenue ......................... (c) Apr. 1 Short-Term Investments—Treasury Bill ............................................ 825 Interest Revenue ......................... Cash...................................................... 150,000 Short-Term Investments—Treasury Bill ............................................
148,900
275
825
150,000
BRIEF EXERCISE 16-4 (a) Jan. (b) July
1 Long-Term Investment—Pullen Bonds 600,000 Cash.................................................. 600,000 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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Chapter 16
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-5 (a) June 30 Long-Term Investments—Hydrocor Bonds ........................................... 297,000 Cash ($300,000 × .99)..................... 297,000 (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. Long-Term Investments—Hydrocor 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 (a) June 30 Trading Investment—Hydrocor Bonds ........................................... 297,000 Cash ($300,000 × .99)..................... 297,000 (b) Dec. 31 Cash ($300,000 × 4% × 6/12) .............. Interest Revenue ............................ (c) Dec. 31
Solutions Manual .
Loss on Fair Value Adjustment of Trading Investments...................... Trading Investments—Hydrocor Bonds (($300,000 × .98) – $297,000)
16-12
6,000 6,000
3,000 3,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-7 Assuming the bonds are purchased to earn interest, BE16-5: Jan. 1 Cash ($300,000 × .98) ........................................... 294,000 Loss on Sale of Bonds....................... 3,273 Long-Term Investments—Hydrocor Bonds ($297,000 + $273)........... 297,273 Assuming the bonds are purchased to trade, BE16-6: Jan. 1 Cash ($300,000 × .98) ........................................... 294,000 Trading Investments—Hydrocor Bonds ($297,000 – $3,000) ........ 294,000
BRIEF EXERCISE 16-8 Aug.
1 Trading Investments—Datawave Common Shares........................ Cash................................................
Oct. 15 Cash (3,000 × $2.75) ........................... Dividend Revenue.......................... Dec.
114,000 114,000 8,250
1 Cash .................................................... 120,000 Trading Investments—Datawave Common Shares ...................... Gain on Sale of Trading Investments
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8,250
114,000 6,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-9 Nov. 30 Loss on Fair Value Adjustment of Trading investments ($46,000 – $44,000) ....... 2,000 Trading Investments— Deal Inc. Common Shares .......................... 2,000
Dec. 31 Trading Investments— Deal Inc. Common Shares ............................... 3,000 Gain on Fair Value Adjustment of Trading Investments ($47,000 – $44,000) .. 3,000
BRIEF EXERCISE 16-10 Jan. 15 Cash............................................................... 49,000 Gain on Sale of Trading Investments ..... 2,000 Trading Investments— 47,000 Deal Inc. Common Shares .......................
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-11 (a) Jan.
1 Long-Term Investments— Hook Common Shares ........................ 250,000 Cash.................................................
250,000
Dec. 31 Cash (20% × $15,000) ................................ 3,000 Dividend Revenue ..............................
3,000
Dec. 31 Long-Term Investments— Hook Common Shares............................ 20,000 Other Comprehensive Income—Gain On Fair Value Adjustment .................
20,000
(b) Jan.
1 Investment in Associate— Hook ..................................................... 250,000 Cash.................................................
250,000
Dec. 31 Investment in Associate— Hook ....................................................... 44,000 Revenue from Investment in Associate (20% × $220,000)............
44,000
Dec. 31 Cash (20% × $15,000) .............................. 3,000 Investment in Associate— Hook.................................................
3,000
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Chapter 16
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-12 (a) Fair Value Balance Sheet: Long-term investment in Dong Ltd. common shares Investment in Associate, Dong Ltd. Income Statement: Dividend revenue Revenue from investment in associate Other Comprehensive Income: Gain on fair value adjustment
(b) Equity Method
$315,000 $346,000 * $4,000
0 $50,000
$15,000
0
* Long-term investment in Dong Ltd. Common shares Less dividend (20% × $20,000) Add: associate income (20% × $250,000) Carrying value of investment
$300,000 (4,000) 50,000 $346,000
BRIEF EXERCISE 16-13 Jan.
1
Investment in Associate— Tomecek ............................................... 175,000 Cash.................................................
175,000
Dec. 31 Cash ($12,000 × 25%) .............................. 3,000 Dividend Revenue ...........................
3,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-14 ATWATER CORPORATION Statement of Comprehensive Income Year Ended April 30, 2014
Profit............................................................................ Other comprehensive income Gain on fair value adjustment on strategic investments, net of income tax ............................ Comprehensive income .............................................
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$650,000
46,000 $696,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-15 Financial Statement
Classification
Trading investments
Balance Sheet
Current assets
Dividend revenue
Income Statement
Other revenue
Investment in associate
Balance Sheet
Long-term investments
Long-term investment— Balance Sheet bonds
Long-term investments
Gain on sale of trading investments
Income Statement
Other revenue
Gain on fair value adjustment for trading investments
Income Statement
Other revenue
Loss on fair value adjustment for strategic investment
Statement of Comprehensive Income
Other comprehensive losses
Interest revenue on bonds purchased for trading
Income Statement
Other revenue
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 16-16 SABRE CORPORATION Balance Sheet (Partial) November 30, 2014
Assets Current assets Treasury bills—at amortized cost ........................... Trading investments—at fair value .........................
$25,125 74,000 99,125
Long-term investments Equity investment—fair value ................................. 105,000 Bond investment—amortized cost ......................... 150,000 Investment in associate ............................................... 250,000 505,000
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Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 16-1 1.
2.
3.
4.
5.
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. 95% of the common Strategic investment 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 The investment was made with shares of Talk to Us the intention to generate gains Ltd. from trading the investment. 15% of the common shares of Lewis Telecommunications Inc. 100% of 15-year bonds of Li Internet Ltd.
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Chapter 16
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-2
1.
10-year BCE bonds
(a) Nonstrategic
2.
10-year GE bonds
Nonstrategic
Noncurrent
3.
1-year Government of Canada bonds 180-day treasury bill
Nonstrategic
Current Amortized cost
No change
Nonstrategic
Current Amortized cost
No change
Bank of Montreal preferred shares Tim Hortons common shares Pizzutto Holdings common shares Kesha Inc., common shares – 22% interest *
Nonstrategic
Current Fair value
No change
Nonstrategic Strategic
Current Fair value
No change No change
4.
5.
6. 7.
8.
*
Strategic
(b) Noncurrent
(c) Amortized cost Fair value
Noncurrent
N/A
Noncurrent
Equity method
(d) No change Amortized cost
Can also choose fair value or cost
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, Sixth Canadian Edition
EXERCISE 16-3 (a) Jan.
May
Aug.
2 Short-Term Investments—T-Bills ........ 39,760 Cash..................................................
39,760
1 Cash ...................................................... 40,000 Short-Term Investments—T-Bills ... Interest Revenue ..............................
39,760 240
1 Short-Term Investments— Money Market Fund .............................. 65,000 Cash..................................................
65,000
31 Short-Term Investments— Money Market Fund.............................. Interest Revenue ..............................
163
Sept. 30 Short-Term Investments— Money Market Fund.............................. Interest Revenue ..............................
163
Oct.
163
163
1 Short-Term Investments—T-Bills ........ 29,821 Cash.................................................. 15 Cash ...................................................... 65,408 Interest Revenue .............................. Short-Term Investments—Money Market Fund ($65,000 + $163 + $163)
29,821
82 65,326
(b) Oct. 31 Interest Receivable ($29,821 × 2.4% × 1/12)......................... Interest Revenue ..............................
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60 60
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-4 (a) (1) Imperial (investor) July 1 Long-Term Investments—Acme 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 ($500,000 × 4% × 6/12)........................ Long-Term Investments—Acme Bonds .................................................. 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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16-23
10,000 1,525 11,525
11,525 1,525 10,000
10,000 10,000
10,000 10,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-4 (Continued) (d) The accounting for the bond investment by Imperial Inc. mirrors the accounting for the bond liability by Acme Corp. because Imperial purchased the bond directly from Acme. This means that the discount is the same for both the investee and the investor. The accounting would not be a mirror image if Imperial had purchased the bond investment from a third party because there would likely be a difference between the issue price by the investee and the purchase price of the investor.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-5 (a) 2014: July 1 Trading Investments—Acme Bonds . Cash................................................ (b) Dec. 31 Interest Receivable............................. Interest Revenue ............................ ($500,000 × 4% × 6/12) Dec. 31 Trading Investments—Acme Bonds . Gain on Fair Value Adjustment of Trading Investments...................... ([$500,000 × 0.96] – $461,000)
461,000 461,000
10,000 10,000
19,000 19,000
(c) The investment will be shown in the current asset section. (d) 2015: Jan. 1 Cash .................................................... Interest Receivable ........................ (e) July
10,000 10,000
1 Cash ($500,000 × 0.97)............................ 485,000 Gain on Sale of Trading Investments 5,000 Trading Investments—Acme Bonds 480,000
(f) The sale of the Acme bonds would have occurred though the bond market to another investor and that is why there would be no entries on the Imperial accounting records, as the bonds remain outstanding.
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Chapter 16
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-6 (a)
The carrying value at April 1, 2013 of $418,444 is higher than the face or maturity value of $400,000, which indicates that the bond was sold at a premium.
(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) Contractual interest rate = 4% $8,000 ÷ $400,000 = 2% semi-annually × 2 = 4% annually Market interest rate = 3% $6,277 ÷ $418,444 = 1.5% semi-annually × 2 = 3% annually (e)
2013 Apr. 1
2013 Oct. 1
Long-Term Investments—Bight Bonds ........................................... 418,444 Cash .........................................
418,444
Cash.................................................. 8,000 Long-Term Investments—Bight Bonds....................................... Interest Revenue .....................
1,723 6,277
2014 Mar. 31 Interest Receivable .......................... 8,000 Long-Term Investments—Bight Bonds....................................... Interest Revenue ..................... 2014 Apr. 1 Cash.................................................. 8,000 Interest Receivable .................
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1,749 6,251
8,000
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 16-6 (Continued) (f)
Total interest received = $80,000 $400,000 × 4% × 5 years = $80,000 or $8,000 × 10 semi-annual periods = $80,000 Total interest revenue = $61,556 $80,000 (interest payment) – $18,444 (premium) = $61,556
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-7 (a) Jan. 1 Trading Investments—Harris Bonds 121,200 Cash ($120,000 × 1.01) .......................
121,200
July 1 Cash ($120,000 × 6% × 6/12) ..................... 3,600 Interest Revenue ................................
3,600
1 Cash ......................................................... 64,000 Gain on Sale of Trading Investments ($64,000 – $60,600)............................. Trading Investments— Harris Bonds ($121,200 × 1/2) ..........
60,600
Dec.31 Interest Receivable ................................... 1,800 Interest Revenue ($60,000 × 6% × 6/12) .........................
1,800
Dec.31 Loss on Fair Value Adjustment of Trading Investments............................... Trading Investments—Harris Bonds ($60,600 – $60,000).............................
3,400
600 600
(b) If the bonds had been purchased to earn interest, the accounting for the investment of the bonds would be at amortized cost. The interest revenue entry on July 1 and the accrued interest receivable entry on December 31 would both include amortization of the premium paid for the bonds.
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-8 2014 Sept. 28 Trading Investments—Cygman Shares (3,500 × $40) ........................................ 140,000 Cash................................................. 140,000 Oct.
1 Trading Investments—Rauk Bonds ... 300,000 Cash................................................. 300,000
Nov. 12 Cash (1,900 × $42) ............................... 79,800 Trading Investments—Cygman Shares ($140,000 ÷ 3,500 × 1,900) .................... 76,000 Gain on Sale of Trading Investments……… 3,800 Dec.
1 Cash [(3,500 – 1,900) × $1.50] ............. Dividend Revenue...........................
2,400 2,400
31 Trading Investments—Rauk Bonds (($300,000 × 1.01) – $300,000). 3,000 Loss on Fair Value Adjustment of Trading Investments ........................... 200 Trading Investments—Cygman Shares [(3,500 – 1,900) × ($40 – $38)]………
3,200
31 Interest Receivable.............................. Interest Revenue ($300,000 × 4% × 3/12) ....................
3,000
3,000
2015 Mar. 31 Cash (1,600 × $40) ................................... 64,000 Gain on Sale of Trading Investments Trading Investments—Cygman Shares (1,600 × $38) .................................... Apr.
1 Cash ($300,000 × 4% × 6/12) .....................6,000 Interest Receivable ............................ Interest Revenue ................................
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3,200 60,800
3,000 3,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-8 (Continued)
Oct.
1 Cash ($300,000 × 4% × 6/12) .................. Interest Revenue ................................
6,000
Dec. 31 Interest Receivable................................. Interest Revenue ($300,000 × 4% × 3/12) .......................
3,000
31 Loss on Fair Value Adjustment of Trading Investments ........................... Trading Investments—Rauk Bonds [$300,000 × (1.01 – 1.00)]
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6,000
3,000
3,000 3,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-9 (a) Dec. 31 Loss on Fair Value Adjustment of Trading Investments .................................................. 5,000 Trading Investments—Co. B Preferred Shares .......................................... 1,500 Trading Investments—Co. A Common Shares ....................................... 2,500 Trading Investments—Co. C Bonds ........ 4,000 (b) YANIK, INC. Balance Sheet (Partial) December 31, 2014
Current assets Trading investments, at fair value ......................... $49,000
YANIK, INC. Income Statement (Partial) Year Ended December 31, 2014
Other expenses Loss on fair value adjustment of trading investments ............................................................... $5,000 (c) 2015 Mar. 20 Cash ....................................................... Loss on Sale of Trading Investments .. Trading Investments—Co. B Preferred Shares ............................
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16-31
13,500 500 14,000
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 16-10 (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 trading investment of $3,000 which is equal to $1,000.
(b) 2014 Dec.31 Cash ......................................................... Loss on Sale of Trading Investments .... Trading Investments ........................... Dec. 31 Trading Investments ........................... Gain on Fair Value Adjustment of Trading Investments.......................
1,000 3,000 4,000 2,500 2,500
(c) Trading Investments Dec.31, 2013 11,000 Dec. 31, 2014 Dec. 31, 2014 2,500 Purchases 5,500 Dec.31, 2014 15,000 (d)
Solutions Manual .
Trading Investments ........................... Cash.................................................
16-32
4,000
5,500 5,500
Chapter 16
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-11 1.
Jan.
2 Investment in Associate—Diner ............ 216,000 Cash (30,000 × 40% × $18) .............. 216,000
June 15 Cash ($30,000 × 40%) ............................... 12,000 Investment in Associate—Diner ..... 12,000 Dec. 31 Investment in Associate—Diner ............ 152,000 Revenue from Investment in........... Associate ($380,000 × 40%) ............ 152,000 2. Mar. 18 Long-Term Investments— Image Fashion Common Shares ........... 480,000 Cash (400,000 × 10% × $12) ............. 480,000 June 30
Cash ($44,000 × 10%) ............................ Dividend Revenue.............................
4,400 4,400
Dec. 31 Other Comprehensive Income— Loss on Fair Value Adjustment ............. 40,000 Long-Term Investments— Image Fashion Common Shares .... 40,000 (400,000 × 10% × [$12 – $11])
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-12 (a) Jan.
1 Investment in Associate— Walla Walla .......................................... 480,000 Cash .............................................. 480,000
Dec. 31 Cash ($35,000 × 25%) .......................... Investment in Associate— Walla Walla....................................
8,750 8,750
Dec. 31 Investment in Associate— 70,000 Walla Walla .......................................... Revenue from Investment in Associate ($280,000 × 25%) ........................... 70,000 (b)
(c) Jan.
Balance Sheet Long-Term Investment in Associate ($480,000 – $8,750 + $70,000) ...............
$541,250
Income Statement Other revenue Revenue from investment in associate
$70,000
1 Long-Term Investments— Walla Walla Common Shares................480,000 Cash .............................................. 480,000
Dec. 31 Cash ($35,000 × 25%) .......................... Dividend Revenue ........................
8,750 8,750
Dec. 31 Long-Term Investments—Walla Walla Common shares .................................. $145,000 Gain on Fair Value Adjustment... 145,000 (50,000 shares × $12.50/share) – $480,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-12 (Continued) (c)
(d) Jan.
(Continued) Balance Sheet Long-term investments—fair value ($480,000 + $145,000) ............................
$625,000
Income Statement Other revenue Dividend revenue................................... Gain on fair value adjustment ................
$8,750 145,000
1 Long-Term Investments— Walla Walla Common Shares ............. 480,000 480,000 Cash ..............................................
Dec. 31
Cash ($35,000 × 25%) .......................... Dividend Revenue ........................
8,750 8,750
Balance Sheet Long-term investments—cost ..............
$480,000
Income Statement Other revenue Dividend revenue...................................
$8,750
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-13 NEW BAY INC. Balance Sheet December 31, 2014
Assets Current assets Cash........................................................................... $ 22,000 Trading investments, at fair value ........................... 48,500 Accounts receivable ...................................... $60,000 Less: Allowance for doubtful accounts...... 10,000 50,000 Interest receivable .................................................... 1,500 Total current assets ............................................. 122,000 Long-term investments Equity investments—fair value ................................ 25,000 Note receivable, 5%, due April 21, 2018 .................. 60,000 Bond investment—amortized cost .......................... 180,000 Investment in associates ......................................... 55,000 Total investments................................................. 320,000 Pr operty, plant, and equipment $66,000 Equipment ................................................... Less: Accumulated depreciation ............... 40,000 26,000 Total assets .............................................................. $468,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-13 (Continued) NEW BAY INC. Balance Sheet (Continued) December 31, 2014
Liabilities and Shareholders' Equity Current liabilities Accounts payable ..................................................... Interest payable ........................................................ Total current liabilities......................................... Long-term liabilities Bond payable, 8%, due 2016 .................................... Total liabilities ...................................................... Shareholders' equity Common shares, no par value, unlimited shares authorized, 10,000 shares issued ...................................................................... Retained earnings..................................................... Accumulated other comprehensive income ........... Total shareholders' equity................................... Total liabilities and shareholders' equity ...........
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$ 35,000 18,000 53,000 268,000 321,000
100,000 45,000 2,000 147,000 $468,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
EXERCISE 16-14 (a)
Oakridge uses IFRS. Under ASPE, the comprehensive income account would not exist.
Other
(b) OAKRIDGE LTD. Statement of Comprehensive Income Year Ended December 31, 2014
Profit from operations ....................................................... $125,000 Other revenue Interest revenue ............................................... $5,000 Gain on sale—trading investments ................ 1,500 6,500 131,500 Other expenses Interest expense .............................................. 8,000 Loss on fair value adjustment— trading investments ..................................... 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, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 16-1A 2014: (a) Jan. 1 Long-Term Investments— Pearl Bonds .................................... 627,660 Cash ......................................... (b) Jul. 1 Cash ($600,000 × 4% × 6/12) ............ 12,000 Long-Term Investments— Pearl Bonds ............................. Interest Revenue ..................... ($627,660 × 3% × 6/12) (c) Dec. 31 Interest Receivable ...................... 12,000 Long-Term Investments— Pearl Bonds ............................. Interest Revenue ..................... [($627,660 – $2,585) × 3% × 6/12] (d) MORRISON INC. Partial Balance Sheet December 31, 2014
Long-term investments Bonds investment—amortized cost ........................ ($627,660 – $2,585 – $2,624) (e) 2015: Jan. 1 Cash....................................................... 12,000 Interest Receivable..................
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627,660
2,585 9,415
2,624 9,376
$622,451
12,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-1A (Continued) 2019: (f) Jan. 1 Cash ................................................ 600,000 Long-Term Investments— Pearl Bonds .............................
600,000
(g) Trading – entries that would be different: 2014: Jul.
1 Cash .................................................. Interest Revenue .....................
12,000
Dec. 31 Interest Receivable........................... Interest Revenue .....................
12,000
12,000
Dec. 31 Loss on Fair Value Adjustment of Trading Investments .................... 7,660 Trading Investments—Pearl Bonds ($627,660 – $620,000)
12,000
7,660
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
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Chapter 16
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-2A (a) Jan.
1 Short-Term Investments— Treasury Bill........................................... 98,039 Cash...................................................
98,039
June 30 Cash ....................................................... 100,000 Interest Revenue ............................... Short-Term Investments—Treasury Bill
1,961 98,039
July
Oct.
5 Short-Term Investments— Money-Market Fund .................................. 25,000 Cash...................................................
25,000
1 Cash .......................................................... 25,185 Short-Term Investments— Money-Market Fund .......................... Interest Revenue ...............................
25,000 185
1 Short-Term Investments— Term Deposit ............................................ 75,000 Cash...................................................
75,000
Dec. 31 Interest Receivable ($75,000 × 3% × 3/12) Interest Revenue .................................
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-2A (Continued) (b) LIU CORPORATION Partial Balance Sheet December 31, 2014
Current assets Interest receivable ..................................................... $ 563 Short-term investment—term deposit .......................... 75,000
LIU CORPORATION Income Statement Year Ended December 31, 2014
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
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$1,961 98,039 4.0%
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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) 2014 – Finance Company
Jan.
1 Long-Term Investments— Power Bonds ............................. Cash.......................................
959,400 959,400
(c)
Bond Discount Amortization Table Effective Interest Method—Semi-annual Interest Payments 7% Bonds Issued at market rate of 8%
Date
Jan. 1, 2014 July 1, 2014 Jan. 1, 2015 July 1, 2015 Jan. 1, 2016
(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
(d) 2014 – Finance Company July 1 Cash ........................................... Long-Term Investments— Power Bonds ............................. Interest Revenue ................... Dec. 31 Interest Receivable.................... Long-Term Investments— Power Bonds .................................... Interest Revenue ...................
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$3,376 3,511 3,651 3,798
(D) Bond Amortized Cost (D) + (C) $959,400 962,776 966,287 969,938 973,736
35,000 3,376 38,376 35,000 3,511 38,511
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 16-3A (Continued) (d) (Continued)
2015 – Finance Company Jan. 1 Cash ........................................... Interest Receivable ...............
35,000 35,000
(e)
FINANCE COMPANY Balance Sheet (Partial) December 31, 2014
Long-term Investments Long-term investment in bonds, at amortized cost
$966,287
FINANCE COMPANY Income Statement Year Ended December 31, 2014
Other revenues Interest revenue ($38,376 + $38,511) .......................
$76,887
(f) 2014 – Power Ltd.
Jan.
1 Cash................................................ 4,797,000 Bonds Payable ......................
4,797,000
(g) 2014 – Power Ltd.
Jul.
1 Interest Expense ($38,376 × 5) . Bonds Payable ($3,376 × 5) .. Cash ($5,000,000 × 7% × 6/12) .......
191,880
Dec. 31 Interest Expense ($38,511 × 5) . Bonds Payable ($3,511 × 5) .. Interest Payable ($5,000,000 × 7% × 6/12) .......
192,555
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16,880 175,000
17,555 175,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-3A (Continued) (g) (Continued) 2015 – Power Ltd. Jan. 1 Interest Payable ......................... Cash.......................................
175,000 175,000
(h) POWER LTD. Balance Sheet (Partial) December 31, 2014 Current liabilities Interest payable .......................................................
$175,000
Non-current liabilities Bonds payable, 8%, due 2019.................................... $4,831,435* *($966,287 × 5) POWER LTD. Income Statement Year Ended December 31, 2014
Other expenses Interest expense [($38,376 + $38,511) × 5] ..............
$384,435
(i) 2014 – Finance Company Jan. 1 Trading Investments— Power Bonds ............................. Cash.......................................
959,400
July 31 Cash ($1,000,000 × 7% × 6/12) .. Interest Revenue ................... Dec. 31 Interest Receivable ($1,000,000 × 7% × 6/12) ............ Interest Revenue ...................
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959,400
35,000 35,000
35,000 35,000
Chapter 16
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-3A (Continued) (i) (Continued) 2014 – Finance Company Dec. 31 Trading Investments— Power Bonds ........................................ 20,600 Gain on Fair Value Adjustment on Trading Investments ................... ($1,000,000 × .98) – $959,400 = $20,600
20,600
(j) FINANCE COMPANY Balance Sheet (Partial) December 31, 2014
Current assets Trading investments, at fair value .........................
$980,000
FINANCE COMPANY Income Statement Year Ended December 31, 2014
Other revenues Interest revenue ........................................................ Gain on fair value adjustment of trading investments
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$70,000 20,600
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 16-3A (Continued) Taking It Further: (1) To hold and earn interest: 2015: Jan. 1 Cash ($1,000,000 × .995) ......................... 995,000 Gain on Sale of Bonds....................... 28,713 Long-Term Investments— Power Bonds ...................................... 966,287 (2) For purposes of trading: 2015: Jan. 1 Cash ($1,000,000 × .995) ......................... 995,000 Gain on Sale of Trading Investments 15,000 Trading Investments— Power Bonds ...................................... 980,000
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Chapter 16
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-4A (a) Feb. 1 Trading Investments— IBF Common Shares ............................. 25,300 Cash...................................................
25,300
Mar. 1 Trading Investments— Raimundo Common Shares.................. 48,000 Cash...................................................
48,000
Apr.
1 Trading Investments— CRT Bonds ............................................. 210,000 Cash................................................... 210,000
July
1 Cash (575 × $1) ...................................... Dividend Revenue .............................
575 575
Aug. 1 Cash (250 × $48) .................................... 12,000 Gain on Sale of Trading Investments Trading Investments— IBF Common Shares [($25,300 575) × 250] ...................... Oct.
1 Cash ($200,000 × 3% × 6/12) ................. Interest Revenue ...............................
1,000
11,000
3,000 3,000
1 Cash......................................................... 215,000 Gain on Sale of Trading Investments 5,000 Trading Investments— CRT Bonds ........................................ 210,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-4A (Continued) Dec. 31 Trading Investments—IBF Common Shares ($16,250 – $14,300) ... 1,950 Loss on Fair Value Adjustment of Trading Investments ($62,300 – $58,250)................4,050 Trading Investments—Raimundo Common Shares ($48,000 – $42,000) Common Shares IBF Raimundo
Cost $14,300* 48,000 $62,300 * $25,300 – $11,000 (b)
Fair Value $16,250 42,000 $58,250
6,000
(325 × $50) (1,500 × $28)
RAKAI CORPORATION Balance Sheet (Partial) December 31, 2014
Current assets Trading investments, at fair value ......................... $58,250
RAKAI CORPORATION Income Statement (Partial) Year Ended December 31, 2014
Other revenue Interest revenue .................................. Dividend revenue ................................ Gain on sale of trading investments . Other expenses Loss on sale of trading investments .
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$3,000 575 6,000
$9,575
4,050
Chapter 16
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-4A (Continued) Taking It Further: If the company will need the 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 recovered. Money-market instruments are recommended because they are low-risk and highly liquid.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-5A (a) FINANCIAL HOLDINGS Balance Sheet (Partial) December 31, 2013
Current assets Trading investments, at fair value ................................. $38,000 (b) FINANCIAL HOLDINGS Income Statement (Partial) Year ended December 31, 2013
Other expenses Loss on fair value adjustment of trading investments....................... (c)
$1,000
2014
Jan. 15 Trading Investments— Hazmi Common Shares ......................... 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 Trading Investments Trading Investments— Sabo Common Shares...................... ($13,500 ÷ 1,000 × 750)
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1,688 10,125
Chapter 16
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-5A (Continued) (c) (Continued) Aug. 5 Cash ....................................................... Dividend Revenue (250 × $2.50).......
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 $4.50 per share ($13,500 ÷ 3,000). Dec. 31 Trading Investments—Sabo Common Shares ($4,000 – $3,375) ....... 625 Trading Investments—PYK Preferred Shares ($27,500 – $24,400) ..... 3,000 Gain on Fair Value Adjustment on Trading Investments ($52,500 – $50,375) Trading Investments—Hasmi Commons Shares ($22,500 – $21,000) ($35,000 – $32,340 = $2,660) Market Price $16.00 13.75 7.00
Number of Shares 250 2,000 3,000
Sabo PYK Hasmi Total * $13,500 – $10,125 = $3,375
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Carrying Amount $ 3,375* 24,500 22,500 $50,375
2,125 1,500
Fair Value $4,000 27,500 21,000 $52,500
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 16-5A (Continued) Taking It Further: Sabo common shares purchased in 2013 and sold on June 15, 2014 yielded a net overall profit of $563. The original cost of 750 of the 1,000 common shares issued in 2013 was $11,250 ($15,000 ÷ 1,500 × 750) and the proceeds from the sale of 750 the common shares in 2014 was $11,813. This profit was recognized in two fiscal years. In the year ended December 31, 2013, a loss on the fair value adjustment of the shares was recorded in the amount of $1,500 ($15,000 – $13,500). This amount was for all 1,000 shares held at that date. The corresponding amount of the fair value adjustment for the 750 shares subsequently sold was $1,125 ($1,500 ÷ 1,000 × 750). In the fiscal year ending December 31, 2014, there was a gain on the sale of the shares of $1,688 recorded . Together these two amounts make up the total net profit of $563 ($1,688 gain on sale less $1,125 loss from the fair value adjustment).
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PROBLEM 16-6A
Balance Sheet
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
Assets NE (+/–) NE (+/–) + NE (+/–) NE (+/–) NE (+/–) + + NE + NE – NE
Liabilities 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 NE + + NE + NE NE
16-54 .
Revenues Expenses 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 NE
Statement of Comprehensive Income Other Comprehensive Income NE NE NE NE NE NE NE NE NE NE NE – NE
Chapter 16
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 16-6A (Continued) Taking It Further: If Olsztyn Inc. is a private company reporting using ASPE, there is no Other Comprehensive Income. For this difference, transaction #12 would be affected. Olsztyn’s investment in Havenot’s common shares would be reported at fair value on its balance sheet and the loss on the fair value adjustment would be reported on the income statement if a quoted market price is available or at cost if none is available. Olsztyn Inc. would also have a choice in the way in which it accounts for investment with significant influence in LaHave Ltd. It could account for the investment using the equity method as given for under IFRS 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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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-7A (a) Situation 1: Fair Value 100,000 ÷ 1,000,000 = 10% Situation 2: Equity Method 300,000 ÷ 1,000,000 = 30% Situation 3: Equity Method* 1,000,000 ÷ 1,000,000 = 100% * Consolidated financial statements are also prepared for reporting purposes. (b) Situation 1 Jan. 10 Long-Term Investments— Sub Common Shares .................... Cash (100,000 × $10)................. Dec. 31 Cash (100,000 × $0.35) .................. Dividend Revenue ..................... Dec. 31 Long-Term Investments— Sub Common Shares .................... Other Comprehensive Income— Gain on Fair Value Adjustment (100,000 × [$12 – $10]) Situation 2 Jan. 10 Investment in Associate—Sub ..... Cash (300,000 × $10).................
1,000,000 1,000,000 35,000 35,000
200,000 200,000
3,000,000 3,000,000
Dec. 31 Cash (300,000 × $0.35) .................. Investment in Associate—Sub
105,000
31 Investment in Associate—Sub ..... Revenue from Investment in Associate ($260,000 × 30%)......
78,000
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105,000
78,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-7A (Continued) (c) Under situation 2, if Par were reporting under ASPE, it would have the choice to report the investment in Sub at (1) fair value because Sub’s shares are traded on an active market and, therefore, a quoted market price can be obtained for the shares or (2) at cost if there is no quoted market price. Jan. 10 Investment in Associate—Sub ..... Cash (300,000 × $10).................
3,000,000
Dec. 31 Cash (300,000 × $0.35) .................. Dividend Revenue .....................
105,000
3,000,000
105,000
(d) (1) Fair Value Balance Sheet Long-term investments—Sub* Investment in associate—Sub** Investment in associate—Sub*** Comprehensive Income Statement Income Statement Revenue from investment in Sub Dividend revenue Other Comprehensive Income Other Comprehensive Income— Gain on Fair Value Adjustment****
(2) Cost Method
(3) Equity Method
$3,600,000 $3,000,000 $2,973,000
78,000 105,000
105,000
600,000
* 300,000 shares × $12 = $3,600,000 ** 300,000 shares × $10 = $3,000,000 *** $3,000,000 – $105,000 + $78,000 = $2,973,000 **** (300,000 × [$12 – $10])
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-7A (Continued) Taking It Further: ASPE is set of standards developed for use primarily by private companies. Private companies are more likely to invest in other private companies and the shares of such companies do not trade actively on public stock exchanges. It is therefore more common for private companies to have difficulty reporting investments at fair value because such values are not readily obtained. So, if fair value cannot be determined, ASPE allows the use of the cost method. Under ASPE, companies can choose to use the cost model rather than the equity method to account for investments subject to significant influence if the fair value of the shares is not known. Private companies often have few users and the information provided by the equity method may not relevant. When choosing between the equity method and the fair value method, the private business reporting under ASPE might choose to report using the fair value method, (but not to other comprehensive income) because of the particular needs of the financial statement users, and possibly also for consistency in comparison with other long-term investments.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-8A (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, 2012
$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 16-8A (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, 2014 Other revenues Revenue 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, 2014 Other revenues Dividend revenue..........................................
$90,000
Taking It Further: The potential advantages of having significant influence over another company include for example: 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 which will help the associate become more profitable and the investment more lucrative for the investor.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-9A (a) SILVER LINING CORPORATION Income Statement Year ended December 31, 2015 (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 adjustments—trading investments Interest expense Income before income tax Income tax expense Profit
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44 541
$ 6 27 7
40 501 60 $ 441
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-9A (Continued) (a) (Continued) SILVER LINING CORPORATION Statement of Comprehensive Income Year ended December 31, 2015 (in millions)
Profit Other comprehensive income Gains on fair value adjustment—strategic investment (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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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-10A STINSON CORPORATION Statement of Comprehensive Income Year Ended April 30, 2015
Service revenue ................................................................. $550,000 Operating expenses Salary 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 trading investments ........ 3,000 Gain on fair value adjustment of trading investments ................................ 1,500 Interest revenue ......................................... 3,360 18,860 227,360 Other expenses Loss on fair value adjustment of trading investments ................................ $ 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, 2015
Assets Current assets Cash............................................................................. $ 100,480 Trading investments, at fair value ............................ 76,000* Accounts receivable ................................................... 48,000 Interest receivable .......................................................... 1,680 Total current assets ................................................... 226,160 Non-current assets Long-term investments Long-term investment— Verma common shares, at fair value ........ $220,000 Investment in associate ................................. 170,000 Long-term investment—bonds, due 2017 at amortized cost ........................................ 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, 2015
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 ............................................................. 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: If Stinson Corporation were a private company and reported under ASPE, it would present an income statement only. Assuming there is a quoted market price for the Verma common shares, the loss on fair value adjustment would be reported in Other Expenses and profit would be reduced by $12,000. The balance sheet would not include Accumulated Other Comprehensive Income in Shareholders’ Equity. If there is not a quoted market price for the Verma shares, then the investment would be reported at cost and not fair value.
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PROBLEM 16-1B 2014: (a) July 1 Long-Term Investments— Schuett Bonds ................................ 275,400 Cash ($300,000 × .918) ............ (b) Dec. 31 Interest Receivable ($300,000 × 3% × 6/12) ................. Long-Term Investments— Schuett Bonds.............................. Interest Revenue ..................... ($275,400 × 4% × 6/12)
275,400
4,500 1,008 5,508
(c) GIVARZ CORPORATION Partial Balance Sheet December 31, 2014
Current assets Interest receivable .................................................... Long-term investments Bonds investment—amortized cost ........................ ($275,400 + $1,008) 2015: (d) Jan. 1
Cash.............................................. Interest Receivable..................
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$276,408
4,500
(e) July 31 Cash.............................................. 4,500 Long-Term Investments— 1,028 Schuett 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 16-1B (Continued) 2024: (f) July 1 Cash.............................................. 300,000 Long-Term Investments— Schuett Bonds .........................
300,000
(g) Trading – entries that would be different: 2014: Dec. 31 Interest Receivable........................... Interest Revenue ..................... Dec. 31 Long-Term Investments— Schuett Bonds .................................. Gain on Fair Value Adjustment— of Trading Investments................ [($300,000 × .96) – $275,400]
4,500 4,500
12,600 12,600
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 16-2B (a) Feb. 1 Short-Term Investments— Term Deposit ....................................... 50,000 Cash.................................................
50,000
Aug. 1 Cash ..................................................... 51,250 Short-Term Investments— Term Deposit................................... Interest Revenue .............................
50,000 1,250
Aug. 1 Short-Term Investments— Money Market Fund ............................. 55,000 Cash.................................................
55,000
Dec. 1 Cash ..................................................... 55,735 Short-Term Investments— Money Market Fund ........................ Interest Revenue .............................
55,000 735
1 Short-Term Investments— Treasury Bill......................................... 99,260 Cash.................................................
99,260
31 Short-Term Investments— Treasury Bill ($99,508 – $99,260)........ Interest Revenue .............................
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PROBLEM 16-2B (Continued) (b) LANNAN CORP. Partial Balance Sheet December 31, 2014
Current assets Short-term investment—treasury bill ...........................$99,508
LANNAN CORPORATION Income Statement Year Ended December 31, 2014
Other revenue Interest revenue ($1,250 + $735 + $248) ........................... $2,233
Taking it Further: Interest earned (February 1 to August 1)—6 months Principal Annual Rate ($1,250 ÷ $50,000) × 2..............
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$1,250 50,000 5.0%
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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) 2014 – Treasury Ltd.
Jan.
1 Long-Term Investments— Surge 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, 2014 July 1, 2014 Jan. 1, 2015 July 1, 2015 Jan. 1, 2016
(A) (B) (C) Interest Interest Received Revenue Premium $2,000,000 × (D) × 4.5% Amortization 5% × 6/12 × 6/12 (B) – (A) $50,000 50,000 50,000 50,000
$46,800 46,728 46,654 46,579
(d) 2014 – Treasury Ltd. July 1 Cash ........................................... Long-Term Investments— Surge Bonds ......................... Interest Revenue ................... Dec. 31 Interest Receivable.................... Long-Term Investments— Surge Bonds ......................... Interest Revenue ...................
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$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)
2015 – Treasury Ltd. Jan. 1 Cash ........................................... Interest Receivable ...............
50,000 50,000
TREASURY LTD. Balance Sheet (Partial) December 31, 2014
Long-term Investments Long-term investment in bonds, at amortized cost $2,073,528 TREASURY LTD. Income Statement Year Ended December 31, 2014
Other revenues Interest revenue ($46,800 + $46,728) .......................
$93,528
(e) 2014 – Surge Ltd.
Jan.
1 Cash ($6,000,000 × 1.04) ................ 6,240,000 Bonds Payable ......................
6,240,000
(f) 2014 – Surge Ltd.
Jul.
1 Interest Expense ($46,800 × 3) . Bonds Payable ($3,200 × 3)....... Cash ($6,000,000 × 5% × 6/12) .......
140,400 9,600
Dec. 31 Interest Expense ($46,728 × 3) . Bonds Payable ($3,272 × 3)....... Interest Payable ($6,000,000 × 5% × 6/12) .......
140,184 9,816
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150,000
150,000
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PROBLEM 16-3B (Continued) (f) (Continued) 2015 – Surge Ltd. Jan. 1 Interest Payable ......................... Cash.......................................
150,000 150,000
(g) SERGE LTD. Balance Sheet (Partial) December 31, 2014 Current liabilities Interest payable............................................................. $150,000 Non-current liabilities Bonds payable, 5%, due 2024..................................... $6,220,584* *($2,073,528 × 3) SERGE LTD. Income Statement Year Ended December 31, 2014
Other expenses Interest expense [($46,800 + $46,728) × 3] ..............
$280,584
(h) 2014 – Treasury Ltd. Jan. 1 Trading Investments— Serge Bonds .............................. Cash.......................................
2,080,000
July 31 Cash ($2,000,000 × 5% × 6/12) .. Interest Revenue ................... Dec. 31 Interest Receivable ($2,000,000 × 5% × 6/12) ............ Interest Revenue ...................
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2,080,000
50,000 50,000
50,000 50,000
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PROBLEM 16-3B (Continued) (h) (Continued) 2014 – Treasury Ltd. Dec. 31 Loss on Fair Value Adjustment on Trading Investments ............................. 20,000 Trading Investments— Serge Bonds................................. $2,080,000 – ($2,000,000 × 1.03) = 20,000
20,000
(i) TREASURY LTD. Balance Sheet (Partial) December 31, 2014
Current assets Trading investments, at fair value ............................ $2,060,000 TREASURY LTD. Income Statement Year Ended December 31, 2014
Other revenues Interest revenue ........................................................
$100,000
Other expenses Loss on fair value adjustment of trading investments $20,000
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-3B (Continued) Taking It Further: The market rate of interest increased. When Serge purchased the bonds, the market rate of interest was 4.5% and lower than the stated rate of 5%. Serge paid 104 for the bonds. This made the bonds more attractive and this explains why Treasury was willing to pay a premium for a higher contractual rate of interest. At Dec. 31, 2014 the bonds were trading at 103. The effective interest rate increased since January 1, 2014. 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 which 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 Serge 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 Trading Investments—Lemelin Common Shares ............................... Cash..............................................
63,600
Mar. 1 Trading Investments— RSD Common Shares ...................... Cash..............................................
7,500
Apr.
1 Trading Investments— MRT Bonds ($100,000 × .98) ............ Cash..............................................
63,600
7,500
98,000 98,000
Cash (2,400 × $2) .............................. Dividend Revenue ........................
4,800
Aug. 1 Cash (1,600 × $25) ............................ Loss on Sale of Trading Investments Trading Investments— Lemelin Common Shares [($63,600 ÷ 2,400) × 1,600] ..........
40,000 2,400
1 Cash ($100,000 × 4% × 6/12) ............ Interest Revenue ..........................
2,000
2 Cash .................................................. Gain on Sale of Trading Investments .................... Trading Investments— MRT Bonds ...................................
100,000
July
Oct.
1
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4,800
42,400 2,000
2,000 98,000
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PROBLEM 16-4B (Continued) (a) (Continued) Dec. 31 Trading Investments— Lemelin Common Shares ................ Trading Investments— RSD Common Shares ...................... Gain on Fair Value Adjustment of Trading Investments ....................
Number of Cost Shares Lemelin 2,400 – 1,600 = 800 $21,200* RSD 600 7,500 Total $28,700 * $63,600 – $42,400 (b)
1,200 900 2,100
Fair Value $22,400 8,400 $30,800
(800 × $28) (600 × $14)
MEAD INVESTMENT CORPORATION Balance Sheet (Partial) December 31, 2014
Current assets Trading investments, at fair value ................................. $30,800 MEAD INVESTMENT CORPORATION Income Statement (Partial) Year ended December 31, 2014
Other revenues Dividend revenue................................... Interest revenue ..................................... Gain on fair value adjustment of trading investments....................... Gain on sale of trading investments .... Other expenses Loss on sale of trading investment ...... Solutions Manual .
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$4,800 2,000 2,100 2,000 $10,900 $
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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, 2013
Current assets Trading investments, at fair value ................................. $55,000 (b) COMMERCIAL INC. Income Statement (Partial) Year ended December 31, 2013
Other revenues Gain on fair value adjustment of trading investments....................... (c)
$5,000
2014
Feb. 10 Trading Investments— Almina Common Shares........................ 30,000 Cash (2,500 × $12)............................. Apr. 15 Cash (1,250 × $27).................................. 33,750 Gain on Sale of Trading Investments Trading Investments— Fahim Common Shares .................... ($39,000 ÷ 1,500 × 1,250) June 15 Trading Investments— Fahim Common Shares ......................... 27,500 Cash (1,000 × $27.50)........................
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30,000
1,250 32,500
27,500
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PROBLEM 16-5B (Continued) (c) (Continued) Aug. 5 Cash.......................................................... 5,000 Dividend Revenue (2,000 × $2.50)....
5,000
Oct. 15 No entry is necessary for the stock dividend. The number of shares held is now 2,750 (2,500 × 1.1), at a cost of $10.91 per share ($30,000 ÷ 2,750). Dec. 31 Trading Investments—Fahim Common Shares ($37,500 – $34,000) ..... 3,500 Trading Investments—Almina Common Shares ($34,375 – $30,000) ..... 4,375 Gain on Fair Value Adjustment on Trading Investments ($83,875 – $80,000) Trading Investments—PLJ Commons Shares ($16,000 – $12,000) ($35,000 – $32,340 = $2,660) Number of Market Price Shares $30.00 250 + 1,000 6.00 2,000 12.50 2,750
Fahim PLJ Almina Total * $39,000 – $32,500 + $27,500 = $34,000
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Carrying Amount $34,000* 16,000 30,000 $80,000
3,875 4,000
Fair Value $37,500 12,000 34,375 $83,875
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-5B (Continued) Taking It Further: Fahim common shares purchased in 2013 and sold on April 15, 2014 yielded a profit of $3,750. The cost of the 1,250 common shares was $30,000 ($36,000 ÷ 1,500 × 1,250) and the proceeds from the sale of the common shares were $33,750. This profit was recognized in two fiscal years. In the year ended December 31, 2013, a gain on the fair value adjustment of the shares was recorded in the amount of $3,000 ($39,000 – $36,000). This amount was for all 1,500 shares held at that date. The corresponding amount of the fair value adjustment for the 1,250 shares subsequently sold was $2,500 ($3,000 ÷ 1,500 × 1,250). In the fiscal year ending December 31, 2014, there was a gain on the sale of the shares of $1,250. Together these two amounts make up the total profit of $3,750.
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PROBLEM 16-6B
Balance Sheet
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.
Assets NE (+/–) NE NE (+/–) + NE (+/–) – (+/–) NE (+/–) + NE (+/–) NE (+/–) + NE – – + + NE
Liabilities NE NE 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 – NE + NE NE + NE – – + + NE
16-82 .
Revenues Expenses NE NE NE NE 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 – – + NE NE
Statement of Comprehensive Income Other Comprehensive Income NE NE NE NE NE NE NE NE NE NE NE NE NE NE NE + NE
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Accounting Principles, Sixth Canadian Edition
PROBLEM 16-6B (Continued) Taking It Further: If Abioye Inc. is a private company reporting using ASPE, there is no Other Comprehensive Income. For this difference, transaction #16 would be affected. Abioye’s investment in Sarolta’s common shares would be reported at fair value on its balance sheet and the gain on the fair value adjustment would be reported on the income statement if a quoted market price is available or at cost if none is available. Abioye Inc. would also have a choice in the way in which it accounts for investment with significant influence in Xing Ltd. It could account for the investment using the equity method as given for under IFRS 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) Situation 1: Fair Value 30,000 ÷ 300,000 = 10% Situation 2: Equity Method 90,000 ÷ 300,000 = 30% Situation 3: Equity Method* 300,000 ÷ 300,000 = 100% * Consolidated financial statements are also prepared for reporting purposes. (b) Situation 1 2014 Oct. 1 Long-Term Investments— Hat Common Shares......................... 1,200,000 Cash (30,000 × $40)..................... 1,200,000 2015 Sept. 30 Cash ................................................. 12,000 Dividend Revenue (30,000 × $0.40) 12,000 Sept.30 Long-Term Investments— Hat Common Shares ....................... Other Comprehensive Income— Gain on Fair Value Adjustment .. [30,000 × ($43 – $40)]
90,000 90,000
Situation 2 2014 Oct. 1 Investment in Associate—Hat ......... 3,600,000 3,600,000 Cash (90,000 × $40)...................... 2015 Sept. 1 Cash (90,000 × $0.40) ....................... 36,000 Investment in Associate—Hat ..... 36,000 Sept.30 Investment in Associate—Hat ......... Revenue from Investment in Associate ($675,000 × 30%).........
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202,500 202,500
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PROBLEM 16-7B (Continued) (c) Under situation 2, if Pankaj were reporting under ASPE, it would have the choice to report the investment in Sub at (1) fair value because Hat’s shares are traded on an active market and so a quoted market price can be obtained for the shares or (2) at cost if there is no quoted market price. 2014 Oct. 1 Investment in Associate—Hat .......... 3,600,000 Cash (90,000 × $40)................... 3,600,000 2015 Sept. 1 Cash (90,000 × $0.40) .................... 36,000 Dividend Revenue ..................... 36,000 (d) (1) Fair Value Balance Sheet Long-term investments—Sub* Investment in associate—Sub** Investment in associate—Sub*** Comprehensive Income Statement Income Statement Revenue from investment in Sub Dividend revenue Other Comprehensive Income Other Comprehensive Income— Gain on Fair Value Adjustment****
(2) Cost Method
(3) Equity Method
$3,870,000 $3,600,000 $3,766,500
202,500 36,000
36,000
270,000
* 90,000 shares × $43 = $3,870,000 ** 90,000 shares × $40 = $3,600,000 *** $3,600,000 – $36,000 + $202,500 = $2,766,500 **** (90,000 × [$43 – $40])
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PROBLEM 16-7B (Continued) Taking It Further: Fair value, Sept. 30, 2016: 30,000 × $45 = Cost: 30,000 × $40 Cumulative other comprehensive income Less income taxes (30% × $150,000) Accumulated other comprehensive income, Sept. 30, 2016
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$1,350,000 1,200,000 150,000 45,000 $105,000
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PROBLEM 16-8B (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 long-term investment account, Dec. 31 $960,000 Less: Hadley’s share of Letourneau’s earnings (200,000) 1 Add: Hadley’s share of Letourneau’s dividends 40,000 Investment account (at cost) $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 Hadley should use the fair value method to account for the investment in Letourneau Corp. Under the fair value method, Hadley would report the investment in Letourneau Corp. as follows: HADLEY INC. Balance sheet (Partial) December 31, 2014 Investments Long-term investments.............................
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PROBLEM 16-8B (Continued) (d) (Continued) HADLEY INC. Income Statement (Partial) Year Ended December 31, 2014 Other revenue Dividend revenue ...................................... Unrealized gain on long-term investments ($970,000 – $800,000) (e)
$ 40,000 170,000
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 16-9B (a) INVESTMENTS R US COMPANY Income Statement Year ended December 31, 2015 (in millions)
Revenues Operating expenses Profit from operations Other revenue Gain on disposal of land Interest revenue Revenue from investment in associate Dividend revenue Gain on fair value adjustment— trading investments Other expenses Interest expense Loss on sale of trading 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 December 31, 2015 (in millions)
Profit Other comprehensive income: Loss on fair value adjustment—strategic equity investment, 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 trading 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 long-term equity investments, since the investment is 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, 2014
Service revenues.............................................................. $651,000 Operating expenses Salary expense ............................................. $335,000 Rent expense ............................................. 45,000 Depreciation expense................................ 28,000 408,000 Profit from operations...................................................... 243,000 Other revenues Revenue from investment in associate ........ $ 31,000 Dividend revenue....................................... 9,000 Gain on sale of trading investments ........ 2,500 Gain on fair value adjustment of trading investments .............................. 2,600 Interest revenue ......................................... 3,300 48,400 291,400 Other expenses Interest expense ............................................ $ 12,500 Loss on fair value adjustment on trading securities ................................................. 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, 2014
Assets Current assets Cash ............................................................................... $150,000 Trading investments at fair value .................................. 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 2017 ........................... $75,000 Long-term investment in bonds, due 2016, at amortized cost ........................................... 36,000 Long-term equity investment, at fair value 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, 2014
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 * Total liabilities and shareholders’ equity (equal Total assets) $1,040,500 Less: Total Liabilities 356,000 Total shareholders’ equity 684,500 Less: Accumulated other comprehensive income** 40,000 Less: Common shares 250,000 Retained earnings $394,500 ** Beginning Balance of Accumulated other Comprehensive income Add: Other comprehensive income for the year Ending Balance
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$28,000 12,000 $40,000
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PROBLEM 16-10B (Continued)
Taking It Further: The Long-term investment in common shares 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 cost or carrying value. The fair value adjustment (assuming quoted market price) would be reported in other revenues on the income statement,. If Vladimir Corporation were a private company and reported under ASPE, it would present an income statement only. The balance sheet would not include Accumulated Other Comprehensive Income in Shareholders’ equity.
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CONTINUING COOKIE CHRONICLE (a)
1. The amount of influence you would have in La Madeleine Ltd. would determine how you would account for the investment. Given that you would own 20% of the common shares of La Madeleine Ltd., it would be assumed (unless there was evidence to the contrary) that you could exert significant influence over the day-to-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, 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 decision making 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 in the shares given that there are only three shareholders.
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CONTINUING COOKIE CHRONICLE (Continued) 2. One of the major advantages of going ahead with this
investment would be the strategic advantage of the horizontal and vertical integration that would occur. Not only would you eliminate a competitor but you both could learn the business of making fancy French cookies while taking advantage of the expertise the Thornton sisters have developed with respect to the operation of the bakery. 3. There would be disadvantages associated with this
investment as well. For example, there may be a significant time investment required by you three, especially since both of the Thornton sisters are very busy and would like the investor to take over some of the responsibilities of running the business. As well, the Thornton sisters will still together exercise majority control and may not be willing to let an investor participate in the decision making process. Finally, if the investment did not work out it may be difficult to find another investor to purchase the shares held by Cookie & Coffee Creations. (b) Since the equity method is applied when an investor can exercise significant influence, details of the relationship between Cookie & Coffee Creations and La Madeleine 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, what will Janet, Brian and Natalie’s responsibilities be in the running of La Madeleine 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. Solutions Manual .
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CONTINUING COOKIE CHRONICLE (Continued) (c)
Because the investment in La Madeleine Ltd. is a strategic investment, it would be classified as a long-term investment in the non-current assets section of Cookie & Coffee Creations’ 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. If the investment were accounted for using the equity method, it would be accounted for at its original cost plus a proportionate share of the La Madeleine’s income, less a proportionate share of any dividends paid by La Madeleine Ltd.
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CUMULATIVE COVERAGE: CHAPTERS 13 TO 16 (a) Jan.
7 Cash ..................................................... 25,000 Preferred Shares ............................ 25,000
Mar. 16 Trading Investments— Osborne Common Shares .................. 19,200 Cash (800 × $24) ............................. 19,200 July
1 Long-Term Investments— Solar Inc. Bonds.................................. 108,200 Cash ($100,000 × 108.2) ................. 108,200
Aug.
2 Cash (800 × $25) .................................. 20,000 Trading Investments— Osborne Common Shares ............. Gain on Sale of Trading Investments
19,200 800
5 Short-Term Investments— 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 Investments— Money Market Fund........................ Interest Revenue ............................
20,000 200
Nov. 30 Cash ..................................................... 50,000 Note Payable................................... 50,000
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CUMULATIVE COVERAGE (Continued) (a) (Continued) Dec.
1 Cash Dividends (500 × $2).................. 1,000 Dividends Payable..........................
1,000
Dec. 31 Interest Expense 250 ($50,000 × 6% × 1/12) .......................... Note Payable ($1,521 – $250) ............ 1,271 Cash ................................................
1,521
31 Investment in Associate—RES ($20,000 × 40%) ................................ 8,000 Revenue from Investment in Associate—RES ..........................
8,000
31 Cash.................................................. Investment in Associate—RES ($1,200 × 40%)..................................
480
31 Interest Receivable ($100,000 × 5% × 6/12) .......................... 2,500 Long-Term Investments— Solar Inc. 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 Other Comprehensive Income— Loss on Fair Value Adjustment* ..........2,000 Long-Term Investments—BCB Shares 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, 2015
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 2,500 Interest receivable............................................ Merchandise inventory ................................... 22,700 Investment in associate—RES ($85,000 + $8,000 – $480) ............................ 92,520 Long-term investment – Solar bonds 107,864 ($108,200 – $336) ......................................... Long-term investment—BCB common shares ($30,000 – $2,000) ............ 28,000 Land .................................................................. 90,000 Building............................................................. 200,000 Accumulated depreciation—building ............. 40,000 Equipment......................................................... 40,000 15,000 Accumulated depreciation—equipment ......... Accounts payable............................................. 18,775 Dividends payable ............................................ 1,000 Income tax payable .......................................... 4,500 Interest payable ................................................ 7,800 Note payable ($50,000 – $1,271) ...................... 48,729 Bonds payable (6%, due 2019) ($126,025 + $1,022) ...................................... 127,047 $2-noncumulative preferred shares, convertible no par value, 500 issued 12,500 ($25,000 – $12,500)........................................ Common shares, no par value, 102,500 issued 112,500 ($100,000 + $12,500)...................................... Solutions Manual .
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CUMULATIVE COVERAGE (Continued) (b) (Continued) PLANKTON CORPORATION Trial Balance (Continued) December 31, 2015
Debit Retained earnings ........................................ Cash dividends............................................. Accumulated other comprehensive income Sales.............................................................. Cost of goods sold....................................... Operating expenses ..................................... Interest revenue ($375 + $200 + $2,164) ..... Interest expense ($6,250 + $250 + $8,822) .. Revenue from investment in associate—RES ....................................... Income tax expense ..................................... Gain on sale of trading investments........... Other Comprehensive Income: Loss on fair value adjustment ............................... Totals
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Credit 110,775
1,000 5,000 750,000 370,000 180,000 2,739 15,322 8,000 50,000 800 2,000 $1,267,665 $1,267,665
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CUMULATIVE COVERAGE (Continued) (c)
Revenues Sales....................................................... Interest revenue .................................... Revenue from investment in associate—RES. .............................. Gain on sale of trading investments .... Expenses Cost of goods sold ................................ Operating expenses .............................. Interest expense .................................... Income before income tax ................... Dec. 31
Solutions Manual .
$750,000 2,739 8,000 800 $761,539
$370,000 180,000 15,322
Income Tax Expense [($196,217 × 27%) – $50,000] .............2,979 Income Tax Payable...................
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565,322 196,217
2,979
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CUMULATIVE COVERAGE (Continued) (c)
(Continued) PLANKTON CORPORATION Trial Balance December 31, 2015
Debit
Credit
Cash ($48,000 + $25,000 – $19,200 – $108,200 + $20,000 – $20,000 + $20,200 + $50,000 $ 14,759 – $1,521 + $480) ........................................... Accounts receivable ........................................ 51,000 Allowance for doubtful accounts .................... $ 2,500 2,500 Interest receivable............................................ Merchandise inventory ................................... 22,700 Investment in associate—RES ($85,000 + $8,000 – $480) ............................ 92,520 Long-term investment—Solar bonds 107,864 ($108,200 – $336) ......................................... Long-term investment—BCB common shares ($30,000 – $2,000) ............ 28,000 Land .................................................................. 90,000 Building............................................................. 200,000 Accumulated depreciation—building ............ 40,000 40,000 Equipment......................................................... 15,000 Accumulated depreciation—equipment ......... Accounts payable............................................. 18,775 Dividends payable ............................................ 1,000 Income tax payable ($4,500 + $2,979) ............. 7,479 Interest payable ................................................ 7,800 Note payable ($50,000 – $1,271) ...................... 48,729 Bonds payable (6%, due 2019) ($126,025 + $ 1,022) ..................................... 127,047 $2-noncumulative preferred shares, convertible no par value, 500 issued 12,500 ($25,000 – $12,500)........................................ Common shares, no par value, 102,500 issued 112,500 ($100,000 + $12,500)...................................... Solutions Manual .
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CUMULATIVE COVERAGE (Continued) (c) (Continued) PLANKTON CORPORATION Trial Balance (Continued) December 31, 2015
Debit Retained earnings ........................................ Cash dividends............................................. Accumulated other comprehensive income Sales.............................................................. Cost of goods sold....................................... Operating expenses ..................................... Interest revenue ($375 + $200 + $2,164) ..... Interest expense ($6,250 + $250 + $8,822) .. Revenue from investment in associate—RES ....................................... Income tax expense ($50,000 + $2,904) ...... Gain on sale of trading investments........... Other Comprehensive Income: Loss on fair value adjustment ............................... Totals
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Credit 110,775
1,000 5,000 750,000 370,000 180,000 2,739 15,322 8,000 52,979 800 2,000 $1,270,644 $1,270,644
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CUMULATIVE COVERAGE (Continued) (d) PLANKTON CORPORATION Income Statement Year Ended December 31, 2015
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 Revenue from long-term equity investment . 8,000 Gain on sale of trading 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, 2015
Profit............................................................................ Other comprehensive income Loss on fair value adjustment ................................ Comprehensive income .............................................
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$143,238 2,000 $141,238
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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Statement of Changes in Shareholders’ Equity Year Ended December 31, 2015
Share capital, preferred shares Balance, January 1, ................................................ Issued for cash, 1,000 shares ........................... Converted 500 shares ........................................ Balance, December 31, 500 shares issued ........... Share capital, common shares Balance, January 1, 100,000 shares issued .......... Converted preferred shares, 2,500 shares ....... Balance, December 31, 102,500 shares issued .... Retained earnings Balance, January 1, ................................................ Profit ................................................................... Cash dividends................................................... Balance, December 31............................................ Accumulated other comprehensive income Balance, January 1 ................................................. Other comprehensive income (loss) ................ Balance, December 31............................................ Total shareholders' equity..........................................
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$
0 25,000 (12,500) 12,500
$100,000 12,500 112,500 $110,775 143,238 (1,000) 253,013 $ 5,000 (2,000) 3,000 $381,013
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CUMULATIVE COVERAGE (Continued) (d) (Continued) PLANKTON CORPORATION Balance Sheet December 31, 2015
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 investment, at fair value .................$28,000 Long-term investment in bonds at amortized cost ..........................................107,864 Investment in associate RES ........................... 92,520 Total investments ....................................................... 228,384 Property, plant and equipment Land ..................................................................$ 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, 2015
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 note payable ..................................... 15,757 Total current liabilities........................................... 50,811 Long-term liabilities Notes payable, 6%, due 2018 ......................... $ 32,972* Bonds payable, 6%, due 2019......................... 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 Total share capital ............................................. 125,000 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) Solutions Manual .
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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 at fair value 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 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 Long-term investment in common shares in RBC 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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BYP 16-1 FINANCIAL REPORTING PROBLEM
The fair value gains reported on the comprehensive income statement of Reitmans (Canada) Limited for the year ended January 28, 2012 in the amount of $530,000 relate to other investments (called available-for-sale financial assets) and not to trading investments (called marketable securities) on the balance sheet. Fair value adjustments on trading investments must go through profit. Companies may choose to record fair value adjustments on non-trading investments in other comprehensive income.
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BYP 16-2 INTREPRETING FINANCIAL STATEMENTS (a) Royal Bank likely chooses to invest a higher percentage of its trading investments 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 income yielding 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) Royal Bank has a higher percentage of its trading investments in government instruments as opposed to other debt instruments to reduce risk. Government debt investments are low risk and typically low income yielding investments, while non-government corporate debt investments are higher risk and potentially higher income yielding investments. Royal Bank favours the lower risk investments. (d) 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 the 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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BYP 16-3 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 16-4 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 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 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 will mostly generate gains and losses from fair value adjustments and selling.
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BYP 16-5 ETHICS CASE
(a) By classifying the securities that have increased in fair value as trading investments, the company would show any gains on the fair value adjustment of these securities on its income statement. It is also true that any losses on the company’s strategic investments would not affect the company’s income statement until these investments are sold. By classifying the debt securities that have decreased in market value as investments held to earn interest, the company would avoid showing any losses on the fair value of these debt investments on its income statement. It is also true that any gains on the company’s strategic securities would not affect the company’s income statement. (b) What Lemke proposes is unethical since it is knowingly not in accordance with IFRS. It is the company’s intention with respect to its investment securities and not their potential effects on earnings that should determine how they are classified. (c) The affected stakeholders are other members of the company’s officers and directors, the independent auditors, the shareholders, and prospective investors. (d) The qualitative characteristic of faithful representation is not met if the investments are classified based on performance. The classification is meant to reflect the purpose of each investment for both balance sheet and income statement presentation. Classification based on performance also violates neutrality because it factors in a bias to attain a predetermined result.
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BYP 16-5 (Continued)
(e) Under IFRS: - Trading investments (debt and equity) are classified as current assets and reported at fair value with the realized and unrealized gains and loss reporting in profit. - Short-term debt investments purchased to earn interest are classified as current assets and reported at amortized cost. - Debt investments purchased to earn interest, with maturities longer than 12 months, are classified as longterm investments and reported at amortized cost. - Strategic investments reported at fair value are classified as long-term investments. - Investments in associates accounted for using the equity method are classified as long-term investments.
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BYP 16-6 “ALL ABOUT YOU” ACTIVITY
(a) An RRSP is primarily intended for retirement savings. RRSP’s 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 longterm strategic plan for income growth or for short-term purposes. (b) The type of investment income that can be generated from equity securities include: dividend and gains from the sale of the investments. Bonds can generate interest income as well as 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. $85,894 for a taxable account, an increase of $6,976. (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. $80,024 for a taxable account, an increase of $12,846.
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BYP 16-6 (Continued)
(e) Assumptions used by the TFSA calculator: 1. Monthly investment contributions are made at the beginning of each month. 2. Provincial tax rates are equal to half of the federal income tax rate. 3. The investment portfolio is diversified with a return consisting of 40% interest, 30% dividends and 30% capital gains.
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CHAPTER 17 The Cash Flow Statement ASSIGNMENT CLASSIFICATION TABLE Brief Exercises
Exercises
Problems Problems Set A Set B
1. Describe the purpose 1, 2, 3, 4, and content of the 5, 6, 7 cash flow statement.
1, 2
1, 2
1A
1B
2. Prepare a cash flow statement using either: the indirect method or the direct method.
8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13,
2A, 3A, 4A, 5A, 6A, 7A, 8A, 9A, 10A, 11A, 12A
2B, 3B, 4B, 5B, 6B, 7B, 8B, 9B, 10B, 11B, 12B
3. Analyze the cash flow statement.
22, 23, 24,
19
14, 15
13A
13B
Study Objectives
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Questions
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Accounting Principles, Sixth 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
Prepare cash flow statement–indirect method.
Moderate
20-25
6A
Prepare cash flow statement–direct method.
Moderate
20-25
7A
Prepare cash flow statement–indirect method.
Moderate
30-40
8A
Prepare cash flow statement–direct method.
Moderate
30-40
9A
Prepare cash flow statement–indirect method.
Moderate
30-40
10A
Prepare cash flow statement–direct method.
Moderate
30-40
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 cash flow statement–indirect method.
Moderate
20-25
6B
Prepare cash flow statement–direct method.
Moderate
20-25
7B
Prepare cash flow statement–indirect method.
Moderate
30-40
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ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number
Description
Difficulty Level
Time Allotted (min.)
9B
Prepare cash flow statement–indirect method.
Moderate
30-40
10B
Prepare cash flow statement–direct method.
Moderate
30-40
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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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study Objective 1. Describe the purpose and content of the cash flow statement. 2. Prepare a cash flow statement using either: the indirect method or the direct method.
3.
Analyze the cash flow statement.
Knowledge Q17-2 Q17-5 Q17-7
Comprehension Q17-1 Q17-3 Q17-4 Q17-6 BE17-2 Q17-8 Q17-9 Q17-10 Q17-11 Q17-12 Q17-13 Q17-14 Q17-15 Q17-17 Q17-18 Q17-19 Q17-20 Q17-21
Q17-16 BE17-3 BE17-4 BE17-5 BE17-6 BE17-7 BE17-8 BE17-9 BE17-10 BE17-11 BE17-12 BE17-13 BE17-14 BE17-15 BE17-16 BE17-17 BE17-18 E17-2 E17-3 E17-4 E17-5 E17-6 E17-7 E17-8 E17-9
Continuing Cookie Chronicle
17-4
Analysis
Synthesis
Evaluation
E17-10 E17-11 E17-12 P17-2A P17-3A P17-4A P17-5A P17-6A P17-7A P17-8A P17-9A P17-10A P17-11A P17-12A P17-2B P17-3B P17-4B P17-5B P17-6B P17-7B P17-8B P17-9B P17-10B P17-11B P17-12B
Q17-22 Q17-23 Q17-24
Broadening Your Perspective
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Application BE17-1 E17-1 P17-1A P17-1B
BE17-19 E17-13 E17-14 P17-13A P17-13B BYP17-1 BYP17-2 BYP17-3 BYP17-4
BYP17-5 BYP17-6
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Accounting Principles, Sixth 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.
Cash equivalents are short-term, highly-liquid investments that are both: (1) readily convertible to known amounts of cash and (2) so near their maturity that their market value is relatively insensitive to changes in interest rates. Generally, only investments with original maturities of three months or less qualify under this definition. Cash equivalents, being equivalent to cash, are treated as cash; i.e., included in the cash account balance and the increase or decrease in the cash balance. As such, they should be included with cash when preparing the cash flow statement.
4.
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. An example is the payment of the principal on a mortgage payable.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 5.
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.
6.
Mandeep’s request to reclassify interest paid from the operating activities to the financing activities of the cash flow statement appears to demonstrate an intention to engineer the financial reports. Most likely, the reclassification will improve the cash generated by operating activities and minimize the impact of a poor performance. This motive is evidenced by the president’s suggestion that the classification as operating activity could be resumed next year. The reclassification of interest paid as a financing activity is allowed under IFRS as an alternative to using the operating activity normal classification. The classification adopted and followed in prior fiscal years should be followed in the current year for reasons of consistency and comparability. If the reclassification between cash flow categories is adopted and applied retroactively to all prior years reported on the comparative cash flow statement, then consistency will be re-established. Any retroactive change in the classification will warrant a note disclosure to the financial statements to that effect.
7.
Since the transaction involving the acquisition of the equipment and the issuance of the shares are with the same entity, they do not represent independent transactions of borrowing and then investing the cash in equipment. Geoff, the chief financial officer is incorrect. The exchange of equipment for common shares at their fair market value will nonetheless be disclosed in the financial statement notes.
8.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 9.
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 be consistent with cash increase 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 cash-based expenses; (2) sales of property, plant, and equipment; (3) sales of investments; and (4) issuing of debt or share capital.
10.
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.
11.
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.
12.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 13.
When bonds are issued at a premium, the amount of cash paid for interest is less than the total amount of the interest expense that will be incurred over the term of the bond, by the amount of the premium. When the premium is amortized, that portion of interest expense recorded does not involve cash. Consequently an adjustment must be made to the amount of profit to convert interest expense (lower than cash interest paid) to the amount of interest paid. An addition to profit is made in this case, for amortizing a premium. The opposite is true for discounts, using the same logic. A deduction to profit is needed to convert the interest expense (higher than amount of cash interest paid) to arrive at the amount of cash used to pay interest.
14.
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.
15.
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.
16.
No, Terry is incorrect. Since at the date of the investment, the bonds were purchased at a discount, the amount of the interest revenue will not equal the amount of cash interest received over the term of the bond, by the amount of discount. The total amount of interest earned will be higher than the amount of cash interest received by the amount of the discount at the date of purchase. The amount of the amortization of the bond discount will be deducted from the profit to arrive at the cash provided (used) by operations.
17.
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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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 18.
The change in method of reporting will have no effect on the cash provided (used) by operating activities. Although the approaches are different, both the direct and indirect methods will produce the same net cash provided by operating activities.
19.
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.
20.
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.
21.
When short-term notes receivable relate to trade (i.e., sale of merchandise or settlement of accounts receivable) transactions, they should be reported in the operating activities section of the cash flow statement along with the revenue accounts to which they relate. When short-term notes receivable relate to lending, they should be reported in the investing activities section of the cash flow statement.
22.
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.
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 23.
Companies in the early stages of development typically have negative flows from operating activities and investing activities, and positive flows from financing activities. The companies are issuing debt and/or equity and using the funds to acquire property, plant, and equipment. In the early stages of development, the company is not operating at its optimal level and generally experiences a loss or a small profit.
24.
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, Sixth 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) Financing activity (I) 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 (O) Operating 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, Sixth Canadian Edition
BRIEF EXERCISE 17-3 (a) (b) (c) (d) (e) (f) (g) (h) (i)
+ + − − + + − + +
BRIEF EXERCISE 17-4 DIAMOND INC. Cash Flow Statement (Partial) Year Ended November 30, 2014
Operating activities Profit ............................................................................... $ 850,000 Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense .............................. $175,000 Loss on the sale of equipment ................... 25,000 Decrease in accounts receivable .......... 80,000 Increase in prepaid expenses .................... (35,000) Decrease in accounts payable .............. (170,000) 75,000 Net cash provided by operating activities .............. $925,000
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BRIEF EXERCISE 17-5 MIRZAEI LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended March 31, 2014
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 trading investments............. (5,000) Increase in accounts receivable ................. (20,000) Decrease in inventory ............................. 7,000 Decrease in prepaid expenses ............... 2,000 Decrease in accounts payable ............... (5,000) Increase in income tax payable .............. 6,000 (10,200) Net cash provided by operating activities.......... $319,800
BRIEF EXERCISE 17-6 Sales revenue ............................................. $640,000 Add: Decrease in accounts receivable ..... 13,650 Cash receipts from customers.................. $653,650
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 17-7 (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 17-8 Operating expenses ......................................... Plus: Increase in prepaid expenses................ Less: Increase in accrued expenses payable Cash payments for operating expenses .........
$100,000 10,900 (6,400) $104,500
BRIEF EXERCISE 17-9 Salaries expense .............................................. Add : Decrease in salaries payable................. Cash payments to employees .........................
$188,000 1,500 $189,500
BRIEF EXERCISE 17-10 (a) The bonds were sold at a premium since the carrying amount is decreasing. (b) Interest expense........................................ Amortization of bond premium ................ Cash payments for interest ......................
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$25,000 5,000 $30,000
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 17-11 Loss from fair value adjustment of trading investments $ 5,500 Increase in trading investments...................... 15,000 Cash payment for purchase of trading investments $20,500 Trading Investments Beg. Bal. 2013 30,000 FV adj. Purchases 20,500 End. Bal. 2014 45,000
5,500
BRIEF EXERCISE 17-12 Income tax expense ............................................. $90,000 Less increase in income tax payable .................. (9,000) Cash payments for income tax ............................ $81,000
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BRIEF EXERCISE 17-13 ANGUS MEAT CORPORATION Cash Flow Statement (Partial) Year Ended December 31, 2014
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, Sixth Canadian Edition
BRIEF EXERCISE 17-14 (a) 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 (b) Under the direct method, the operating activities section would not show the loss. The investing activities section would be the same as the indirect method.
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Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 17-15 Investing activities: Proceeds from sale of land ...................................$120,000 1 Equipment purchase .............................................. (147,000) 2 Proceeds from equipment sale................................ 23,000 3 Net cash used by investing activities ..................... $ (4,000) 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, 2014 $237,000 Less: balance in account before equipment purchase: Balance, Jan. 1, 2014 ............... $148,000 Less cost of equipment sold.. (58,000) 90,000 Cost of equipment purchased ........................ $147,000
3.
Carrying amount of equipment sold ............... Plus gain ........................................................... Cash proceeds from sale of equipment ........
$18,000 5,000 $23,000
BRIEF EXERCISE 17-16 Dividends paid $46,000 Proof: Retained earnings December 31, 2014 .............. Profit..................................................................... Retained earnings, December 31, 2013 ............. Dividends declared during 2014 ........................ Increase in dividends payable............................ Cash payment for dividends...............................
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$ (261,000) 197,000 114,000 50,000 (4,000) $ 46,000
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BRIEF EXERCISE 17-17 Financing activities Sale of common shares 1 ............................ $ 10,000 Repayment of mortgage payable ....................(25,000) Payment of cash dividends 2 ........................................ (60,000) Net cash used by financing activities ....................... (75,000) 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 declared (calculated) ............. (65,000) Retained earnings, end of year ................................. $165,000 Dividends payable, beginning of year ..................... $15,000 Add: Cash dividends declared ................................. 65,000 80,000 Less: Cash dividends paid (calculated)................... (60,000) Dividends payable, end of year ................................ $20,000
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. The increase in bonds payable of $5,000 comes from the bond discount amortization of $5,000.
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BRIEF EXERCISE 17-18 BAKER CORPORATION Cash Flow Statement—Direct Method Year Ended April 30, 2014
Operating activities Net cash provided by operating activities ............
$ 49,000
Investing activities Proceeds from sale of equipment .......... $ 6,000 Purchase of land (Note X) ........................ (25,000) Net cash used by investing activities ...............
(19,000)
Financing activities Proceeds from issue of note payable ...... $20,000 Payment to reacquire common shares .. (19,000) Payment of dividends ............................... (25,000) Net cash used by financing activities...............
(24,000)
Net increase in cash ................................................... Cash, May 1 ................................................................. Cash, April 30 ..............................................................
6,000 8,500 $ 14,500
Note X: Land was purchased by paying $25,000 issuing a mortgage note payable for $75,000.
cash and
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BRIEF EXERCISE 17-19 (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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SOLUTIONS TO EXERCISES EXERCISE 17-1 Transaction 1. Sold inventory for $1,000 cash. 2. Purchased machine for $30,000. Made a $5,000 down payment and issued 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 cash. 7. Redeemed bonds having an amortized cost of $200,000 for $175,000. 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
−$175,000
O NC
−$18,000 NE
I
−$100,000
I
+$13,000
O
−$12,000
Chapter 17
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EXERCISE 17-2 PESCI LTD. Cash Flow Statement (Partial) Year Ended November 30, 2014
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 17-3 PESCI LTD. Cash Flow Statement (Partial) Year Ended November 30, 2014
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 17-4 CHARRON INC. Cash Flow Statement (Partial) Year Ended October 31, 2014
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 ......................... 10,000 Increase in trading investments* ............... (12,000) Increase in accounts receivable ................ (11,000) 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) 20,800 Net cash provided by operating activities ................... $107,800 * Includes gain on fair value adjustment of trading investments of $2,000.
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EXERCISE 17-5 (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 ........ Increase in accrued expenses payable........................................ Cash payments for operating expenses..
$70,000 (20,000) 2,500
(d) Interest expense....................................... Less: Increase in bonds payable from amortization of discount ............ Cash payments for interest expense ......
$18,000
(e) Gain on fair value adjustment ................. Less: increase in trading investments ... Cash payments for trading investments
$(6,000) 9,000 $ 3,000
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2,000 $54,500
(2,000) $16,000
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EXERCISE 17-6 McTAVISH LTD. Cash Flow Statement (partial)—Direct Method Year Ended September 31, 2014
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.....................
4. Cash payments for income taxes Income tax expense............................................ Less: Increase in Income taxes payable ...........
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$285,000 (23,000) $262,000
$122,000 3,100 (10,500) $114,600
$4,000 (500) $ 3,500
$38,500 (9,800) $28,700
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EXERCISE 17-7 CHARRON INC. Cash Flow Statement (partial)—Direct Method Year Ended December 31, 2011 Operating activities Cash receipts Cash receipts from customers 1 ................................................$614,000 Cash payments To suppliers 2 ................................................................ $(369,500) For operating expenses 3 .................... (92,700) 4 For trading investments .................... (10,000) 5 For income taxes ............................... (34,000) (506,200) Net cash provided by operating activities .......... $107,800 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 ..
$625,000 (11,000) $614,000 $390,000 (13,500) (7,000) $369,500 $88,000 1,700 3,000 $92,700
4. Cash payments for trading investments Gain on fair value adjustment............................ Add: Increase in trading investments ............... 5. Cash payments for income taxes Income tax expense............................................ Add: Decrease in income taxes payable ...........
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$(2,000) 12,000 $10,000 $29,000 5,000 $34,000 Chapter 17
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Accounting Principles, Sixth Canadian Edition
EXERCISE 17-8 DUPRÉ CORP. Cash Flow Statement (Partial) Year Ended December 31, 2014
Investing activities Sale of equipment* ..................................... $ 5,000 Purchase of equipment .................................. (65,000) Purchase of equipment (Note X) ................... (3,000) Net cash used by investing activities...................... $(63,000) Financing activities Payment of cash dividends ............................ $(8,000) Repayment of note payable .......................... (10,000) Net cash used by financing activities ..................... $(18,000) Note X: Equipment costing $53,000 was acquired by paying $3,000 cash and issuing a note payable for $50,000.
*Cost of equipment sold .................................. Accumulated depreciation............................... Net carrying amount ........................................ Loss on sale of equipment .............................. Cash proceeds from sale.................................
$46,000 38,000 8,000 3,000 $ 5,000
Cash .................................................................. 5,000 Accumulated Depreciation .............................. 38,000 Loss on Sale of Equipment ............................. 3,000 Equipment ......................................................................... 46,000
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EXERCISE 17-9 PREFERRED HOMES LTD. Cash Flow Statement (Partial) Year Ended September 30, 2014
Investing activities Sale of equipment (2) ................................. $ 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 (3) ..................... $(80,000) Issuance of common shares ......................... 100,000 Repurchase of common shares (4) ................ (15,000) 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
Repayments
Solutions Manual .
Mortgage Note Payable Oct. 1, 2013 50,000 5,000 Land purchase 65,000 Sept. 30, 2014 110,000
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EXERCISE 17-9 (Continued) (2) Transactions involving Equipment:
Oct. 1, 2013 Purchases Sept. 30, 2014
Disposal
Equipment 125,000 Disposal 20,000 139,000
Accumulated Depreciation Oct. 1, 2013 5,000 Sept. 30 Sept. 30, 2014
6,000
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 .............................. Gain on Sale of Equipment .......................... Equipment .....................................................
3,000 5,000 2,000 6,000
(3) Transactions involving Retained Earnings:
Dividends
Dividends paid
Solutions Manual .
Retained Earnings Oct. 1, 2013 70,000 Profit Sept. 30, 2014
80,000 210,000 220,000
Dividends Payable Oct. 1, 2013 80,000 Dividends Sept. 30, 2014
20,000 70,000 10,000
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EXERCISE 17-9 (Continued) (4) Transactions involving Common Shares:
Reacquisition
Common Shares Oct. 1, 2013 25,000 Issuance Sept. 30, 2014
150,000 100,000 225,000
Contributed Surplus—Reacquisition of Common Shares Oct. 1, 2013 0 Reacquisition 10,000 Sept. 30, 2014 10,000 Common Shares ................................................... 25,000 Contributed Surplus—Reacquisition of Common Shares ................................ Cash.............................................................. ($150,000 + $100,000 − $225,000 = $25,000)
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10,000 15,000
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EXERCISE 17-10 SAVARY LIMITED Cash Flow Statement Year Ended December 31, 2014
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 preferred 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 17-11 FLYPAPER AIRLINES INC. Cash Flow Statement Year Ended March 31, 2014 Operating activities Cash receipts Cash receipts from customers ................................ $254,000* Cash from trading investments............................... 5,600 Dividends on investments ...................................... 14,000 273,600 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 ......... 69,100 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 provided by financing activities ............... (14,000) Net increase in cash .............................................................. 71,100 Cash, April 1, 2013............................................................. 35,000 Cash, March 31, 2014 ....................................................... $ 106,100 Note X: Land costing $35,000 was acquired by issuing common shares. * $53,000 + $201,000 = $254,000 Solutions Manual .
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EXERCISE 17-12 (a) STORM ADVENTURES LTD. Cash Flow Statement—Indirect method Year Ended December 31, 2014
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 17-12 (Continued) (a) (Continued) (1) Transactions involving Retained Earnings:
Dividends
Dividends paid
Solutions Manual .
Retained Earnings Jan. 1, 2014 32,500 Profit Dec.31, 2014
103,600 69,900 141,000
Dividends Payable Jan. 1, 2014 30,000 Dividends Dec.31, 2014
5,000 32,500 7,500
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EXERCISE 17-12 (Continued) (b) STORM ADVENTURES LTD. Cash Flow Statement—Direct Method Year Ended December 31, 2014
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 (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 ......................................................... Cash, January 1................................................................. Cash, December 31 ........................................................... (1) Cash receipts from customers Sales .................................................................... Add: Decrease in accounts receivable.............
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30,400 12,600 $ 43,000
$678,000 9,000 $687,000
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Accounting Principles, Sixth Canadian Edition
EXERCISE 17-12 (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 ...........
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$439,800 (12,000) 427,800 (5,000) $422,800
$80,000 7,000 $87,000
$23,300 3,500 $26,800
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EXERCISE 17-13 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 greater degree than company B.
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EXERCISE 17-14 (a)
Bank of Montreal Cash provided by operating activities Cash used by investing activities Cash provided by financing activities Increase in cash
Scotiabank
$ 572 (12,768)
$ 1,063 (33,778)
13,757 $ 1,561
33,338 $ 623
Bank of Montreal
Scotiabank
$ 572 (12,768) $(12,196)
$ 1,063 (33,778) $(32,715)
(b) ($ in millions)
− = (c)
Cash provided by operating activities Cash used by investing activities Free cash flow
At first glance, Bank of Montreal appears to be in better shape because it had a larger increase in cash for the year. On the other hand, Scotiabank generated more cash from operations, but spent considerably more cash in investing activities, which appear to have been financed completely from financing activities. This is usually a good sign, showing that the bank is investing its cash in productive assets that will allow it to continue and increase future cash from operations.
(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 amount would appear on their statement of cash flow for investing activities compared to operating activities.
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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 trading 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 distributed a stock 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. Solutions Manual .
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(a) Classification O I O I
(b) Cash
(c) Profit
− + + −
− − + NE
NC F
NE −
NE NE
O O
− NE
− +
O
−
NE
NC
NE
NE
O O
− +
NE +
O
NE
−
O O
+ +
+ NE
F F
+ −
NE NE
O
+
NE
O
+
NE Chapter 17
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PROBLEM 17-1A (Continued) *
Using the indirect method, the loss/gain added/deducted under operating activities.
would
be
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 INC. Cash Flow Statement (Partial)—Indirect Method Year Ended September 30, 2014
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 INC. Cash Flow Statement (Partial)—Direct Method Year Ended September 30, 2014
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 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, 2014
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 taxes 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, 2014
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 is more complex and provides more details to the company’s competitors. Solutions Manual .
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PROBLEM 17-4A
BIRD CORP. Cash Flow Statement (Partial) Year Ended December 31, 2014
(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 Bird Corp. In 2014 is $125,000. See calculation (4) (c) Financing activities Repayment of mortgage note (3).................. $(35,000) Payment of cash dividends (4) ....................... (21,250) Issuance of common shares (6) ................ 90,000 Repurchase of common shares (6) ............ (8,000) 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 mortgage note payable for $65,000. Note Y: During the year, 500 preferred shares were converted into 5,000 common shares at a book value of $50,000.
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PROBLEM 17-4A (Continued) (1) Transactions involving Equipment:
Jan. 1, 2014 Purchases Dec. 31, 2014
Equipment 340,000 Disposal 75,000 393,000
22,000
Accumulated Depreciation—Equipment Jan. 1, 2014 94,000 Disposal 19,125 Depreciation 49,125 Dec. 31, 2014 124,000 Cost of equipment sold ................................... Accumulated depreciation (derived above) ... Net carrying amount ........................................ Add: Gain on sale of equipment...................... Cash proceeds from sale.................................
$22,000 19,125 2,875 1,000 $ 3,875
Cash .................................................................. Accumulated Depreciation .............................. Gain on Sale of Equipment ......................... Equipment .....................................................
3,875 19,125
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1,000 22,000
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PROBLEM 17-4A (Continued) (2) Transactions involving Buildings:
Jan. 1, 2014 Purchases Dec. 31, 2014
Buildings 750,000 Disposal 150,000 850,000
50,000
Accumulated Depreciation—Buildings Jan. 1, 2014 300,000 Disposal 17,500 Depreciation 25,000 Dec. 31, 2014 307,500 Cost of building sold........................................ Accumulated depreciation (derived above) ... Net carrying amount ........................................ Less: Loss on sale of building ........................ Cash proceeds from sale.................................
$50,000 17,500 32,500 10,000 $22,500
Cash .................................................................. Accumulated Depreciation .............................. Loss on Sale of Building ................................. Building ........................................................
22,500 17,500 10,000 50,000
(3) Transactions involving Mortgage Notes Payable: Mortgage Notes Payable Jan. 1, 2014 Repayments 35,000 New Notes Dec. 31, 2014
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310,000 65,000 340,000
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PROBLEM 17-4A (Continued)
(4) Transactions involving Retained Earnings:
Closing div.
Dividends decl. Dec. 31, 2014
Dividends paid
Retained Earnings Jan. 1, 2014 25,000 Profit (b) Dec. 31, 2014 Cash Dividends 25,000 Closing entry 0
100,000 125,000 200,000
25,000
Dividends Payable Jan. 1, 2014 2,500 21,250 Dividends decl. 25,000 Dec. 31, 2014 6,250
(5) Transactions involving Bonds Payable:
Prem. Amort.
Bonds Payable Jan. 1, 2014 5,000 Dec. 31, 2014
585,000 590,000
Interest Expense ...................................................... $48,250 Less: Amortization of bond discount ..................... 5,000 Cash paid for interest .............................................. $43,250 Cash paid for interest will be reflected under operating activities.
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PROBLEM 17-4A (Continued) (6) Transactions involving Common Shares:
Reacquisition
Common Shares Jan. 1, 2014 10,000 Conv. Pref. Issuance Dec. 31, 2014
410,000 50,000 90,000 540,000
Contributed Surplus—Reacquisition of Common Shares Jan. 1, 2014 0 Reacquisition 2,000 Dec. 31, 2014 2,000 Common Shares (1,000 × $10) .................... Contributed Surplus—Reacquisition of Common Shares ......................... Cash.................................................... (e)
Cash December 31, 2014 Cash December 31, 2013 Net increase in cash for fiscal year 2014 Add: Cash used in investing activities (a) Cash used in financing activities (c) Cash provided from operating activities
10,000 2,000 8,000 $ 22,125 10,000 12,125 173,625 25,750 $211,500
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 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 COYOTE LTD. Cash Flow Statement—Indirect Method Year Ended May 31, 2014
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, 2013 ............................................................. 43,000 Cash, May 31, 2014 ............................................................. $ 12,600 Note X: Land with as 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 17-5A (Continued) (1) Increase in accumulated depreciation ($68,250 – $40,000) (2) Increase in equipment ($325,000 – $190,000) (3) Beginning balance of mortgage notes payable Add: New note issued for land purchase Ending balance of mortgage notes payable
$ 80,000 45,000 125,000
(4) Transactions involving Retained Earnings:
Div. (derived)
Dividends paid
Retained Earnings June 1, 2013 62,150 Profit May 31, 2014
215,500 108,000 261,350
Dividends Payable June 1, 2013 5,000 59,650 Dividends decl. 62,150 May. 31, 2014 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 17-6A COYOTE LTD. Cash Flow Statement—Direct Method Year Ended May 31, 2014
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, 2013 ............................................................. 43,000 Cash, May 31, 2014 ............................................................. $ 12,600 Note X: Land with as 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 17-6A (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 tax 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 17-6A (Continued) (7) Transactions involving Retained Earnings:
Div. (derived)
Dividends paid
Retained Earnings June 1, 2013 62,150 Profit May 31, 2014
215,500 108,000 261,350
Dividends Payable June 1, 2013 5,000 59,650 Dividends decl. 62,150 May. 31, 2014 7,500
Taking It Further: If Coyote Inc. was reporting under IFRS instead of ASPE, the interest paid could be classified as financing activities.
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PROBLEM 17-7A E-PERFORM LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2014
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 equipment (Note X) ................... (25,000) Net cash used by investing activities......................... (23,500) Financing activities Sale of common shares .................................. $45,000 Retirement of note payable** ........................(100,000) Payment of cash dividends*** ........................ (12,630) Net cash used by financing activities ....................... (67,630) Net increase in cash .............................................................. 49,400 Cash, January 1 .................................................................. 48,400 Cash, December 31 ............................................................ $ 97,800
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PROBLEM 17-7A (Continued) Note X: Equipment was purchased by paying $25,000 cash and issuing a note payable for $60,000. *
Cash ................................................................... 1,500 Accumulated Depreciation ............................. 48,500 Loss on Sale of Equipment .............................. 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 ** Note payable, 2013 .............................................. Note issued for equipment.................................. Note payable retired ............................................ Note payable, 2014 .............................................. *** Retained earnings, 2013...................................... Profit ..................................................................... Dividends declared and paid .............................. Retained earnings, 2014......................................
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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 17-7A (Continued) 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 17-8A E-PERFORM LTD. Cash Flow Statement—Direct Method Year Ended December 31, 2014
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 Investing activities Sale of equipment* .......................... $ 1,500 Purchase of equipment (Note X)..... (25,000) Net cash used by investing activities.....................(23,500) Financing activities Sale of common shares .................. $45,000 Retirement of note payable* ................ (100,000) Payment of cash dividends* ................ (12,630) Net cash used by financing activities ................. (67,630) 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. * See calculations in P17-7A.
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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)
$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
$62,410 12,400 (4,500) $70,310
Taking It Further: The company generated significant amounts of cash from its operations through cash received from customers. Most 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 17-9A WETASKIWIN LTD. Cash Flow Statement—Indirect Method Year Ended December 31, 2014
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 17-9A (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 17-9A (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 2014 are lower at $14,000).
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PROBLEM 17-10A WETASKIWIN LTD. Cash Flow Statement—Direct Method Year Ended December 31, 2014
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) Investing activities Collection of notes receivable....................... $23,000 Issue of notes receivable................................ (14,000) Sale of equipment ........................................ 8,000 (5) Net cash provided by investing activities ................... 17,000 Financing activities Repayment of note payable ......................... $ (5,000) (6) Payment of cash dividends ......................... (9,000) (7) 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) 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 ............. (5) Cash from the sale of equipment Equipment Carrying amount………………… Less: Loss on Sale…………………………… Cash Received…………………………………
$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 $10,000 (2,000) $8,000
(6) 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
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PROBLEM 17-10A (Continued) (7) Cash dividends Retained earnings, beginning of year ................. Add: Profit .......................................................... Less: Dividends (calculated) .............................. Retained earnings, end of year ...........................
$28,000 36,000 64,000 (9,000) $55,000
Taking It Further: Yes. Depending on the timing of the cash payments and receipts, it is entirely possible that the company could have had a negative cash balance at one or more times during the year.
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PROBLEM 17-11A DIATESSARON INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2014 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 Amortization of premium on long-term debt investment .................. 500 (2) Increase in accounts receivable ................ (26,000) Increase in inventory.................................. (49,500) Increase in accounts payable ..................... 10,500 Decrease in income tax payable ............ (1,000) (19,000) Net cash provided by operating activities ............. 49,000 Investing activities Acquisition of long-term debt investment $(102,000) Sale of equipment........................................ 6,000 (3) Net cash used by investing activities......................... (96,000) Financing activities Issue of note payable.................................... $ 28,000 Payment of dividends ($15,000 − $6,000)... (9,000) Repayment of note payable .......................... (3,000) Net cash provided by financing activities ..............
16,000
Net decrease in cash......................................................... (31,000) Cash, January 1................................................................. 98,000 Cash, December 31 ........................................................... $67,000 Note: Common shares were issued to purchase equipment costing $105,000. Solutions Manual .
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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) Non-cash interest revenue on long-term debt investment Long-term debt investment, end of year ................... $101,500 Less: Purchase price.................................................. (102,000) Premium amortization .............................................. $ 500 (3) 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, 2014
Operating activities Cash receipts From customers ...................................................... $637,000 (1) From interest ........................................................... 5,000 (2) Cash payments To suppliers..................................... $(471,000) (3) For operating expenses .................. (104,000) (4) For interest ...................................... (3,000) For income tax ................................ (15,000) (5) (593,000) Net cash provided by operating activities ......... 49,000 Investing activities Acquisition of long-term debt investment . $(102,000) Sale of equipment ........................................ 6,000 (6) Net cash used in investing activities ......................... (96,000) Financing activities Issue of note payable..................................... $ 28,000 Payment of dividends ($15,000 − $6,000)... (9,000) Repayment of note payable .......................... (3,000) Net cash provided by financing activities ..............
16,000
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 receipts from interest Interest revenue................................................... Add: amortization of premium on long-term debt investment** .................................. (3) Cash payments to suppliers Cost of goods sold .............................................. Add: Increase in inventory ............................... Cost of goods purchased ................................... Less: Increase in accounts payable.................. (4) Cash payments for operating expenses Operating expenses ............................................ Less: Depreciation expense* .............................. (5) Cash payments for income tax Income tax expense ............................................ Add: Decrease in income tax payable ............. (6) Cash from sale of equipment Carrying amount of equipment.................................. Less: Loss on sale .................................................... Cash received .............................................................
*
$663,000 (26,000) $637,000 $4,500 500 $5,000 $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) **
Non-cash interest revenue on long-term debt investment Long-term debt investment, end of year ................... $101,500 Less: Purchase price.................................................. (102,000) Premium amortization................................................ $ (500)
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PROBLEM 17-12A (Continued) Taking It Further: Accounts payable can arise from various expenditures. The information that accounts payable is 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:
$3,485 − $2,251 = $1,234
Agrium:
$1,350 − $151 = $1,199
Potash appears to be in the stronger financial position. It generates more cash from operating activities, is investing in property, plant, and equipment, and is also paying down its debt. It also has a higher profit, and a higher free cash flow.
Taking It Further: Potash Corporation appears to be in growth stage as considerably more cash is being spent on investing activities, compared to its competitor, Agrium. Potash is also borrowing 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 wages to employees. 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 non-trade note payable. 18. Paid insurance for the month.
(a) Classification O I
(b) Cash
(c) Profit
− +
− +
NC
NE
NE
F
−
NE
O O O O O
+ NE − NE −
+ + NE NE −
O
−
NE
O
−
−
O
+
NE
O
NE
−
F
−
NE
F
+
NE
O
+
NE
F O
+ −
NE −
* 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 May 31, 2014
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 taxes payable .... (6,500) 34,500 Net cash provided by operating activities $125,000 (b) LUI INC. Cash Flow Statement (Partial)—Direct Method Year Ended May 31, 2014
Operating activities Cash receipts From customers (1)..................................... Cash payments To suppliers ................................ $(529,000) (2) For operating expenses ......... (146,500) (3) For interest ............................. (4,000) (4) For income taxes.................... (36,500) (5) Net cash provided by operating activities
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$841,000
(716,000) $125,000
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PROBLEM 17-2B (Continued) (b) (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 cash inflows and outflows. Solutions Manual .
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PROBLEM 17-3B (a) SABLE ISLAND LTD. Cash Flow Statement (Partial)—Indirect Method Year Ended December 31, 2014
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 insurance ..................... (2,500) Increase in accounts payable.................. 5,000 Decrease in income taxes 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, 2014
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) (b) (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, 2014
(a) Investing activities Sale of equipment (1) ................................. $ 1,000 Sale of building (2)...................................... 35,500 Purchase of land and buildings (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 2014 is $66,250 calculation (4).
see
(c) Financing activities Issuance of long-term notes (3)................. $ 60,000 Repayment of long-term notes (3) ............. (170,000) Payment of cash dividends (4) .................. (6,250) Issuance of preferred shares ..................... 50,000 Repurchase of common shares (5) ........... (29,300) Net cash used by financing activities ... $ (95,550) (d) Note X: Land costing $50,000 and buildings costing $130,000 were acquired by paying $25,000 cash and issuing a mortgage note payable for $155,000.
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PROBLEM 17-4B (Continued) (1) Transactions involving Equipment:
Jan. 1, 2014 Purchases Dec. 31, 2014
Equipment 480,000 Disposal 40,000 492,000
28,000
Accumulated Depreciation—Equipment Jan. 1, 2014 192,000 Disposal 22,000 Depreciation 48,000 Dec. 31, 2014 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 .............................. Loss on Sale of Equipment ............................. Equipment .....................................................
1,000 22,000 5,000
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PROBLEM 17-4B (Continued) (2) Transactions involving Buildings:
Jan. 1, 2014 Purchases Dec. 31, 2014
Buildings 1,250,000 Disposal 130,000 1,310,000
70,000
Accumulated Depreciation—Buildings Jan. 1, 2014 600,000 Disposal 52,500 Depreciation 31,250 Dec. 31, 2014 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 .............................. Gain on Sale of Building ............................. Equipment .....................................................
35,500 52,500
(3) Transactions involving Notes Payable: Long-Term Notes Payable Jan. 1, 2014 Repayments 170,000 New Notes Dec. 31, 2014
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18,000 70,000
350,000 60,000 240,000
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PROBLEM 17-4B (Continued)
(4) Transactions involving Retained Earnings:
Closing div.
Retained Earnings Jan. 1, 2014 6,250 Profit (b) Dec. 31, 2014
Cash Dividends—Preferred Dividends decl. 6,250 Closing entry Dec. 31, 2014 0
240,000 66,250 300,000
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. (5) Transactions involving Common Shares:
Reacquisition
Common Shares Jan. 1, 2014 30,800 Dec. 31, 2014
154,000 123,200
Contributed Surplus—Reacquisition of Common Shares Jan. 1, 2014 0 Reacquisition 1,500 Dec. 31, 2014 1,500 Common Shares ................................................... 30,800 Contributed Surplus—Reacquisition of Common Shares ................................ Cash..............................................................
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1,500 29,300
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PROBLEM 17-4B (Continued) (6) Transactions involving Bond Payable:
Prem. Amort.
Bond Payable Jan. 1, 2014 2,000 Dec. 31, 2014
216,000 214,000
Interest Expense......................................................... $23,000 Add: Amortization of bond premium ......................... 2,000 Cash paid for interest................................................. $25,000 Cash paid for interest expense will be captured under operating activities. (e)
Cash December 31, 2014 Cash December 31, 2013 Net increase in cash for fiscal year 2014 Add: Cash used in investing activities (a) Cash used in financing activities (c) Cash provided from operating activities
$ 21,000 5,000 16,000 28,500 95,550 $140,050
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 KING CORP. Cash Flow Statement—Indirect Method Year Ended July 31, 2014
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 accrued expenses 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 used by financing activities
20,000
Net increase in cash ......................................................... Cash, Aug. 1, 2013............................................................. Cash, July 31, 2014 ...........................................................
13,200 11,000 $ 24,200
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PROBLEM 17-5B (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:
Aug. 1, 2013 Purchases July 31, 2014
Equipment 170,000 Disposal 80,000 225,000
25,000
Accumulated Depreciation—Equipment Aug. 1, 2013 35,000 Disposal 5,000 Depreciation 51,000 July 31, 2014 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 .............................. Loss on Sale of Equipment ............................. Equipment .....................................................
14,000 5,000 6,000
(2) Beginning balance of mortgage notes payable Less: Principal repayments during year Ending balance of mortgage notes payable
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25,000
$ 80,000 15,000 $ 65,000
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PROBLEM 17-5B (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 17-6B KING CORP. Cash Flow Statement—Indirect Method Year Ended July 31, 2014 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 used by financing activities
20,000
Net increase in cash .............................................................. 13,200 Cash, Aug. 1, 2013 .............................................................. 11,000 Cash, July 31, 2014 ............................................................. $ 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 17-6B (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 accrued expenses payable ... (5) Cash payments for interest Interest expense .................................................. (6) Cash payments for income tax Income tax expense ............................................ Less: Increase in income tax 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 17-6B (Continued) (7) Transactions involving Equipment:
Aug. 1, 2013 Purchases July 31, 2014
Equipment 170,000 Disposal 80,000 225,000
25,000
Accumulated Depreciation—Equipment Aug. 1, 2013 35,000 Disposal 5,000 Depreciation 51,000 July 31, 2014 81,000 Cost of equipment sold ................................... Carrying value – given ..................................... Accumulated depreciation...............................
$25,000 20,000 $ 5,000
(8) Beginning balance of mortgage notes payable Less: Principal repayments during year Ending balance of mortgage notes payable
$ 80,000 15,000 $ 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 17-7B WAYFARER INC. Cash Flow Statement – Indirect Method Year Ended December 31, 2014
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 Non-cash interest revenue on long-term debt investment ................... (900) (2) Increase in accounts receivable ............... (46,800) Increase in inventory................................ (111,600) Increase in accounts payable ..................... 40,500 Decrease in income tax payable ............ (3,600) (49,500) Net cash provided by operating activities ........ 26,100 Investing activities Acquisition of long-term debt investment $(175,500) Sale of equipment........................................ 12,600 (3) Net cash used by investing activities....................... (162,900) 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 17-7B (Continued) Calculations: (1) 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 (2) Non-cash interest revenue on long-term debt investment Long-term debt investment, end of year ................... $176,400 Less: Purchase price.................................................. (175,500) Non-cash interest revenue........................................ $ 900 (3) Cash from sale of equipment Carrying amount of equipment .................................... $16,200 Less: Loss on sale....................................................... (3,600) Cash received ............................................................... $12,600 Taking It Further: No. For example, cash collections from customers will be lower than sales if the company made more credit sales than cash collections during the year. Also, cash payments will exceed expenses if the company prepaid expenses or reduced its current liability balances. Lastly, there if there are non-cash revenues or gains, these will increase profit but not cash.
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PROBLEM 17-8B WAYFARER INC. Cash Flow Statement – Direct Method Year Ended December 31, 2014
Operating activities Cash receipts From customers ........................... $1,090,800 (1) From interest ................................ 9,000 (2) $1,099,800 Cash payments To suppliers ................................... $(843,300) (3) For operating expenses ....................(196,200) (4) For interest .................................... (5,400) For income tax .............................. (28,800) (5) (1,073,700) Net cash provided by operating activities .............. 26,100 Investing activities Acquisition of long-term debt investment $(175,500) Sale of equipment........................................ 12,600 (6) Net cash used by investing activities....................... (162,900) 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 17-8B (Continued) Calculations: (1) Cash receipts from customers Sales ......................................................................... $1,137,600 Less: Increase in accounts receivable .................. (46,800) $1,090,800 (2) Cash receipts from interest Interest revenue................................................... $9,900 Less: non-cash interest from long-term debt Investments** ........................................... (900) $9,000 (3) 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 (4) Cash payments for operating expenses Operating expenses ............................................ $265,500 Less: Depreciation expense* .............................. (69,300) $196,200 (5) Cash payments for income tax Income tax expense ............................................ $25,200 Add: Decrease in income tax payable ............. 3,600 $28,800 (6) 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 17-8B (Continued) **
Non-cash interest revenue on long-term debt investment Long-term debt investment, end of year ................... $176,400 Less: Purchase price.................................................. (175,500) Non-cash interest revenue........................................ $ 900
Taking It Further: The decrease in cash during the year has been caused primarily by the purchase of the long-term debt 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. Long-term debt investments usually yield returns lower than the interest rate on outstanding debt. The purchase of the investment means that the company is investing in an interestbearing investment that likely generates interest revenue at a lower rate than the interest it pays on outstanding debt. 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 17-9B GALENTI, INC. Cash Flow Statement—Indirect Method Year Ended December 31, 2014
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 trading investments ............ 7,500 Proceeds from sale of trading 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
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PROBLEM 17-9B (Continued) 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. Calculations: (1) Trading investments, end of year.............................. $94,500 Plus: Carrying value of investments sold ($15,000 + $7,500).......................................... 22,500 Less: Trading investments, beginning of year........ (107,000) Payment for purchase of trading investments ......... $ 10,000 Proceeds from the sale of trading investments........ $ 15,000 Cash transactions involving trading 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 Sale of Equipment ................. Equipment ............................................
15,550 49,200
(3) Retirement of note payable Note payable, beginning of year............................... Note issued to purchase equipment ........................ Less: Note payable, end of year .............................. Retirement of note payable.......................................
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8,750 56,000
$ 80,000 70,000 (140,000) $ 10,000
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PROBLEM 17-9B (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 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 17-10B GALENTI, INC. Cash Flow Statement—Direct Method Year Ended December 31, 2014 Operating activities Cash receipts From customers ........................... $263,700 (1) From trading investments (4) ...... 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 Investing activities Sale of equipment ................................ $15,550 (4) 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) (5) Payment of cash dividends* .......... (36,500) (6) Net cash provided by financing activities ........... Net increase in cash ................................................ Cash, January 1........................................................ Cash, December 31 ..................................................
3,500
55,450 47,250 $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)
(2)
(3)
(4)
Cash receipts from customers Sales ............................................................ Less: Increase in accounts receivable.....
$307,500 (43,800) $263,700
Cash payments to suppliers Cost of goods sold ..................................... Add: Increase in inventory ........................ Cost of goods purchased........................... Less: Increase in accounts payable ..........
$ 99,460 9,250 108,710 (8,420) $100,290
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
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 Sale of Equipment ................. Equipment ............................................
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15,550 49,200 8,750 56,000
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PROBLEM 17-10B (Continued) (5) 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
(6) 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
Taking It Further: Increases and decreases in current assets and current liabilities related to operations are not shown directly on the cash flow statement prepared using the direct method. These changes are shown indirectly by matching them against the related revenue or expense item from the income statement. Inventory and accounts payable changes are matched against cost of goods sold to report cash payments to suppliers. An increase in inventory means more goods were purchased than sold, and an increase in accounts payable means that during the year, credit purchases exceeded payments to creditors.
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PROBLEM 17-11B MILK RIVER LTD. Cash Flow Statement – Indirect Method Year Ended December 31, 2014
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 note 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...................................................... Accumulated depreciation (calculated).................... Carrying amount .......................................................
$12,000 (3,500) $ 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, 2014
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. Non-cash 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 The Gap: $1,363 − $454 = $909 Million Le Château: $(11,304) + $6,545 = $(4,759) Thousands
(b)
The Gap appears to be in the stronger financial position. It generates cash from operating activities and has a positive free cash flow. It also shows a profit.
Taking it Further: Le Château appears to be downsizing. Typically, companies that are growing have net cash outflows from investing activities. In the case of Le Château, the lack of profitability and negative cash flows from operating activities likely led to the need to sell off non-current assets to general cash.
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CONTINUING COOKIE CHRONICLE Koebel’s Family Bakery Ltd. Year Ended July 31, 2015
(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
Koebel’s Family Bakery Ltd. Year Ended July 31, 2015
(b)
Coffee Beans Ltd. Year Ended November 30, 2014
$235,279 (157,833) $ 77,446
Coffee Beans Ltd. Year Ended November 30, 2014
$1,137,650 (4,545,728) $(3,408,078)
Koebel’s and Coffee Bean’s cash performance, although not similar are both very strong. Koebel’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 Koebel were modest in comparison.
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CONTINUING COOKIE CHRONICLE (Continued) Coffee Beans’ long-term liabilities increased year by close to $3.2 million in 2014 from 2013. At the same time the cash provided from financing activities totalled $7.4 million. This means there has been a substantial equity investment into Coffee Beans in the last year. In spite of that large increase in investment by shareholders, no dividends were paid during the year. It appears that with the substantial equity investment and its strong cash position Coffee Beans is in a good position to expand and diversify. (d)
Koebel’s 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 Koebel’s was able to pay a dividend of $120,000 to its shareholders and still increase its cash. Investing in Koebel’s will provide Coffee Beans the opportunity to diversify and while increasing the company’s cash flow.
(e)
Before selling shares and/or becoming employed by Coffee Beans Ltd. the Koebel’s should obtain a full set of financial statements. The financial statement 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 Koebel’s 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 last two years, it would be difficult for the Koebel’s to get a return on their investment as shareholders.
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Accounting Principles, Sixth Canadian Edition
BYP 17-1 FINANCIAL REPORTING PROBLEM
(a)
Cash and cash equivalents consist of cash on hand, bank balances and short-term deposits with original maturities of three months or less.
(b) Per Reitmans’ 2012 cash flow statement, cash and cash equivalents decreased by $33,199,000. (c)
The one significant investing activity reported in Reitmans’ cash flow statement was the purchase of property and equipment and intangible assets in the amount of $59,154,000.
(d) The most significant financing activities on Reitmans’ cash flow statement was the payment of dividends in the amount of $52,654,000. (e)
As indicated in note 25 to the financial statements, Reitmans’ had two non-cash transactions: (1) additions to property and equipment and intangible assets included in trade and other payables in the amount of $3,028,000 and (2) ascribed value credited to share capital from exercise of share options in the amount of $2,228,000.
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Accounting Principles, Sixth Canadian Edition
BYP 17-2 INTERPRETING FINANCIAL STATEMENTS (a)
Cash from operating activities Cash used in investing activities Cash from financing activities Increase in cash for the year
$7.0 (9.2) 2.2 $ 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 $7 million in cash from operating activities in 2012. The fact that operating activities are generating a significant cash flow means there is less cause for concern. However, $57.5 million of bank indebtedness is 8.2 times the cash flow generated from operations, and 4.4 times the profit. (c) The profit for the year was calculated using accrual accounting. Decreases in non-cash current assets and increases in non-cash current liabilities can result in cash provided from operations lower than the amount of profit reported in the income statement. (d) Free Cash Flow = Cash provided by operating activities − Cash used in investing activities = $7.0 million − $9.2 million = $(2.2) million Free cash flow indicates the amount of discretionary cash flow which Andrew Peller Limited has at its disposal. In this case free cash flow is negative, so there is no discretionary cash flow.
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Accounting Principles, Sixth Canadian Edition
BYP 17-3 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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Accounting Principles, Sixth Canadian Edition
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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Accounting Principles, Sixth Canadian Edition
BYP 17-5 ETHICS CASE
(a)
Other signs of positive performance besides the figure for cash provided by operating activities should be considered by the board in setting the dividend policy. Availability of cash is an important condition for paying a dividend. Profitability is another consideration. The amount of the dividend can be reduced if the dividend payout ratio is too high. Looking into the future, Paradis should also look into addressing any possible contingent liabilities outstanding which could impact the profitability and liquidity of the business.
(b) The stakeholders in this situation are: Phil Monat, president of Paradis Corporation Rick Kwan, controller Rick’s assistant The Board of Directors The shareholders of Paradis Corporation (c)
The president's statement, "We must get that amount above $1 million," puts undue pressure on the controller. This, along with his other statement, "I know you won't let me down, Rick," encourages Rick to do something biased but not necessarily unethical. The president is biased in his request to get a specific accounting result. Controller Rick Kwan's intentional reclassification of interest paid from the operating activities section of the financing activities is biased but also not unethical. The classification of interest paid in the financing activities is allowed under IFRS. On the other hand, it is clear that the intention is to engineer the results to fit a specific criteria to satisfy the President. The classification adopted in prior fiscal years should be followed in the current year for reasons of consistency.
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Accounting Principles, Sixth Canadian Edition
BYP 17-5 (Continued) (d) If the reclassification between cash flow categories is adopted and applied to all prior years reported on the comparative financial statements, it is unlikely that someone will notice because the comparative cash flow statement will be presented on a consistent basis. Any retroactive change in the classification will warrant a note disclosure to the financial statements to that effect. This disclosure will flag the change and may attract inquiries as to the reason for the implementation of the change. An explanation for the need for the change will be necessary to satisfy not only board members but also outside users of the financial statements such as Paradis’ bank. (e)
If Paradis were reporting under ASPE, it would not have the choice to classify interest paid as a financing activity on the cash flow statement. If implemented, the change would be unethical as it is known to be a violation of GAAP. In that case, the request by the President and suggestion by the Controller show unethical behaviour.
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Accounting Principles, Sixth Canadian Edition
BYP 17-6 “ALL ABOUT YOU”– ACTIVITY (b) My Cash Flow Statement Year Ended August 31, 2014 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
2013
$ 8,000 4,000 (4,000) (3,600) (3,000) (4,600) (500)
$ 8,000 3,600 (4,000) (3,200) (3,000) (4,420) (500) (180) (3,700)
(3,700)
(7,500) (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, 2013 Cash, August 31, 2014
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7,500
(7,000) (1,200) (8,200)
7,500 1,500
(1,000) 6,500
1,000 10,000
(4,700) 2,100 ($2,600)
(1,900) 4,000 $2,100
Chapter 17
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BYP 17-6 (Continued) (a)
Your cash position at August 31, 2013 is close to half of the cash you had at September 1, 2012. If you were to maintain the same spending patterns over the next year you could be completely out of cash by August 31, 2014.
(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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Accounting Principles, Sixth Canadian Edition
CHAPTER 18 Financial Statement Analysis ASSIGNMENT CLASSIFICATION TABLE Study Objectives
Questions
1. Identify the need for, and tools of, financial analysis.
1, 2
Brief Exercises 1, 2
2. Explain and apply horizontal analysis.
3, 4, 5, 6
3. Explain and apply vertical analysis.
Exercises 12
Problems Set A 3, 5
Problems Set B 3, 5
3, 4, 5
1, 2, 4,
1, 2
1, 2
5, 6, 7, 8
5, 6
3, 4, 5
2, 3
2, 3
4. Identify and use ratios to analyze liquidity.
9, 10, 11,12, 19
7, 8, 9, 16, 17, 18
6, 7, 12, 13, 14, 15
4, 5, 6, 7, 8, 9
4, 5, 6, 7, 8, 9
5. Identify and use ratios to analyze solvency.
13, 14, 15, 19
10, 11, 12, 16
8, 9, 12, 13, 14, 15
4, 5, 6, 7, 8, 9
4, 5, 6, 7, 8, 9
6. Identify and use ratios to analyze profitability.
16, 17, 18, 19
13, 14, 15, 16, 17
10, 11, 12, 13, 14, 15, 16
3, 4, 5, 6, 7, 8, 9
3, 4, 5, 6, 7, 8, 9
7. Recognize the limitations of financial statement analysis.
20, 21, 22,
18
16
1, 2, 6
1, 2, 6
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Chapter 18
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Accounting Principles, Sixth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Prepare horizontal analysis and identify changes.
Moderate
60-70
2A
Interpret horizontal and vertical analysis.
Moderate
25-30
3A
Prepare vertical analysis, calculate profitability ratios, and compare.
Moderate
50-60
4A
Calculate ratios.
Moderate
35-40
5A
Calculate and evaluate ratios.
Moderate
70-80
6A
Calculate and evaluate ratios.
Moderate
45-55
7A
Evaluate ratios.
Moderate
25-35
8A
Evaluate ratios.
Moderate
15-20
9A
Calculate missing information.
Complex
25-35
1B
Prepare horizontal analysis and identify changes.
Moderate
60-70
2B
Interpret horizontal and vertical analysis.
Moderate
25-30
3B
Prepare vertical analysis, calculate profitability ratios, and compare.
Moderate
50-60
4B
Calculate ratios.
Moderate
35-40
5B
Calculate and evaluate ratios.
Moderate
70-80
6B
Calculate and evaluate ratios.
Moderate
45-55
7B
Evaluate ratios.
Moderate
25-35
8B
Evaluate ratios.
Moderate
15-20
9B
Calculate missing information.
Complex
25-35
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material Study Objectives 1. Identify the need for, and tools of, financial analysis. 2. Explain and apply horizontal analysis. 3. Explain and apply vertical analysis. 4. Identify and use ratios to analyze liquidity.
Knowledge BE18-1
Comprehension Q18-1 Q18-2 BE18-2 E18-12
Application
Analysis P18-3A P18-5A P18-3B P18-5B
Q18-3
Q18-4 Q18-5 Q18-6
Q18-7
Q18-5 Q18-6 Q18-8 Q18-12 Q18-19 BE18-7 E18-12
BE18-3 BE18-4 BE18-5 E18-1 BE18-5 BE18-6 E18-3 BE18-17 E18-6 E18-13 P18-4A P18-4B
5.
Identify and use ratios to analyze solvency.
Q18-13 BE18-16
Q18-14 Q18-15 Q18-19 BE18-10 E18-12
BE18-11 E18-8 E18-13 P18-4A P18-4B
6.
Identify and use ratios to analyze profitability.
Q18-16 BE18-16
Q18-19 BE18-13 E18-12
BE18-14 BE18-17 E18-10 E18-13 P18-4A P18-4B
7.
Recognize the limitations of financial statement analysis.
Q18-20 Q18-22
E18-2 E18-4 P18-1A P18-2A E18-4 E18-5 P18-2A Q18-10 Q18-11 BE18-8 BE18-9 BE18-18 E18-7 E18-14 E18-15 P18-5A BE18-12 E18-9 E18-14 E18-15 P18-5A P18-6A P18-7A Q18-17 Q18-18 BE18-15 E18-11 E18-14 E18-15 E18-16 P18-3A P18-5A P18-6A Q18-21 BE18-18 E18-16 P18-1A P18-2A
Broadening Your Perspective
BYP18-4
Q18-9 BE18-16
BYP18-5
BYP18-1 BYP18-2 BYP18-3
Synthesis
Evaluation
P18-1B P18-2B
P18-3A P18-2B P18-3B P18-6A P18-7A P18-8A P18-9A P18-5B P18-6B P18-7B P18-8B P18-9B P18-8A P18-9A P18-5B P18-6B P18-7B P18-8B P18-9B P18-7A P18-8A P18-9A P18-3B P18-5B P18-6B P18-7B P18-8B P18-9B P18-6A P18-1B P18-2B P18-6B
BYP18-6
Continuing Cookie Chronicle
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
ANSWERS TO QUESTIONS 1.
(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.
2.
(a) The three common tools used in analysis are: horizontal analysis, vertical analysis and ratio analysis. (b) 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.
3.
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. 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.
4.
(a) An answer cannot be calculated when there is no value in a base year, because division by 0 is mathematically impossible. (b) An answer cannot be calculated when there is a negative value in a base year and a positive value in the next year.
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Chapter 18
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Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 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, vertical analysis compares data within the same year. Horizontal and vertical analysis are similar in that they both use percentages to demonstrate number relationships.
6.
Analysis of Facebook’s 2012 results, its first year’s results after it became a public company, will be limited at best. A vertical analysis of the income statement and balance sheet might be useful to determine the company’s performance for the current year. However, any horizontal analysis would not be useful as there are no comparative prior years as a public company and caution would have to be exercised in comparing Facebook as a public company in 2012 to its performance as a private company in prior years.
7.
(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%.
8.
Yes, it can. By converting the accounting numbers to percentages, companies of vastly different sizes can be more readily compared.
9.
(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.
10.
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.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 11.
Aubut Corporation could have a liquidity problem in comparison to its competition. Before sounding the alarm, it should be established that Aubut’s nearest competitor is truly comparable in all respects to Aubut. For example, Aubut could be selling to customers on account using Aubut credit cards and this would increase accounts receivable. The competitor might have very little accounts receivables if they only accept national credit cards and debit cards. As well, the nature of the inventory being sold should be comparable. If the competitor sells food, and Aubut does not, this could render the comparisons concerning inventory turnover unfair. Finally, despite the comparisons, it must be noted that an operating cycle of 30 days, albeit worse than that of the competition, is still an excellent operating cycle and is not necessarily indicative of an overall liquidity problem.
12.
From the list of liquidity ratios given in your 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.
13.
(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.
14.
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).
15.
One of the solvency ratios, the debt to total assets ratio generates a percentage which, when the result is low, it is interpreted as 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.
16.
(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.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 17.
Yes, McDonald’s has made effective use of leverage. McDonald’s earned a higher rate of return using borrowed money than it cost them to service the debt. This increased the return to the shareholders.
18.
An investor interested in growth would want to invest in a company with a high price-earnings ratio and a low dividend payout. The high price-earnings ratio indicates that investors expect this company’s profits to grow and are willing to pay for this anticipated future growth. A low payout ratio generally indicates that the company has growth opportunities and is choosing to reinvest profits to finance this future growth rather than paying earnings out as dividends to the shareholders. An investor interested in shares with income potential would likely choose a company that pays out more of its profits as dividends and therefore has a higher dividend payout ratio.
19.
(a) Asset turnover (b) Acid-test ratio (c) Operating cycle (d) Return on equity (e) Interest coverage
20.
1.
Alternative accounting policies. Differences in accounting policies can make intercompany comparisons difficult and misleading.
2.
Comprehensive income. 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—fulsome, 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.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
QUESTIONS (Continued) 21.
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.
22.
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.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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
1. Analysis of a company's dividend history 2. Comparison of differentsized companies 3. Comparison of gross profit to net sales among competitors 4. 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 2014 80% 136% 126% 220% 129%
Cash Accounts receivable Inventory Prepaid expenses Total current assets
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2013 150% 115% 122% 0% 119%
2012 100% 100% 100% 100% 100%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-4 Cash Accounts receivable Inventory Prepaid expenses Total current assets
2014 (47%) 18% 4% n/a 8%
2013 50% 15% 22% (100%) 19%
2014 125%
2013 96%
2012 100%
110% n/a 117%
98% n/a 100%
100% 0% 100%
BRIEF EXERCISE 18-5 (a) Current assets Property, plant, and equipment Goodwill Total assets (b) 2014 Current assets Property, plant, and equipment Goodwill Total assets
Amount $1,530,000 3,130,000
Percentage 32.2% 65.9%
90,000 $4,750,000
1.9% 100.0% 2013
Current assets Property, plant, and equipment Goodwill Total assets
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Amount $1,175,000 2,800,000
Percentage 28.8% 68.7%
100,000 $4,075,000
2.5% 100.0%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-5 (Continued) (b)
Current assets Property, plant, and equipment Goodwill Total assets
2012 Amount Percentage $1,225,000 30.1% 2,850,000 69.9% $4,075,000
0.0% 100.0%
BRIEF EXERCISE 18-6 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.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-7 (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 a fewer number of 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 a fewer number of 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.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-8 (a)
(1) and (2) Receivables turnover Collection period
Receivables turnover Collection period
2014 $6,420,000 = = ($850,000 + $750,000) ÷ 2 =
365 ÷
=
8.0
2013 $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
2014 $4,540,000 = = ($1,020,000 + $980,000)÷2
Days sales in = inventory
Inventory turnover
4.5
=
2013 $4,550,000 = = ($980,000 + $840,000) ÷ 2
Days sales in = inventory
Solutions Manual .
365 ÷
365 ÷
18-13
5.0
=
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-8 (Continued) (a) (Continued) (5) Operating cycle = Days sales in inventory + Collection period 2014: 127 days = 81 days + 46 days 2013: 114 days = 73 days + 41 days (b)
Management should be concerned with the fact that inventory is moving more slowly in 2014 than it did in 2013, 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 2014. 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.
BRIEF EXERCISE 18-9 Holysh’s liquidity is deteriorating even though its current and acid-test ratios are higher. The receivables are being collected more slowly, and it is taking longer to sell the inventory. These less-liquid assets are a higher proportion of the current assets than last year.
Solutions Manual .
18-14
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-10 (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 and has raised its equity "buffer and it also means that the company's ability to meet interest payments as they come due has strengthened.
BRIEF EXERCISE 18-11 ($ in thousands) (a)
(b)
Debt to = total assets
$3,032,480 $7,300,310
=
$910,905* Interest = = coverage $64,038 *$910,905 = $613,934 + $232,933 + $64,038
(c) Free cash flow
Solutions Manual .
41.5%
14.2
times
= $973,838 – $349,172 = $624,666
18-15
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-12 (a)
The debt to total assets ratio for Culleye Corporation has deteriorated, because there is proportionately more debt compared to total assets than there was in 2013. Colleye’s interest coverage ratio has improved. The business can pay its interest expense more times in 2014 than it did in 2013.
(b) While interest coverage is important, it is a reflection of a single year’s performance. On the other hand, debt, especially non-current debt carries over from year to year. The improvement in the interest coverage ratio is overshadowed by the deterioration in the debt to total assets ratio. Consequently, the overall solvency of Colleye has deteriorated in 2014.
Solutions Manual .
18-16
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-13 (a)
Improvement: An increase in the gross profit margin would be viewed as an improvement because it means that a greater percentage of net sales is going towards profit.
(b) Deterioration: A decrease in asset turnover would be viewed as deterioration because it means the company has become less efficient at using its assets to generate sales. (c)
Improvement: An increase in the return on equity would be viewed as an improvement because it means more profit was generated per dollar of equity investment.
(d) Deterioration: A decrease in earnings per share would be viewed as deterioration because the profit for each share is smaller amount. (e)
Deterioration: A decrease in profit margin would be viewed as deterioration because there is less profit as a percentage of net sales compared to the previous year.
Solutions Manual .
18-17
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-14 ($ in millions) $31,250 – $23,894 $31,250
(a) Gross profit margin
=
(b) Profit margin
=
(c) Asset turnover
=
$31,250 = ($16,841 + $17,428) ÷ 2
(d) Return on assets
=
$769 = ($16,841 + $17,428) ÷ 2
$769
=
= 23.5% 2.5%
$31,250 1.8 times
4.5%
BRIEF EXERCISE 18-15 Ignoring all other factors, if an investor wants to purchase shares for growth, Apple would be the better choice of the two. Although Apple does not pay a dividend, as indicated by its dividend payout ratio, it is viewed to have more future earnings potential than Bank of Montreal, based on its higher price-earnings ratio. If instead, the investor is looking for income, Bank of Montreal would be a better choice since the bank pays more than half of its profits as dividends.
Solutions Manual .
18-18
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-16 Ratio Acid-test ratio 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 18-17 (a) 2014
Average accounts receivable
=
$1,090 + $965 2
= $1,027.50
2013
Average accounts receivable
=
$965 + $880 2
=
2014
Average total assets
=
$27,510 + $26,760 2
2013
Average total assets
=
$26,760 + $23,815 = $25,287.50 2
2014
Average shareholders' equity
2013
Average shareholders' equity
Solutions Manual .
$922.50
= $27,135.00
$12,830 + $12,575 =
2
=
$12,702.50
=
$11,752.50
$12,575 + $10,930 =
18-19
2
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-17 (Continued) (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 ratios 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 .
18-20
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE 18-18 (a)
Stirling Corporation $200,000 Inventory = = 20 turnover $10,000
Inventory turnover
(b)
=
Bute Inc. $180,000 $12,000
=
15
times
times
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 .
18-21
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO EXERCISES EXERCISE 18-1 DRESSAIRE INC. Balance Sheet 2014 $120,000 400,000 90,000
2013 $ 80,000 350,000 70,000
2012 $100,000 300,000 65,000
145,000 150,000 135,000
125,000 115,000 120,000
150,000 100,000 85,000
(a) Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings
2014 120% 133% 138%
2013 80% 117% 108%
2012 100% 100% 100%
97% 150% 159%
83% 115% 141%
100% 100% 100%
(b)
2014
Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings
Current assets Non-current assets Current liabilities Non-current liabilities Common shares Retained earnings
Solutions Manual .
2013
50% 14% 29%
(20%) 17% 8%
16% 30% 13%
(17%) 15% 41%
18-22
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-2 Net sales increased by 10% in 2013 but then fell back within 1% of the level of net sales of 2012. 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 2013 than sales but declined in 2014 below the 2012 level. This means that operating expenses were brought under control in 2014, 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 rose faster than income tax over the three years, we can conclude that profit increased as well. 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 shown in red are taken from your text; the subtotals and 2013 and 2014 numbers are calculated based on the hypothetical numbers from 2012 and the percentages given in the text. Net sales Cost of goods sold Gross profit Operating expenses Profit from operations and before income tax Income tax expense Profit
Solutions Manual .
2014 101% $2,020 100% 1,200 820 99% 495 325
2013 110% $2,200 111% 1,332 868 112% 560 308
2012 100% $2,000 100% 1,200 800 100% 500 300
106%
105%
100%
48 $ 277
18-23
47 $ 261
45 $ 255
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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
2014 Amount Percent $800,000 100.0% 550,000 68.8% 250,000 31.3% 175,000 21.9%
2013 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 .
18-24
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-4 (a) LULULEMON ATHLETICA INC. Balance Sheet January 29, 2012, and January 30, 2011 (in U.S. thousands)
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
2012
2011
Increase (Decrease) Amount Percent
$527,093 207,541 $734,634
$389,279 110,023 $499,302
$137,814 97,518 $235,332
35.4% 88.6% 47.1%
$103,439 25,014 128,453 606,181
$85,364 19,645 105,009 394,293
$ 18,075 5,369 23,444 211,888
21.2% 27.3% 22.3% 53.7%
$734,634
$499,302
$235,332
47.1%
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.
Solutions Manual .
18-25
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-4 (Continued)
(b) LULULEMON ATHLETICA INC. Balance Sheet January 29, 2012, and January 30, 2011 (in U.S. thousands)
Assets Current assets Non-current assets
2012 Amount Percent $527,093 71.7% 207,541 28.3%
Total assets
$734,634
100.0%
$499,302
100.0%
Liabilities and Shareholders' Equity Current liabilities Non-current liabilities Total liabilities Shareholders' equity Total liabilities and shareholders' equity
$103,439 25,014 128,453 606,181
14.1% 3.4% 17.5% 82.5%
$ 85,364 19,645 105,009 394,293
17.1% 3.9% 21.0% 79.0%
$734,634
100.0%
$499,302
100.0%
(c)
2011 Amount Percent $389,279 78.0% 110,023 22.0%
The two most significant changes from 2011 to 2012 include: the more than 53% horizontal increase in shareholders’ equity and the nearly double (more than an 88% horizontal increase) of non-current assets. It is interesting that noncurrent assets increased without a commensurate increase in debt; indicating that it was likely financed primarily by the increase in equity. There were also stronger increases in current assets than the increases in current liabilities, improving liquidity.
Solutions Manual .
18-26
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-5 If we make the assumption that there are no other factors impacting the income statement than those stated in the problem, then we can determine the vertical percentage of profit for each year as follows: 2012: 100.0% – 59.4% – 19.6% – 4.2% = 16.8% 2011: 100.0% – 60.5% – 20.4% – 3.8% = 15.3% 2010: 100.0% – 60.0% – 20.0% – 4.0% = 16.0% It would appear that profit declined as a percentage of net sales between 2010 and 2011, and increased slightly in 2012.
Solutions Manual .
18-27
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-6 ($ in millions) (a) 2014 Working capital = $1,430 – $890 = $540
= $1,314 – $825 = $489
Current ratio = 1.61:1 ($1,430 $890)
= 1.59:1 ($1,314 $825)
Acid-test ratio = 0.86:1 [($30 + $55 + $676) $890]
= 0.89:1 [($91 + $60 + $586) $825]
Receivables turnover = 6.6 times ($4,190 [($676 + $586) ÷ 2])
= 7.3 times ($3,940 [($586 + $496) ÷ 2])
Collection period = 55 days (365 ÷ 6.6 times)
= 50 days (365 ÷ 7.3 times)
Inventory turnover = 5.0 times ($2,900 [($628 + $525) ÷ 2])
= 4.8 times ($2,650 [($525 + $575) ÷ 2])
Days sales in inventory = 73 days (365 ÷ 5.0 times)
= 76 days (365 ÷ 4.8 times)
Operating cycle = 128 days (73 + 55)
= 126 days (76 + 50)
(b) Working capital Current ratio Acid-test ratio Receivables turnover Collection period Inventory turnover Days sales in inventory Operating cycle
Solutions Manual .
2013
Better Better Worse Worse Worse Better Better Worse
18-28
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-7 (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.
Solutions Manual .
18-29
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-8 (a)
Debt to total = assets Free cash flow Interest coverage
=
=
Debt to total = assets Free cash flow
Interest coverage
(b)
2014 $2,177 $3,886
=
56.0%
$400
=
$450
($406 + $14 + $174) $14
=
42.4 times
$850
2013 $1,959 $3,708
=
52.8%
– $300
=
$280
($375 + $27 + $152) $27
=
20.5 times
= $580
=
Debt to total assets Free cash flow Interest coverage
Solutions Manual .
–
Worse Better Better
18-30
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-9 (a)
The debt to total assets has weakened over the past three years.
(b)
The interest coverage has improved over the past three years.
(c)
The company’s solvency initially appears to be worsening as evidenced by its increased reliance on debt. However, its interest coverage ratio is improving, so the company appears to be able to handle the increased level of debt. Overall, its solvency appears to be relatively stable given the differing directions of the company’s debt to total assets and interest coverage ratios. However, the trend of an increasing debt to total assets ratio is not a good one and should be watched carefully particularly because the interest coverage is still quite low.
Solutions Manual .
18-31
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-10 (a) ($ in thousands) 2014 Gross profit margin
2013
$500 – $375 = 25.0% $500
Profit margin
$33.5 $500
Asset turnover
$500 ($350 + $275) 2
Return on assets
$33.5 ($275 + $350) 2
= 6.7%
=
1.6 times
= 10.7%
Profit margin Asset turnover Return on assets Return on equity
Solutions Manual .
= 27.5%
$30.0 $400
= 7.5%
$400 1.5 = times ($275 + $274.467) 2
$30.0 = 10.9% ($275 + $274.467) 2
$33.5 Return on = 28.7% equity ($133.5 + $100) 2
(b) Gross profit margin
$400 – $290 $400
$30.0 ($100 + $50) 2
= 40.0%
Worse Worse Better Worse Worse
18-32
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-11 (a)
Talisman Energy is more profitable. Its profit margin of 16.6% is significantly higher than that of Suncor’s, at 11.7%. In addition, its return on equity of 14.6% is also much larger than that of Suncor’s, at 11.7%. Note that earnings per share are not comparable between companies because of differing capital structures.
(b)
Investors favour Talisman Energy over Suncor. Talisman has a higher price-earnings ratio—11.6 times earnings compared to Suncor’s 9.6 times. Talisman’s higher profitability picture in the current period leads investors to believe it has a better opportunity for future profitability than Suncor.
(c)
Investors would purchase shares in Talisman for growth purposes. The payout ratio is also higher with Talisman and so investors expecting higher dividend income would invest in Talisman over Suncor.
Solutions Manual .
18-33
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-12 Ratio Acid-test Asset turnover Current ratio Debt to total assets Gross profit margin Interest coverage Inventory turnover Operating cycle Profit margin Receivables turnover Return on assets Return on equity (c)
(a) (b) Classification Higher Result L B P B L W S B P B S B L B L B P B L B P B P W
The comparison that was done in part (b) was intercompany comparison.
Solutions Manual .
18-34
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-13 ($ in thousands except for share price) (a)
(b)
1.
Asset turnover
P
=
2.
Current ratio
L
=
$1,017,325 ($516,180 + $519,842) ÷ 2 $342,373
= 1.4
$238,434 3.
Debt to total assets
4.
Earnings per share
5.
Free cash flow
6.
S
=
$246,713 $516,180
= 47.8%
P
=
$11,346 24,874
=
S
=
$18,441
S
=
$11,346 + $212 + $2,682 67.1 = times $212
Priceearnings ratio P
=
Interest coverage
7.
= 2.0 times
8.
Profit margin
9.
Return on assets
$12.29
$ 43,201
= ($24,760)
= 27 times
$0.46
P
=
$11,346 $1,017,325
P
=
$11,346 = 2.2% ($516,180 + $519,842) ÷ 2
P
=
$11,346 = 4.3% ($263,120 + $258,969) ÷ 2
Return on 10. equity
Solutions Manual .
–
$0.46
18-35
= 1.1%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-14 (a)
Asset turnover is calculated as: Net sales ÷ average total assets. So 3 × total assets of $100,000 = Net sales of $300,000.
(b)
If gross profit is 40%, then cost of goods sold is 60% of net sales. $300,000 × 60% = $180,000.
(c)
Gross profit is 40% of net sales of $300,000 or $120,000 or sales of $300,000 less cost of goods sold calculated in (b) of $180,000 = $120,000.
(g)
Profit margin is 15% of net sales of $300,000 or $45,000.
(e)
The income taxes rate is 25% and so profit before income taxes is profit of $45,000 ÷ .75 or $60,000.
(f)
The income taxes rate is 25% × profit before income taxes of $60,000 = $15,000 or Profit before income taxes of $60,000 less profit of $45,000 = income tax expense of $15,000.
(d)
Operating expense is derived from deducting from gross profit of $120,000 profit before income taxes of $60,000 = $60,000.
Summary of results: RIVERDANCE LIMITED Income Statement Year Ended December 31, 2014 Net sales Cost of goods sold Gross profit Operating expenses Profit before income taxes Income tax expense Profit
Solutions Manual .
18-36
$300,000 180,000 120,000 60,000 60,000 15,000 $ 45,000
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-15 (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 assets = total liabilities of $560,000 less current assets 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 .
18-37
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-15 (Continued) Summary of results: MAIN RIVER CORP. Balance Sheet December 31, 2014 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 .
18-38
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE 18-16 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 analyse 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 2014. If, however, we analyse the change in the total comprehensive income, we see a significant increase in 2013, compared to a significant decrease in profit. Total comprehensive income declined significantly in 2014 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 .
18-39
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM 18-1A (a)
WESTJET AIRLINES LTD. Income Statement Horizontal Analysis Year Ended December 31 2011 2010 Revenue 120% 102% Operating expenses 125% 107% Profit for operations 88% 65% Other expenses 129% 153% Profit before income taxes 82% 52% Income tax expense 77% 56% Profit 84% 51%
2009 89% 92% 72% 195% 54% 51% 55%
2008 100% 100% 100% 100% 100% 100% 100%
2009
2008
139% 89% 103%
122% 94% 102%
100% 100% 100%
114% 85% 95% 120%
102% 94% 97% 113%
100% 100% 100% 100%
103%
102%
100%
WESTJET AIRLINES LTD. Balance Sheet Horizontal Analysis December 31 2011 2010 Assets Current assets 154% Non-current assets 87% Total assets 106% Liabilities & Shareholders’ Equity Current liabilities 127% Non-current liabilities 80% Total liabilities 96% Shareholders' equity 126% Total liabilities and shareholders' equity 106%
Solutions Manual .
18-40
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-1A (Continued) (b) In a horizontal analysis of the income statement over the
last four years, WestJet’s increase in revenue has not translated into increased profit. The 25% growth in operating expenses was higher than the 20% growth in revenue over the four years. This is not a positive trend and expenses should be carefully reviewed. Other expenses varied widely over the same period, although these are smaller in dollar amount and by their nature can often vary. Nonetheless, after a significant increase in other expenses in 2009, it is positive to see a reduction of other expenses occurring in subsequent years. The income tax rate, as a percentage of profit before income taxes, has also increased. This is not a controllable expense by the company however, but it does have an impact on overall profit growth. Because of the impact of all of the factors identified above, profit for WestJet has declined 16% over the four year period. In a horizontal analysis of the balance sheet, current assets have increased by 54%, outpacing the increase the 27% increase in current liabilities over the same period. It is interesting to note that current assets have grown faster than revenue. Further analysis as to the reason for this increase (that is, an increase in cash, receivables, etc.) would be helpful. Both non-current assets and non-current liabilities have declined over the four-year period, while shareholders’ equity has increased.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-1A (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. In addition, after considering the additional information provided in the Taking It Further section, it is unlikely that meaningful percentage changes could be assessed between 2009 and 2010 without a full understanding of the impact of the move to IFRS. This is even more important when interpreting trends in a horizontal percentage of the base-year amount.
Taking It Further: The horizontal analysis should be interpreted with additional information and disclosure 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 risks drawing conclusions from information that has not been prepared using consistent accounting practices and standards, which could in turn lead to the wrong conclusions.
Solutions Manual .
18-42
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-2A (a)
The horizontal and vertical analysis statements demonstrate that the company’s control over its cost of goods sold was relatively steady in 2012 and 2013. However, cost of goods sold increased significantly as a percentage of net sales in 2014, and is increasing faster than net sales. Operating expenses also increased, but a slower pace than that exhibited by cost of goods sold, although the trend of increasing costs faster than the increase in sales is worrisome.
(b)
Most expenses have grown as much or more than revenue. This is not the case for interest expense. Interest expense has reduced substantially 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 a major increase of 140% over a three 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 .
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-2A (Continued) Taking It Further: Although the profit before income taxes has remained constant as a percentage of each year’s net sales, over the last four years, the amount of sales has increased in absolute terms each year, as shown in the horizontal analysis statement. Since profit before income taxes is a constant percentage of net sales, profit before income tax has also increased by the same amount, 140%, as shown in the horizontal analysis.
Solutions Manual .
18-44
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-3A (a)
CHEN AND CHUAN COMPANIES Income Statements Year Ended December 31, 2014
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% 18-45
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-3A (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 a 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 intercompany comparison.
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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-3A (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 .
18-47
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-4A Liquidity Ratios 1. Working capital 2.
Current ratio
=
3.
Acid-test ratio
=
4.
–
$318,900
$208,500
$318,900 $208,500 $68,100 + $107,800 $208,500
=
$110,400
=
1.5
=
0.8
$1,948,500 Receivables = = turnover ($113,200* + $107,900**)÷2 * $113,200 = $107,800 + $5,400 ** $107,900 = $102,800 + $5,100
5.
Collection period
=
6.
Inventory turnover
=
7.
Days sales in inventory
=
8.
Operating cycle
Solutions Manual .
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
18-48
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-4A (Continued) Solvency Ratios Debt to 9. total assets
10.
11.
=
$312,500 $998,200
=
$407,000* Interest = = coverage $28,000 * $407,000 = $265,300 + $113,700 + $28,000 Free cash flow
=
Profitability Ratios Gross profit 12. = margin
$ 316,200 –
$161,300
$154,900
$923,000 $1,948,500
=
47.4%
=
13.6%
Profit margin
=
$265,300 $1,948,500
14.
Asset turnover
=
$1,948,500 = ($998,200 + $852,800) ÷ 2
Solutions Manual .
14.5 times
=
13.
15. Return on assets
31.3%
$265,300 = ($998,200 + $852,800) ÷ 2 =
18-49
2.1 times
28.7%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-4A (Continued) Profitability Ratios (Continued) 16.
Return on equity
=
$265,300 ($685,700 + $465,400) ÷ 2
= 46.1%
17.
Earnings per share
=
$265,300 [60,000 − (4,000 ÷ 2)]
= $4.57
$5,000
= 1.9%
18. Payout ratio =
÷
$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 amongst the Cable Company’s 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 .
18-50
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5A (a) and (b) 2013
(b) Change
= $177,000
$343,000 – $182,000 = $161,000
F
= 1.9
$343,000 $182,000
NC
2014
Liquidity Ratios
– $187,000
1. Working capital
$364,000
Current 2. ratio
=
$364,000 $187,000
Acid-test 3. ratio
=
$209,000* $195,000* = 1.1 = 1.1 $187,000 $182,000 * $209,000 = $70,000 + $45,000 + $94,000 *$195,000 = $65,000 + $40,000 + $90,000
Receivables 4. turnover =
Collection 5. period
$675,000 = 7.0 ($98,000* + $95,000**)÷2 *$98,000 = $94,000 + $4,000 **$95,000 = $90,000 + $5,000
times
= 1.9
$630,000 = 6.8 ($95,000* + $91,000**)÷2 *95,000 = $90,000 + $5,000 **$91,000 = $88,000 + $3,000
NC
times
F
days
F
= 365
Solutions Manual
÷
7.0
= 52
18-51 .
days
365
÷
6.8
= 54
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5A (Continued) (a) and (b) (Continued) Liquidity Ratios 2014 (Continued) $620,000 Inventory 6. = = 4.9 times turnover ($130,000 + $125,000) ÷ 2
7.
Days sales in inventory
8.
Operating = cycle
=
365
÷
4.9
74 days
+
52 days
Solutions Manual
= 74
= 126 days
18-52 .
days
(b) Change
2013 $575,000 = 5.2 times ($125,000 + $97,000) ÷ 2
365
÷
5.2
70 days
+
54 days
= 70
U
days
U
= 124 days
U
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5A (Continued) (a) and (b) (Continued)
2014 Solvency Ratios Debt to 9. = total assets
10.
Interest coverage
11.
Free cash flow
=
=
$377,000 $754,000
(b) Change
2013 = 50.0%
$332,000 $648,000
=
51.2%
F
$121,000* $105,000* = 3.5 times = 5.3 times $35,000 $20,000 *$121,000 = $64,000 + $22,000 + $35,000 *$105,000 = $65,000 + $20,000 + $20,000
$73,500
Solutions Manual
– $115,500
= $(42,000)
18-53 .
$129,000 – $35,000 =
$94,000
Chapter 18
U
U
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5A (Continued) (a) and (b) (Continued)
2014
(b) Change
2013
Profitability Ratios Gross profit 12. = margin
$280,000 $900,000
= 31.1%
$265,000 $840,000
= 31.5%
U
13.
Profit margin
=
$64,000 $900,000
= 7.1%
$65,000 $840,000
= 7.7%
U
14.
Asset turnover
=
$900,000 $840,000 = 1.3 times = 1.3 times NC ($754,000 + $648,000) ÷ 2 ($648,000 + $630,000) ÷ 2
15.
Return on assets
=
$64,000 = 9.1% ($754,000 + $648,000) ÷ 2
$65,000 = 10.2% ($648,000 + $630,000) ÷ 2
$64,000 = ($377,000 + $316,000) ÷ 2 = 18.5%
$65,000 ($316,000 + $259,000) ÷ 2 = 22.6%
Return on 16. equity
Solutions Manual
18-54 .
Chapter 18
U
U
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5A (Continued) (a) and (b) (Continued) Profitability Ratios (Continued) Earnings 17. = per share
$64,000 20,000
18. Payout ratio =
$3,000
2014
÷
(b) Change
2013 = $3.20
$65,000 20,000
$64,000 = 4.7%
$8,000
÷
$65,000
= $3.25
U
= 12.3%
U
(c) (1) Liquidity: Stayed essentially the same The overall liquidity of Click and Clack is slightly better with respect to the receivables turnover, but worse for inventory turnover than the previous year, but the changes are small. (2) Solvency: Deteriorated Although the debt to total assets ratio improved slightly, the interest coverage ratio worsened. A large amount of cash was used in investing activities during 2014 which in turn increased the debt and corresponding interest charges. Free cash consequently turned negative and the interest coverage ratio has deteriorated. (3) Profitability: Deteriorated Profitability has decreased slightly. Profit was mostly affected by the large increase in interest charges. This explains why the gross profit margin decreased slightly but the profit margin decreased dramatically. The return on assets declined correspondingly. Solutions Manual
18-55 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5A (Continued) Taking It Further: The problem is employing intracompany comparison. It is hard to say which is more useful— intercompany or intracompany comparisons—as both provide valuable information. When two companies in the same industry are compared, then intercompany comparisons can be very useful. A business might obtain feedback that they are doing well from an intracompany analysis, but may not be doing as well on an intercompany comparison, possibly failing to keep pace with pricing increases or cost control opportunities that the company’s competitors are taking advantage of.
Solutions Manual
18-56 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-6A (a) ($ in millions of CAD dollars for Tim Hortons and US dollars for Starbucks) Tim Hortons
Liquidity Ratios
Starbucks
1.
Current ratio
=
$1,009.1 $491.5
= 2.1
2.
Receivables turnover
=
$2,536.5 $181.0
= 14
times
Collection period
=
365
= 26.0
days
Inventory turnover
=
$1,527.4 $90.6
= 16.9
times
Days sales in inventory
=
365
÷ 16.9 = 21.6
days
365
÷
21.6
+ 26.0 = 47.6
days
55.3
3.
4.
÷
14
$3,794.9 $2,075.8
= 1.8
$11,700.4 $344.6
= 34
times
= 10.7
days
= 6.6
times
= 55.3
days
+ 10.7 = 66.0
days
365
÷
34
$4,949.3 $754.6 6.6
Operating cycle =
Solutions Manual
18-57 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-6A (Continued) (a) (Continued) Solvency Ratios Debt to total 5. assets
Tim Hortons =
$1,039.1 $2,481.5
= 41.9%
Starbucks $2,973.1 $7,360.4
= 40.4%
6.
= Interest $647.1 + $26.6 +$200.9 32.9 $1,248.0 + $33.3 +$563.1 55.4 = = coverage times times $26.6 $33.3 Profitability Ratios Gross profit 7. margin $1,009.1 $6,751.1 = = 39.8 % = 57.7% $2,536.5 $11,700.4 Profit 8. margin = $647.1 $1,248.0 = 25.5% = 10.7% $2,536.5 $11,700.4 Asset 9. turnover = $2,536.5 $11,700.4 = 1.1 times = 1.7 times $2,287.9 $6,873.2 Return on 10. assets = Return on 11. equity
=
Solutions Manual
$647.1 $2,287.9
= 28.3%
$1,248.0 $6,873.2
= 18.2%
$647.1 $1,349.1
= 48.0%
$1,248.0 $4,034.8
= 30.9%
18-58 .
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-6A (Continued) (b)
Liquidity: When looking at the liquidity ratios, one can conclude that Tim Hortons is far more liquid than Starbucks. Where there is a larger discrepancy in the performance is in the collection of accounts receivable. It is taking Tim Hortons more than twice as much time to collect accounts receivable compared to Starbucks. However, Tim Hortons is still collecting its receivables in less than 30 days. Since the receivables are from franchisees, the difference might be caused by a different credit policy offered to franchisees between the two businesses. Tim Horton has also outpaced Starbucks for its inventory turnover, although this might be caused by the items that are not food related that are held in inventory by Starbucks. Solvency: The debt to total assets ratio is similar between Tim Hortons and Starbucks. Where Starbuck’s is noticeably better, is in its ability to pay interest. Profitability: Tim Hortons is more profitable than Starbucks on all profitability ratios except its gross profit margin and asset turnover.
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-7A (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. 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). When compared to the turnover for Supplies Unlimited, it appears that Fournitures Ltée is turning over its inventory much faster than its competition. (c) Supplies Unlimited’s current ratio could be higher than Fournitures Ltée’s because, in spite of its slower inventory turnover. It could also have a higher level of prepaid expenses or similar type of current assets.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-7A (Continued) (d) Fournitures Ltée’s 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%. This percentage is still very good in general. The other ratio that pinpoints solvency is the times interest earned ratio. In this case, since Fournitures Ltée has proportionately more debt, it is not surprising to note that it has a lower times interest earned 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 its 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, Sixth Canadian Edition
PROBLEM 18-7A (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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Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-8A
(a) Potash is more liquid. Its inventory and receivables turnover much faster than do Agrium’s. Consequently, its operating cycle is also much better than Agrium’s. Its current ratio is not as strong as that of Agrium, but it is possible that Agrium’s current ratio is somewhat inflated by slow moving receivables and/or inventory. (b) Agrium is more solvent with a lower debt to total assets ratio and a much better interest coverage ratio than Potash. (c) Overall, Potash is far more profitable. It has a much higher gross profit margin, profit margin, return on assets, and return on equity. The only ratio that is not in support of Potash’s superior profitability is its asset turnover which is half of Agrium’s. Taking It Further: Based on its higher price-earnings ratio, investors favour Potash over Agrium. This is consistent with Potash’s superior profitability. Investors are likely keeping an eye on short-term returns for their investment.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-9A (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.
(d) Profit before income taxes $155,750 plus interest expense $10,500 = profit from operations of $166,250. (c)
Profit from operations of $166,250 plus operating expenses of $333,750 = gross profit of $500,000.
(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.
Summary of results: SCHWENKE CORPORATION Income Statement Year Ended December 31, 2014 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 .
18-64
$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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-9A (Continued) (h)
Inventory turnover is 8 times and so cost of goods sold of $750,000 ÷ 8 = inventory of $93,750.
(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.
(m) Total liabilities and shareholders’ equity of $833,333 less shareholders’ equity of $650,000 = total liabilities of $183,333. (l)
Total liabilities of $183,333 less non-current liabilities of $120,000 = current liabilities of $63,333.
(i)
Current ratio is 3:1 so current liabilities of $63,333 × 3 = current assets of $190,000.
(j)
Total assets of $833,333 less current assets of $190,000 = property, plant and equipment of $643,333.
(g)
Current assets of $190,000 less cash of $7,500 less inventory of $93,750 = accounts receivable of $88,750.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-9A (Continued)
Summary of results: SCHWENKE CORPORATION Balance Sheet December 31, 2014 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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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-1B
(a) MICRO BREWERY INC. Income Statement Year Ended December 31
Sales revenue Cost of goods sold Gross profit Operating expenses Profit from operations Other income Profit before income taxes Income tax expense Profit
Solutions Manual .
2014 147% 177% 127% 110% 198% 67% 192% 192% 192%
18-67
2013 120% 139% 107% 109% 98% 99% 98% 98% 98%
2012 123% 136% 114% 104% 163% 138% 161% 161% 161%
2011 100% 100% 100% 100% 100% 100% 100% 100% 100%
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-1B (Continued) (a) (Continued) MICRO BREWERY INC. Balance Sheet Horizontal Analysis December 31 2014 Assets Current assets 136% Non-current assets 143% Total assets 141% Liabilities and Shareholders’ Equity Liabilities Current liabilities 98% Non-current liabilities 50% Total liabilities 73% Shareholders’ equity Common shares 1100% Retained earnings 130% Total shareholders’ equity 168% Total liabilities and shareholders' equity 141%
2013
2012
2011
103% 150% 141%
119% 95% 100%
100% 100% 100%
92% 113% 104%
80% 40% 59%
100% 100% 100%
1100% 118% 156%
100% 116% 115%
100% 100% 100%
141%
100%
100%
(b) Micro Brewery has seen some significant changes between 2011 and 2014. In a horizontal analysis of the income statement, other than a slight exception in 2013, we can see that sales revenue has grown over the four-year period. The cost of goods sold also increased during this period, however at a rate faster than sales. That is, sales increased 47% while cost of goods sold increased 77% over the same period. This is not a positive trend and costs and pricing may need to be carefully reviewed.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-1B (Continued) (b) (Continued) Operating expenses on the other hand, only increased by 10% during the four years, resulting in a large increase in the profit from operations between 2011 and 2014. Other income is not a significant dollar amount and by its nature can be expected to vary over the years. Income tax expense increased at the same rate as profit before income taxes, indicating that the company experienced a constant tax rate. The horizontal analysis of the balance sheet adds additional insight into Micro Brewery’s financial performance and position. Current assets have increased by 36% during the period. Further analysis to determine the composition of this increase (that is, an increase in cash, receivables or inventory) would be helpful. However, we can note that this increase is less than the rate of increase in sales revenue over the same four-year period which is positive. It is also more than the increase in current liabilities (36% current assets growth compared to −2% current liabilities growth). There was a significant increase in non-current assets in 2013 indicating that an expansion or acquisition of new equipment likely occurred. This supports the increased revenue we saw in 2014. Total assets increased by 41% during the period. On the liability side, the current liabilities have stayed relatively constant varying only by 2% over the four years. There has been considerable fluctuation in noncurrent liabilities; however, 2012 saw a considerable drop as debt was paid down while 2013 saw a significant increase. This is consistent with the increase in assets during the same period likely requiring an increase in financing. In 2014, the company’s growth supported further repayment of debt.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-1B (Continued) (b) (Continued) Common shares experienced a significant increase in 2013 as new equity was invested into the business; these funds were likely used to finance part of the expansion we speculated about above. Retained earnings have also grown significantly during the period. A reconciliation of this account with the change in profit indicates that dividends must have been paid and these were also increasing each year. (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. In addition, after considering the additional information provided in the Taking It Further section, it is unlikely that meaningful percentage changes could be assessed between 2012 and 2013 without a full understanding of the impact of the move from ASPE to IFRS.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-1B (Continued) Taking It Further: Micro Brewery completed a major expansion and share issue in 2013 as it went from being a closely held private corporation to a public corporation. This information helps explain some of the significant variations we saw in our above analysis in 2013. Consequently, horizontal analysis percentages should be interpreted in light of the additional information and disclosure provided in the notes to the financial statements concerning the impact the move to IFRS had on the financial statement elements. Without this information, the user of the analysis risks drawing conclusions from information that has not been prepared using consistent accounting practices and standards, which could in turn lead to the wrong conclusions.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-2B (a)
Although the operating expenses have been increasing over the last 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 that reveals that in absolute terms, the amount of other revenue involved is very small and so an increase of 240% over a three 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, Sixth Canadian Edition
PROBLEM 18-2B (Continued) Taking It Further: The change in the percentage increase in profit before tax and income tax expense is the same in a horizontal analysis of the income statement, reflecting that the income tax expense is calculated at the same income tax rate from year to year. Therefore the absolute amount of the tax expense is changing in the same proportion as the change in profit before income taxes. As demonstrated in the vertical analysis of the income statement, when compared to revenues, the absolute amount of income tax expense will change since other variables, such as operating expenses, reduce revenues in different amounts and proportions each year.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-3B (a)
Net sales Cost of goods sold Gross profit Operating expenses Profit from operations Rental income Profit before income tax Income tax expense Profit
Income Statement Year Ended June 30, 2014 Manitou Amount Percent $360,000 100.0% 200,000 55.6% 160,000 44.4% 60,000 16.7%
Muskoka Amount Percent $1,400,000 100.0% 720,000 51.4% 680,000 48.6% 272,000 19.4%
100,000 12,000
27.8% 3.3%
408,000 24,000
29.1% 1.7%
112,000 22,400 $ 89,600
31.1% 6.2% 24.9%
432,000 95,040 $ 336,960
30.9% 6.8% 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: 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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PROBLEM 18-3B (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%
Muskoka Return on Equity $336,960 ÷ $743,480 = 45.3%
(c)
Muskoka is slightly more profitable. Muskoka has a better gross profit margin, but a slightly lower profit margin than does Manitou. This is primarily because Manitou has a lower amount of rental income. Manitou has lower operating expenses, compared to Muskoka. Muskoka’s return on equity is also 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 intercompany comparison.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-3B (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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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-4B
Liquidity Ratios 1. Working capital 2.
Current ratio
=
3.
Acid-test ratio
=
4.
Receivables turnover
=
5.
Collection period
=
6.
Inventory turnover
7.
Days sales in inventory
– $180,150
$250,500 $180,150
= $70,350 = 1.4
$154,100* $180,150 *$154,100 = $23,100 + $26,280 + $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
=
= 8.
$250,500
365
÷
7.6
$540,000 ($96,400 + $74,000) ÷ 2
times
= 48
days
= 6.3
times
365
÷
6.3
= 58
days
58
+
48
= 106
days
Operating cycle =
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-4B (Continued) Solvency Ratios Debt to total 9. assets
10.
Interest coverage
11.
Free cash flow
=
$270,150 $715,800
= 37.7%
=
$73,270 + $12,930 + $3,200 $3,200
=
$116,780
Profitability Ratios Gross profit 12. = margin
–
$51,660
= 27.9 times =
$65,120
$250,000 $790,000
= 31.6%
13.
Profit margin
=
$73,270 $790,000
= 9.3%
14.
Asset turnover
=
$790,000 ($715,800 + $672,000) ÷ 2
= 1.1 times
15.
Return on assets
=
$73,270 ($715,800 + $672,000) ÷ 2
= 10.6%
16.
Return on equity
=
$73,270 ($445,650 + $396,000) ÷ 2
= 17.4%
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-4B (Continued) Profitability Ratios (Continued) 17.
Earnings per share
=
$73,270 15,000
18
Payout ratio
=
$23,620
= $4.88 ÷
$73,270
= 32.2%
Taking It Further: Rose Packing’s liquidity appears to be a bit weak, based on its acid-test ratio of less than 1 and 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 amongst 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 Rose Packing for prior years.
Solutions Manual .
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5B
Liquidity Ratios Working = 1. capital 2.
Current ratio
=
3.
Acid-test ratio
=
4.
Receivables turnover =
5.
Collection period
2014 $415,000
– $337,750 = $77,250
$415,000 $337,750
$360,000 –
$315,000 = $45,000
$360,000 $315,000
= 1.2
$50,000 + $100,000 $337,750
Change
2013
$42,000 + $87,000 $315,000
= 0.4
$1,000,000 = 10.2 times ($105,000* + $91,000**)÷2 * $105,000 = $100,000 + $5,000 ** $91,000 = $87,000 + $4,000
F
= 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
Solutions Manual
÷
10.2
= 36
days
18-80 .
365
÷
11.0
= 33
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5B (Continued) Liquidity Ratios (Continued) 2014 6.
Inventory turnover
7.
Days sales in inventory =
8.
Operating cycle
=
Chan -ge
2013
$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
=
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18-81 .
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5B (Continued) Solvency Ratios 2014 9.
Debt to total assets
=
10.
Interest coverage
=
11.
Free cash flow
=
$437,750 $1,240,000
Chan -ge
2013 = 35.3%
$415,000 $1,135,000
= 36.6%
$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 –
Solutions Manual
$110,000 = $23,500
18-82 .
$180,500 –
$56,000
= $124,500
Chapter 18
F
F
U
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5B (Continued) Profitability Ratios 2014 Gross 12. profit margin
=
$350,000 $1,000,000
Profit 13. margin
=
$97,750 $1,000,000
Asset 14. turnover
=
Return on 15. assets
=
Chan -ge
2013 = 35.0%
$305,000 $940,000
= 32.4%
F
= 9.8%
$76,500 $940,000
= 8.1%
F
=0.9 times
U
$1,000,000 0.8 = times ($1,240,000 + $1,135,000)÷2
$940,000 ($1,135,000 + $1,075,000)÷2
$97,750 = 8.2% ($1,240,000 + $1,135,000)÷2
$76,500 = 6.9% ($1,135,000 + $1,075,000)÷2
18-83
Chapter 18
Solutions Manual .
F
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5B (Continued) Profitability Ratios (Continued)
Return on 16. equity
=
Earnings 17. per share
=
2014 $97,750 = 12.8% ($802,250 + $720,000) ÷ 2 $97,750 − $15,500 100,000
= $0.82
2013 $76,500 ($720,000 + $659,000) ÷ 2 $76,500 − $15,500 100,000
Chan -ge
= 11.1%
F
= $0.61
F
= 20.3%
U
18. Payout ratio = $15,500
Solutions Manual
÷
$97,750
= 15.9%
18-84 .
$15,500
÷
$76,500
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-5B (Continued) (c) (1) Liquidity: Deteriorated Track’s overall liquidity has deteriorated in 2014 compared to 2013 in spite of a modest improvement in the current ratio. Both the receivables and inventory turnover ratios have deteriorated and consequently the operating cycle worsened by 24 days. (2) Solvency: Improved The debt to total assets ratio improved slightly. The interest coverage ratio improved even more so; consequently, overall solvency improved. A larger amount of cash was used in investing activities during 2014 compared to 2013 which resulted in a large decrease in free cash flow. (3) Profitability: Improved Profitability, with the exception of the asset turnover ratio which decreased slightly, has improved overall.
Taking It Further: The problem is employing intracompany comparison. It is hard to say which is more useful— intercompany or intracompany comparisons—as both provide valuable information. When two companies in the same industry are compared, then intercompany comparisons can be very useful. A business might obtain feedback that they are doing well from an intracompany analysis, but may not be doing as well on an intercompany comparison, possibly failing to keep pace with pricing increases or cost control opportunities that the company’s competitors are taking advantage of.
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18-85 .
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-6B (a) ($ in thousands) The Brick
Liquidity Ratios
Leon's
1.
Current ratio =
$388,087 $280,005
2.
Receivables turnover
=
$1,351,648 $72,760
= 18.6
times
Collection period
=
365
= 20
days
365 ÷
Inventory turnover
=
= 4.5
times
$394,099 $86,627
Days sales in inventory
=
Operating cycle
=
3.
4.
Solutions Manual
÷
$343,772 $139,123
= 1.4
18.6
$753,977 $167,264
$682,836
= 23.7 times
$28,753 23.7
= 15
days
= 4.5
times
365
÷
4.5
= 81
days
365
÷ 4.5
= 81
days
81
+
20
= 101
days
81
+
= 96
days
18-86 .
= 2.5
15
Chapter 18
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-6B (Continued) The Brick
Solvency Ratios 5. 6.
Debt to total assets
=
Interest coverage
=
Profitability Ratios: 7. Gross profit = margin 8.
Profit margin
=
9.
Asset turnover
=
Return on 10. assets
$674,836 $766,482
Leon's
$35,873 + $30,979 +$14,443 = $30,979
$597,671 $1,351,648
$169,878 $595,339
= 88.0% 2.6
= 44.2%
$35,873 $1,351,648
= 2.7%
$1,351,648 $750,182
= 1.8
$35,873 $750,182 $35,873 $82,584
= 28.5%
N/A — no interest expense
$288,737 $682,836
= 42.3%
$56,666 $682,836
= 8.3%
$682,836 $581,007
= 1.2
= 4.8%
$56,666 $581,007
= 9.8%
= 43.4%
$56,666 $417,874
= 13.6%
times
=
Return on 11. equity
=
Solutions Manual
18-87 .
Chapter 18
times
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-6B (Continued) (b) Liquidity: Leon’s Leon’s has a much stronger current ratio than The Brick. It also collects its receivables more quickly than The Brick. That said, both companies’ collection periods are still very good at fewer than 30 days. The inventory turnovers of the two companies are identical. As a result, Leon’s operating cycle is also better than The Brick. Solvency: Leon’s The level of debt is what sets these two companies apart. Whereas The Brick has more than half the value of its assets in non-current liabilities, Leon’s is less than 5%. As a result, Leon’s debt to total assets ratio is significantly better than than of The Brick. Profitability: Leon’s Although The Brick has a higher gross profit margin, it is not translating into a higher profit margin. The main culprits explaining this result are the high interest expense and the correspondingly high other non-operating expenses. Although the return on assets of The Brick is about half of that of Leon’s, its return on equity is more than triple that of Leon’s. This is likely because of The Brick’s higher use of leverage.
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.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-7B
(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 times for Flavour, it appears that Refresh is turning over its inventory at a much slower rate than the competition. (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, Sixth Canadian Edition
PROBLEM 18-7B (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 its 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 astounding 19.7% return while Refresh Ltd. has an excess of 14.5% return.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-8B
(a)
Snap-On is more liquid than Stanley. It has a very strong higher current and acid-test ratio. The strength of these two ratios outweighs the fact that Snap-On is turning over receivables and inventory more slowly than Stanley. A detailed composition of the current assets and current liabilities of each company would help confirm this initial assessment.
(b) Stanley is more solvent, but only marginally. Stanley has less debt to total assets than Snap-On. On the other hand, Snap-On has a better interest coverage ratio than Stanley but Snap-On’s interest coverage is still quite strong. (c)
Snap-On has a much stronger profitability demonstrated by its higher gross profit margin and higher profit margin. It also has considerably better returns on assets and equity compared to Stanley.
Taking It Further: Investors seem to favour Stanley as it has a higher priceearnings ratio. This is inconsistent with (c) as investors would likely favour a company with a better profitability.
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Accounting Principles, Sixth Canadian Edition
PROBLEM 18-9B (b) Gross profit is 40% of net sales of $11,000,000 or $4,400,000. (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.
(c)
Gross profit of $4,400,000 less operating expenses of $1,600,000 equal profit from operations of $2,800,000.
(f)
Profit margin is 15% of sales. Net sales × 15% equals profit of $1,650,000.
(e)
Profit of $1,650,000 plus income tax expense of $707,000 equals profit before income taxes of $2,357,000.
(d) Profit from operations of $2,800,000 less profit before income taxes of $2,357,000 equals interest expense of $443,000. Summary of results: VIEUX CORPORATION Income Statement Year ended December 31, 2014 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 .
18-92
$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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM 18-9B (Continued) (h) Receivables turnover is 10 times and so net sales of $11,000,000 ÷ 10 = inventory 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.
(k)
Return on assets is 22% so profit of $1,650,000 ÷ 22% equals total assets of $7,500,000.
(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.
(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. (o)
Total liabilities and shareholders’ equity is equal to total assets of $7,500,000.
(n)
Total liabilities and shareholders’ equity of $7,500,000 less shareholders’ equity of $3,400,000 equals total liabilities of $4,100,000.
(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.
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PROBLEM 18-9B (Continued) Summary of results: VIEUX CORPORATION Balance Sheet December 31, 2014 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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CONTINUING COOKIE CHRONICLE
(a)
Koebel’s Family Bakery is far more liquid than the public company Cookies and Cream. Of course, its current ratio is very high, consistent with the excess cash it has on hand. Its receivables turnover is much higher than Cookies and Cream; however, it is unlikely that Koebel’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, Koebel’s Family Bakery Ltd. remains in the better solvency position. (c)
From a profitability point of view, Koebel’s Family Bakery’s performance is far better than that of Cookies and Cream. Koebel’s gross profit margin, profit margin, return on common shareholders’ equity and return on assets ratios are multiples of those experienced by Cookies and Cream. Again, this is not unusual as Koebel’s business model is quite different than that of Cookie and Cream. 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 Cookies and Cream.
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CONTINUING COOKIE CHRONICLE (Continued) (d) Compared to 2013, Cookies and Cream’s ratios in 2014 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 Cookies and Cream’s common shares because of the increase in the dividend payout ratio. (e)
Overall, Koebel’s is stronger than Cookies and Cream 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 Cookies and Cream common shares could decline at a time when Koebel’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 short-term return may not be the most appropriate option. To maintain liquidity and reduce its risk, Koebel’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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BYP 18-1 FINANCIAL REPORTING PROBLEM (a)
ASSETS Current Cash and cash equivalents Marketable securities Trade and other receivable Derivative financial assets Income taxes recoverable Inventories Prepaid expenses Total current assets Property and equipment Intangible assets Goodwill Deferred income taxes Total assets
Solutions Manual
REITMANS (CANADA) LIMITED Balance Sheets (in thousands) January 28, 2012 Amount Percentage $196,835 71,442 3,033 751 4,735 78,285 11,902 366,983 184,221 17,057 42,426 23,174 $633,861
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31.0% 11.3% 0.5% 0.1% 0.7% 12.4% 1.9% 57.9% 29.0% 2.7% 6.7% 3.7% 100.0%
January 29, 2011 Amount Percentage $230,034 70,413 2,866
34.9% 10.7% 0.4%
73,201 12,491 389,005 193,064 13,841 42,426 21,021 $659,357
11.1% 1.9% 59.0% 29.3% 2.1% 6.4% 3.2% 100.0%
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Accounting Principles, Sixth Canadian Edition
REITMANS (CANADA) LIMITED Balance Sheets (in thousands) January 28, 2012 Amount Percentage
LIABILITIES Current Trade and other payables Derivative financial liability Deferred revenue Income taxes payable Current portion of long-term debt Total current liabilities Other payables Deferred revenue Deferred lease credits Long-term debt Pension liabilities Total liabilities SHAREHOLDERS’ EQUITY Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Total shareholders' equity Total liabilities and shareholders' equity
Solutions Manual
$ 63,875 1,505 22,278
10.1% 0.2% 3.5%
1,474 89,132 11,110
0.2% 14.1% 1.8%
17,317 8,573 14,877 141,009 39,890 5,158 439,067 8,737 492,852 $633,861
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January 29, 2011 Amount Percentage $ 64,093
9.7%
2.7% 1.4% 2.3% 22.2%
19,834 5,998 1,384 91,309 10,180 2,384 19,011 10,047 13,626 146,557
3.0% 0.9% 0.2% 13.8% 1.5% 0.4% 2.9% 1.5% 2.1% 22.2%
6.3% 0.8% 69.3% 1.4% 77.8% 100.0%
29,614 6,266 468,777 8,143 512,800 $659,357
4.5% 1.0% 71.1% 1.2% 77.8% 100.0%
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BYP 18-1 (Continued) (a) (Continued) REITMANS (CANADA) LIMITED Statements of Earnings Years Ended January 28 and January 29 (in thousands) 2012 Amount Percentage Sales $1,019,397 100.0% Cost of sales 363,333 35.6% Gross margin 656,064 64.4% Selling and distribution expenses 547,367 53.7% Administrative expenses 46,878 4.6% 594,245 58.3% Results from operating activities 61,819 6.1% Finance income 5,562 0.5% Finance costs (1,509) -0.1% Earnings before income taxes 65,872 6.5% Income taxes 18,333 1.8% Net earnings $ 47,539 4.7%
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2011 Amount $1,059,000 350,671 708,329 528,676 55,511 584,187 124,142 4,505 (845) 127,802 38,817 $ 88,985
Percentage 100.0% 33.1% 66.9% 49.9% 5.2% 55.2% 11.7% 0.4% -0.1% 12.1% 3.7% 8.4%
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BYP 18-1 (Continued) (b) From a review of Reitmans’ balance sheet, we note that current assets make up 57.9% of total assets in 2012, not significantly different than 2011. Current liabilities on the other hand only amount to 14.1% of total assets. Reitmans’ liquidity would appear to be strong based on these proportions. Its solvency would also appear to be strong, as total liabilities are only 22.3% of total assets, and relatively unchanged in proportion between the two years. On the income statement (or statement of earnings as Reitmans calls it), the gross profit percentage declined by 2.5%. This decline combined with a 3% increase in operating, resulted in a 3.7% decline in profit.
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BYP 18-2 INTERPRETING FINANCIAL STATEMENTS (a) In terms of liquidity, both companies have low current and acid-test ratios, but CP’s is worse. Other liquidity ratios are practically identical, with CP’s receivables and inventory turnover marginally higher than those of CN. (b) CN is more solvent than CP in all of the solvency ratios. (c) CN is more profitable. All of its ratios are better than those of CP, except the asset turnover which is the same. In particular, CN’s profit margin is far superior (almost 2.5 times higher that of CP’s) and drives its higher return on assets and return on equity ratios as its asset turnover is the same as that of CP. (d) 1. A lower ratio is preferable as a lower amount of expenses as a percent of revenues translates into a higher profit. 2. CN has the better operating ratio by a considerable margin. 3. CN’s lower operating ratio reinforces the determination of the higher profit margin, which in turn leads to a higher return on assets and higher return on equity.
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BYP 18-3 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 18-4 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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BYP 18-5 ETHICS CASE (a)
The stakeholders in this case are: Sabra Surkis, president of Surkis Industries Carol Dunn, public relations director You, as controller of Surkis Industries Shareholders and creditors of Surkis Industries Potential creditors and investors in Surkis Industries Any other readers of the press release
(b) The president's press release is incomplete, and to that extent the information is not fully disclosed, transparent, or of high quality and could be perceived as unethical. (c)
As controller you should at least inform Carol, the public relations director, about the biased content of the release. She should be aware that the information she is about to release, while factually accurate, is incomplete. Both the controller and the public relations director (if she agrees) have the responsibility to inform the president of the bias of the about-to-be-released information.
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BYP 18-6 “ALL ABOUT YOU” ACTIVITY (a)
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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
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BRIEF EXERCISE B-3 Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. PST 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%) ................... PST Payable ($1,600 × 9.975%)............. Sales Returns and Allowances ................... GST Payable ($800 × 5%) ............................. PST 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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600 90 690
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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 × 1.07) ................................... GST Recoverable ($5,300 × 5%) ................... Accounts Payable ...................................
5,000 321 265 5,586
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 ................ 28,000 Sales .................................................... GST Payable ($25,000 × 5%) ............. PST Payable ($25,000 × 7%) ..............
25,000 1,250 1,750
Cost of Goods Sold .................................. 18,600 Merchandise Inventory ......................
18,600
Sales Returns and Allowances ............... GST Payable ($800 × 5%) ......................... PST Payable ($800 × 7%) ......................... Accounts Receivable—Marvin..........
800 40 56 896
Merchandise Inventory ............................ 11,000 GST Recoverable ($11,000 × 5%) ............ 550 Accounts Payable—Macphee ........... Furniture ($600 × 1.07) ............................. GST Recoverable ($600 × 5%) ................. Cash ..................................................
642 30
GST Payable .............................................. GST Recoverable ............................... Cash ...................................................
7,480
B-5
11,550
672 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 Furniture ............................................. HST Recoverable ($600 × 13%)......... Cash ..............................................
600 78
31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................
7,480
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Credit
8,249
25,000 3,250
18,600
904
12,430
678
1,917 5,563
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EXERCISE B-4 Province of Manitoba
Date May
1
3
5
7
12
31
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GENERAL JOURNAL Account Titles and Explanation Rent Expense ............................................ GST Recoverable ($7,300 × 5%) .............. Cash ....................................................
Debit 7,300 365
7,665
Accounts Receivable—Marvin ............... 28,000 Sales .................................................... GST Payable ($25,000 × 5%) ............. PST Payable ($25,000 × 7%) .............. Sales Returns and Allowances ............... GST Payable ($800 × 5%) ......................... PST Payable ($800 × 7%) ......................... Accounts Receivable—Marvin..........
25,000 1,250 1,750
800 40 56 896
Purchases ................................................. 11,000 GST Recoverable ($11,000 × 5%) ............ 550 Accounts Payable—Macphee ............ Furniture ($600 × 1.07) ............................. GST Recoverable ($600 × 5%) ................. Cash .....................................................
642 30
GST Payable .............................................. GST Recoverable ................................ Cash .....................................................
7,480
B-8
Credit
11,550
672 1,917 5,563
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EXERCISE B-5 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 5 Sales Returns and Allowances ................ GST Payable ($800 × 5%) .......................... Accounts Receivable—Marvin........
800 40 840
7 Purchases ................................................... 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-6 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
5 Sales Returns and Allowances ........ HST Payable ($800 × 13%) ................ Accounts Receivable—Marvin ...
800 104
7 Purchases........................................... HST Recoverable ($11,000 × 13%) ... Accounts Payable—Macphee ......
11,000 1,430
12 Furniture ............................................. HST Recoverable ($600 × 13%)......... Cash ..............................................
600 78
31 HST Payable ....................................... HST Recoverable ......................... Cash ..............................................
7,480
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Credit
8,249
25,000 3,250
904
12,430
678
1,917 5,563
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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
Credit
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
4,700.00 235.00 329.00 896.00
806.40
168.00
30 GST Payable ...................................... 1,890.50 GST Recoverable ......................... Cash ..............................................
741.60 1,148.90
30 PST Payable....................................... 2,640.00 Cash ..............................................
2,640.00
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EXERCISE B-8 Date
GENERAL JOURNAL Account Titles and Explanation
Debit
June 8 Equipment ................................................. HST Recoverable ($1,500 × 13%) ............ Accounts Payable...............................
1,500.00 195.00
10 Supplies..................................................... HST Recoverable ($100 × 13%) ............... Cash......................................................
100.00 13.00
12 Accounts Receivable ............................... Service Revenue.................................. HST Payable ($1,250 × 13%) ...............
1,412.50
18 Repairs Expense....................................... HST Recoverable ($220 × 13%) ............... Cash......................................................
220.00 28.60
22 Cash ........................................................... Accounts Receivable ..........................
1,412.50
30 HST Payable .............................................. HST Recoverable................................. Cash......................................................
2,520.60
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Credit
1,695.00
113.00
1,250.00 162.50
248.40
1,412.50
820.45 1,700.15
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EXERCISE B-9 Date
GENERAL JOURNAL Account Titles and Explanation
Debit
June 8 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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Credit
1,575.00
105.00
1,250.00 62.50
231.00
1,312.50
315.55 654.95
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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
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Credit
3,051 2,600 338 1,350 91 700
1,469 675
226
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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, Sixth 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, Sixth 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, Sixth 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, Sixth 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, Sixth Canadian Edition
PROBLEM B-4 Province of British Columbia GENERAL JOURNAL Account Titles and Explanation
Date Nov
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 ....................................................... 10 Accounts Receivable—Regional Band Sales ...................................................... GST Payable ($5,100 × 5%) .................. PST Payable ($5,100 × 7%) ..................
214 10
Solutions Manual .
B-20
Credit
2,835 2,600 130 182 35 700
1,456
224 5,712 5,100 255 357
Appendix B
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM B-4 (Continued)
Date
GENERAL JOURNAL Account Titles and Explanation
Debit
Nov. 13 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, Sixth 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, Sixth 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, Sixth 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, Sixth 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—Pednault.... 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, Kinnear, Barlow
Accounting Principles, Sixth 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.
Debit
Credit Balance
1,800
Jan. 7 17
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 6,000
Jan.15 24
2,000
Balance 6,000 4,000
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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE C-5 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BRIEF EXERCISE C-6 General Journal Date
Account Titles and Explanations
Apr. 30
30
30
30
J1 Ref.
Debit
Service Revenue ........................................ Rent Revenue............................................. Income Summary................................
53,800 12,000
Income Summary. ...................................... Depreciation Expense ........................ Salaries Expense ................................ Supplies Expense ...............................
30,900
Income Summary....................................... B. Willis, Capital .................................
34,900
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, Kinnear, Barlow
Accounting Principles, Sixth 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. No. Ref. Dr. Merchandise Inventory Sales Cr. Cr. 321 2,720 1,960 322 890 570
C-5
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE C-2 (Continued) (a) and (c) (Continued)
Date
Purchases Journal Accounts Merchandise Supplies Payable Inventory 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE C-3
(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.
Sales Cr. 860
CR1 Cost of Goods Other Sold Dr. Merchandise Accounts Cr. Inventory 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE C-3 (Continued) (a) and (d) WONG COMPANY General Journal Date
Account Titles and Explanations
Sept. 11
20
J1 Ref.
Debit
Accounts Payable—Leonard Co. ............... Merchandise Inventory........................
200
Sales Returns and Allowances................... Cash......................................................
860
Inventory ...................................................... Cost of Goods Sold .............................
490
Credit 200
860 490
EXERCISE C-4 (a) and (b) Account Date Debited 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE C-5 (a) and (b) WONG COMPANY Cash Receipts Journal Account Credited
Ref.
Cash Dr.
Sept. 16 L. Maille 25 T. Lu
860 2,720
Date
(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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE C-5 (Continued) (a) and (d) WONG COMPANY General Journal Date
Account Titles and Explanations
Sept. 11 Accounts Payable—Leonard Co. ............... Purchase Returns and Allowances .... 20
Sales Returns and Allowances................... Cash......................................................
J1 Ref.
Debit
Credit
200 200 860 860
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE C-6 (Continued) (b) Oct.
5 Accounts Payable—Lyden Company ........ Purchase Returns and Allowances ...
720
7 Sales Returns and Allowances .................. Accounts Receivable—M. Presti........
600
720
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
EXERCISE C-7 (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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS PROBLEM C-1 (a), (b), and (c) Sales Journal
Date Jan.
Account Debited
4 Wong 9 Tops Corp. 17 NFQ Co. 31 Wong
Invoice Ref. No. 371 372 373 374
Accounts Receivable Dr. Sales Cr. 6,500 2,600 7,500 7,380 23,980 (112)/(401)
S1 Cost of Goods Sold Dr. Merchandise Inventory Cr. 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-1 (Continued) (a), (b) and (c) (Continued) Cash Receipts Journal
Account Credited
Date
Jan. 6 13 15 Tops Corp. 17 Wong 20 27 30 NFQ Co.
Ref.
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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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 No. Ref. 204 205 206 207
Accounts Receivable Dr. Sales Cr.
S1 Cost of Goods Sold Dr. Merchandise 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
J1
Date
Account Titles and Explanations
Oct. 13
Accounts Payable—Chen Corp. ............ 201/ Merchandise Inventory ................... 120
Solutions Manual .
C-19
Ref.
Debit
Credit
260 260
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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
Ref.
Cash Dr.
9,610 8,600 8,810 140 45,000 8,640 5,530 9,320 95,510 (101)
A/R Cr.
CR1
Sales Cr.
COGS Dr. Other Merch. Inventory Accounts Cr. Cr.
9,610
6,247
8,810
5,727
8,600 45,000 8,640
5,616
5,530 14,130 (112)
9,320 6,058 36,380 23,648 (401) (505)/(120)
Cash Payments Journal
Date
Payee
Cash Cr.
Oct. 9 Madison Co. 5,800 18 2,215 23 Chen Corp. 4,640 26 45,000 26 600 30 The Gazette 58,255 (101)
Solutions Manual .
Merch. Accts. Invent. Payable Dr. Dr.
45,000 (X)
CP1 Account Debited
5,800 Madison Co.
Other Accts. Dr. Ref
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-2 (Continued) (a), (b) and (c) (Continued)
Account Credited
Date
Terms Ref.
Purchase s 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-3 (b) Sales Journal
Account Debited
Date Jan.
3 24
S1
Cost of Goods Sold Dr. Accounts Invoice Receivable Dr. Merchandise No. Sales Cr. Ref. Inventory Cr.
B. Rohl B. Lu
3,000 7,800 10,800 (112)/(401)
1,250 3,300 4,550 (505)/(120)
Cash Receipts Journal
Date
Account Credited
Accounts Other COGS Dr. Cash Receivable Sales Merch. Accounts Ref. Dr. Cr. Cr. Cr. Inv. Cr.
Jan. 7 S. Armstrong 4,000 3,000 13 B. Rohl 23 7,700 115 29 Notes Rec. 35,000 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-3 (Continued) (b) (Continued)
Date
Purchases Journal Accounts Merchandise Supplies Payable Inventory 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, Kinnear, Barlow
Accounting Principles, Sixth 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. Dr. Ref
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, Kinnear, Barlow
Accounting Principles, Sixth 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
Debit
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 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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 Jan.
Explanation 31
Solutions Manual .
C-28
Balance
No. 725
Ref.
Debit
CP1
3,900
Credit
Balance 3,900
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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 Jan.
Explanation 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
P1 CP1
1,150
Explanation
Ref.
Debit
Balance
J1
5 27
Watson & Co. Date Jan.
1 20
Solutions Manual .
C-30
14,000
14,200 200
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-3 (Continued) (d) PERRAULT MUSIC CO. Trial Balance January 31, 2014 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-4 (b) Sales Journal
Date
Account Debited
May 3
B. Simone
Invoice Ref. No.
S1
Accounts Receivable Dr. Sales Cr.
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. ............ Notes Payable ......................................
/201
15,500
20
Solutions Manual .
C-33
750
325
15,500
200
Accounts Payable—Lancio Co. .................. /201 Merchandise Inventory ........................ 120
Credit
510 510
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-4 (Continued) (b) (Continued)
Date
Purchases Journal Accounts Merchandise Supplies Payable Inventory 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-4 (Continued) (b) (Continued)
Cash Receipts Journal Account Credited
Date
May 7 G. Parrish 13 B. Simone 23 29 Notes Rec.
Cash Dr.
Ref.
CR1
Accounts Other COGS Dr. Receivable Sales Merch. Inv. Accounts Cr. Cr. Cr. Cr.
2,800 2,400 9,500 115 40,000 54,700 (101)
2,800 2,400 9,500 5,200 (112)
4,450
4,450 9,500 (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. Inv. Dr.
Accts. Payable Dr.
40,000 40,000 (X)
CP1 Account Debited
Other Accts. Dr. Ref.
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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-4 (Continued) (a) and (c) (Continued) Equipment Date May
1
No. 157
Explanation
Ref.
Balance
30
P1
Debit
Credit
8,200 4,000
12,200
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-4 (Continued) (a) and (c) (Continued) Sales Date
No. 401
Explanation
Ref.
Debit
CR1 S1
May 31 31
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, Kinnear, Barlow
Accounting Principles, Sixth 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. S1 CR1
3 13
Solutions Manual .
C-39
Debit
Credit
2,400 2,400
Balance 2,400 0
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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
P1 J1
May 17 20
Credit 2,100
510
Balance 2,100 1,590
WN Shaw Date May
Explanation
Ref. P1 CP1
5 27
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
PROBLEM C-4 (Continued) (d) LEE CO. Trial Balance May 31, 2014 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, Kinnear, Barlow
Accounting Principles, Sixth 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.
5 Accounts Payable—Zears Co ..................... 201/ Purchase Returns and Allowances..... 512
Solutions Manual .
C-42
Debit
Credit
450 450
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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. 510 511 512 513 514 515 516 517
Ref.
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (a) (Continued) Cash Receipts Journal CR1 Other Accounts COGS Dr. Accounts Account Cash Sales Date Ref. 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 13,400 Liazuk Co. 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (a) (Continued)
Date
Account Credited
Terms Ref.
Purchase s 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth 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
Date Jan. 1 9 18 31 31 31 31 31
Merchandise Inventory Explanation Ref. Balance J1 J1 S1 P1 CR1 CP1 J2 Adjusting entry
Solutions Manual .
C-50
Debit
Credit
74,120 58,480
Debit
Credit 400
19,800 20,200
Debit
Debit
Credit
Credit
160 500 7,920 54,600 21,568 180 102
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 Balance 20,000 20,160 19,660 11,740 66,340 44,772 44,952 44,850
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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 J1 Adjusting entry
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Equipment Date Jan. 1
Explanation Balance
Ref.
Debit
Accumulated Depreciation—Equipment Date Explanation Ref. Debit Jan. 1 Balance 31 J1 Adjusting entry
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
No. 157 Balance 6,450
Credit 125
No. 158 Balance 1,500 1,625
Credit 15,000
No. 200 Balance 15,000
Credit
500 15,000 55,800 49,400
Debit
Debit
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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued)
Date Jan. 31 31 31
Income Summary Explanation Ref. Closing entry J2 Closing entry J2 Closing entry 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 J2 Closing entry
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 .
No. 300 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 400 J1 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued)
Date Jan. 9 31 31 31 31
Cost of Goods Sold Explanation Ref. J1 S1 CR1 Adjusting entry J2 J2 Closing entry
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
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
No. 505 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Receivable Subsidiary Ledger R. Draves Date Jan. 1 11 22
Explanation Balance
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
Credit
Balance 1,500 3,400 4,200
Credit
Balance 1,800 1,400 7,500 0
1,900 800
J. Ebel Date Jan. 3 9 25 31
B. Soto Date Jan. 3 22 31
Solutions Manual .
Explanation
Explanation Balance
Explanation
C-55
400 6,100 7,500
Credit 2,000
3,500
Credit 5,000
900 900
Credit
4,800
Balance 7,500 5,500 9,000
Balance 5,000 0 900 0
Balance 3,100 4,800 0
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (b) and (f) (Continued) Accounts Payable Subsidiary Ledger Laux Supplies Date Jan. 5 17 27 28
Ref. P1 P1 P1 P1
Debit
Credit 2,700 400 1,200 800
Balance 2,700 3,100 4,300 5,100
Liazuk Co. Date Explanation Jan. 1 Balance 9 16 18 23
Ref. CP1 P1 J1 CP1
Debit
Credit
Balance 10,000 0 13,900 13,400 0
Mikush Bros. Date Explanation Balance Jan. 1 21
Ref. J1
Nguyen & Son Date Explanation Jan. 1 Balance 9 16 23 27
Ref. CP1 P1 CP1 P1
Welz Wares Date Explanation Jan. 5 16 27
Ref. P1 P1 P1
Solutions Manual .
Explanation
C-56
10,000 13,900 500 13,400
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
Debit
Appendix C
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (c) and (d)
WINTERS COMPANY Trial Balance January 31, 2014 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, Kinnear, Barlow
Accounting Principles, Sixth 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (e) WINTERS COMPANY Income Statement Month Ended January 31, 2014 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, 2014 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (e) (Continued) WINTERS COMPANY Balance Sheet January 31, 2014 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
CUMULATIVE COVERAGE (Continued) (g) WINTERS COMPANY Post-Closing Trial Balance January 31, 2014 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, Kinnear, Barlow
Accounting Principles, Sixth 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%)
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
0
600000
Press:
I/Y
N
PMT
FV
CPT
PV
Result: PV = $ (493,156.26)
Solutions Manual .
PV-1
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–2 (Continued) 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, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–3 Using tables: Discount rate from Table PV-1 is 0.67556 (10 periods at 4%). The future value of $8,000 invested today (present value) for a period of 10 years discounted at 4% is $11,842.03 ($8,000 ÷ 0.67556). Mohammed should receive $11,842.03 when the GIC matures in 10 years. After the first 5 years, using the discount rate from Table PV-1 of 0.82193 (5 periods at 4%), the value of $8,000 invested today (present value) is $9,733.19 ($8,000 ÷ 0.82193). The interest earned in the first 5 years is: $1,733.19 = $9,733.19 – $8,000.00 The interest earned in the second 5 years is: $2,108.84 = $11,842.03 – $9,733.19 The interest earned in the first 5 years of $1,733.19 is based on an initial investment of $8,000. The interest earned in the second 5 years of $2,108.84 is higher because it is based on the initial investment of $8,000 plus the $1,733.19 interest earned over the first five year period.
Solutions Manual .
PV-3
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–3 (Continued) Using a financial calculator: Value of the investment after 10 years: Enter: 4 10 –8000 Press:
I/Y
N
PV
0 PMT
CPT
FV
CPT
FV
Result: FV = $11,841.95 Value of the investment after 5 years: Enter: 4 5 –8000 Press:
I/Y
N
PV
0 PMT
Result: FV = $9,733.22 The interest earned in the first 5 years is: $1,733.22 = $9,733.22 – $8,000.00 The interest earned in the second 5 years is: $2,108.73 = $11,841.95 – $9,733.22 The interest earned in the first 5 years of $1,733.22 is based on an initial investment of $8,000. The interest earned in the second 5 years of $2,108.73 is higher because it is based on the initial investment of $8,000 plus the $1,733.22 interest earned over the first five year period.
Solutions Manual .
PV-4
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–3 (Continued) Using Excel functions: =FV(rate,nper,pmt,pv,type) Option 1
Option 2
Rate
.04
Rate
.04
nper
10
nper
5
PMT
$0
PMT
$0
PV
$ (8,000)
Type
0
Result FV = $11,841.95
PV Type
$ (8,000) 0
Result FV = $9,733.22
The interest earned in the first 5 years is: $1,733.22 = $9,733.22 – $8,000.00 The interest earned in the second 5 years is: $2,108.73 = $11,841.95 – $9,733.22 The interest earned in the first 5 years of $1,733.22 is based on an initial investment of $8,000. The interest earned in the second 5 years of $2,108.73 is higher because it is based on the initial investment of $8,000 plus the $1,733.22 interest earned over the first five year period.
Solutions Manual .
PV-5
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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. Janet Bryden therefore must wait 12 years to receive $100,000. Using a financial calculator: Enter:
7
–44401
0
100000
Press:
I/Y
PV
PMT
FV
CPT
N
Result: N = 12
Solutions Manual .
PV-6
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–4 (Continued) 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-7
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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: Enter:
15
0
–3152
10000
Press:
N
PMT
PV
FV
CPT
I/Y
Result: I/Y = 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-8
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–6
Using tables: Discount rate from Table PV-2 is 9.71225. The present value of 15 payments of $25,000 each discounted at 6% is therefore $242,806.25 ($25,000 × 9.71225). Tarzwell Ltd. should pay $242,806.25 for this annuity contract. Using a financial calculator: Enter:
6
15
25000
0
Press:
I/Y
N
PMT
FV
CPT
PV
Result: PV = $(242,806.22)
Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE
.06
NPER
15
PMT
$ 25,000.00
FV
$0
Type
0
Result: PV = $ (242,806.22)
Solutions Manual .
PV-9
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–7 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
(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%
BEPV–8 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
Solutions Manual .
PV-10
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–8 (Continued) Using a financial calculator: Enter:
2.5
20
2750
100000
Press:
I/Y
N
PMT
FV
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-11
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–9 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) .....................................................
$55,368.00
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) ...........................................................
40,913.04
Present value of bonds ................................................
$96,281.04
Using a financial calculator: Enter:
3
20
2750
100000
Press:
I/Y
N
PMT
FV
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-12
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–10 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: Enter:
8
6
–50000
0
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-13
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–11 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: Enter:
9
6
–50000
0
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-14
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–12 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
1058871
0
PV
FV
PMT
CPT
I/Y
Result: I/Y = 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-15
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–13 Using a financial calculator: Enter:
1.25*
12**
185000
0
Press:
I/Y
N
PV
FV
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-16
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–14 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: Enter:
2*
18000
–1702
0
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 periods semi-annual will equal 6 years
Solutions Manual .
PV-17
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–15 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: Enter:
3
5
32000
0
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-18
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–16 Using tables: From Table PV-2, the present value of an annuity stream of $6,500 per year, for 5 years at 3% is: $6,500 × 4.57971 = $29,768.12 If the price of the car you would like to purchase is $32,000, then you need to receive a $2,231.88 ($32,000.00 – $29,768.12) trade in value for your existing vehicle.
Using a financial calculator: Enter:
3
5
–6500
0
Press:
I/Y
N
PMT
FV
CPT
PV
Result: PV = $29,768.10 Trade-in value required: $32,000.00 – $29,768.10 = $2,231.90
Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE
.03
NPER
5
PMT
$(6,500)
FV
$0
Type
0
Result: PV = $29,768.10 Trade-in value required: $32,000.00 – $29,768.10 = $2,231.90
Solutions Manual .
PV-19
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–17
The better option for repayment of this piece of equipment is the single payment of $46,000 in 2 years.
Solutions Manual .
PV-20
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–17 (Continued) 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 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-21
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–18 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-22
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–18 (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
$(46,000) 0
Result PV = $38,016.53
BEPV–19
Using tables: Discount rate from Table PV-2 is 5.14612. The present value of 8 payments of $2,690 each discounted at 11% is therefore $13,843.06 ($2,690 × 5.14612). Sam Waterston should not purchase the tire retreading machine because the present value of the future cash flows is less than the purchase price of the retreading machine.
Solutions Manual .
PV-23
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–19 (Continued) Using a financial calculator: Enter:
11
8
2690
0
Press:
I/Y
N
PMT
FV
CPT
PV
Result: PV = $(13,843.07) PV is less than cost. Do not buy machine.
Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) RATE
.11
NPER
8
PMT
$2,690
FV
$0
Type
0
Result: PV = $(13,843.07) PV is less than cost. Do not buy machine.
Solutions Manual .
PV-24
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–20
Using tables: To determine the present value of the future cash flows, discount the future cash flows at 10%, using Table PV-1. Year 1 ($35,000 × 0.90909) =
$ 31,818.15
Year 2 ($45,000 × 0.82645) =
37,190.25
Year 3 ($55,000 × 0.75131) =
41,322.05
Present value of future cash flows
Solutions Manual .
PV-25
$110,330.45
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–20 (Continued)
Using a financial calculator: Year 1:
Enter:
10
1
0
–35000
Press:
I/Y
N
PMT
FV
CPT
PV
CPT
PV
CPT
PV
Result: PV = $31,818.18 Year 2:
Enter:
10
2
0
–45000
Press:
I/Y
N
PMT
FV
Result: PV = $37,190.08 Year 3:
Enter:
10
3
0
–55000
Press:
I/Y
N
PMT
FV
Result: PV = $41,322.31 Value in use = $31,818.18 + $37,190.08 + $41,322.31 = $110,330.57
Solutions Manual .
PV-26
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth Canadian Edition
BEPV–20 (Continued) Using Excel functions: the formula is: =PV(rate,nper,pmt,fv,type) Year 1
Year 2
RATE
.10
RATE
.10
NPER
1
NPER
2
PMT
$0
PMT
$0
FV
$(35,000)
Type
FV
0
Result PV = $31,818.18
Type
$(45,000) 0
Result PV = $37,190.08
Year 3 RATE
.10
NPER
3
PMT
$0
FV
$(55,000)
Type
0
Result PV = $41,322.31 Value in use = $31,818.18 + $37,190.08 + $41,322.31 = $110,330.57
Solutions Manual .
PV-27
Appendix PV
Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow
Accounting Principles, Sixth 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:
I/Y
N
PMT
FV
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-28
Appendix PV